Ritchie Bros Auctioneers Inc

TSX:RBA

Earnings Call Transcript 2023-Q1

[Operator]

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. [Operator Instructions]. 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 sir.

[Sameer Rathod]

Thanks, and hello and good afternoon to everyone joining on 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.

[Ann Fandozzi, Chief Executive Officer]

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 macro economic 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 and a pro forma full quarter basis and approximately 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 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 accident, 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, integration is off to a strong start. We've 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 in our transaction and service offerings, which will ultimately drive revenue growth and cost savings which will meaningfully enhance 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 Richie 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.

[Eric Jacobs, Chief Financial Officer]

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 now there is sundry items. We believe segmenting our GTV by sector who 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 12%. Excluding the impact of the IAA acquisition, lot volumes were up 28% year-over-year in a quarter driven by strategic account. However, the average price per lot sold was down 14% versus the first quarter of 2022.

And 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 of Ritchie Bros' down on GTV growth in the United States. This growth was partially offset by declines in GTV in Canada and international 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 and our commercial construction and transportation sector to continue in the second quarter. This gross will be partially offset by continued pressure on average selling prices due to asset mix and software 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. with 60% commission's versus 40% buyer fees. Whereas IAA was about 20% commissions and 80% buyer fees.

On a pro forma combined basis, we were at roughly 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 which can vary over time.

In the automotive category, it's a combination of contractual obligations and vehicles purchased for dismantling which can also vary quarter-to-quarter. There also tends to be more inventory revenue transactions in international markets.

As a result, with higher preferences, large bulk transactions and/or changes in the dollar amount of international activity could distort our total revenue growth. Therefore, 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.

Next slide please. 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 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 a lower commission rates 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 160 basis point expansion in our take rate.

Both Ritchie Bros. and IAA benefited from higher buyers. There was also an increase in marketplace services revenue at Ritchie Bros. The increase in biographies help 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 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 unfavorable mix of inventory packages and 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 use vehicle pricing, coupled with less non insurance vehicles being purchased due to a tightened supply environment and fewer contractual bulk automotive sales than 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. Includes the cost of our inspectors for auction services and costs of services. This is consistent with how each company has historically reported.

Selling, general administrative expenses includes yards not used for events weekly, 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 includes 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 units volumes.

In the first quarter we also invested in incremental salespeople to expand our market coverage, 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 absences purchase accounting adjustment. This adjustment will also result in additional $52 million reduction in our cost of services primarily in the second quarter of this year with any remaining amount and subsequent periods.

Any income statement benefits and the fair value adjustment of these prepaid costs, as part of purchase accounting is 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 [ph] and branch related costs when you compare that to prior year. As Ann noted earlier, we have started to implement our integration plan and have already acts in approximately $15 million and 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, we expect cost savings 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 $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 yards 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 into the first quarter of 2023.

Therefore, we now expect total capital expenditures to be between $275 million to $290 million on as reported bases 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. 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.

[Ann Fandozzi, Chief Executive Officer]

I thank our incredible team for their relentless focus and execution and dedication to our company with IAA we have a brighter future ahead.

Operator, you can now open the call for questions.

[Operator]

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

[Sabahat Khan, RBC Capital Markets.]

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

[Ann Fandozzi, Chief Executive Officer]

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, 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 kind of duplicate of executive ranks. And we took those actions and communicated those changes, that was a big portion of that work. The other piece of it was really think about kind of exactly duplicate of functions, like HR, where we took actions, and the bulk of the one time costs in order to achieve think about the bulk of those are severances those kinds of things. So, again, we are very, very pleased with how the pieces are coming together.

[Sabahat Khan, RBC Capital Markets.]

Okay, great. And then maybe we get a little bit of color on sort of the underlying trends. Maybe in the Richie business, I think you called out some fleet realignments that help maybe just have 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.

[Ann Fandozzi, Chief Executive Officer]

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 kind of 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 that side of the business is, think about the kind of the construction equipment, that yellow iron that hasn't exactly started to loosen up yet. But other caps, 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 is as we see, kind of grow with our strategic accounts were historically, in the last couple of years during COVID, they just have not had equipment to sell as they're selling 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 we're starting to see supply chain shift, and open up not in every category, but we're starting to see the light of 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, Bothers investors that maybe aren't worse than the IAA business, the higher the US vehicle price, the more Apple's vehicles are to get fixed, and not that clear of 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 IA side. Net-net, again, that is why we're out looking for to kind of that low to mid single digit growth that Eric referenced.

[Sabahat Khan, RBC Capital Markets.]

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 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?

[Ann Fandozzi, Chief Executive Officer]

Yes, so as at let's pick up. One of the things we committed to and obviously, is almost a maniacal focus on day to day execution. So as we said previously, the percentage of employees that are part of the innovation team is a very, very low percentage of employees. Right? We have people and you see it in the results in the quarter people very focused on their business driving results driving SLAs driving the full based on the customer that is the vast majority over 99% of the employees. The integration team, think about experts across the areas, it was important for us to make the head of integration, be our chief people officer, because so much of the integration work is kind of bringing the people side together. So that team is very purpose built. That team has kind of the cost synergies broken down by functional area, each area is represented.

So think about every area knows what their portion is to deliver of the 100 to 120. And, and per the proxy when the delivery is expected. And of course, sooner always better than later. And then similarly, though, revenue opportunities, prioritize highlighted and a portion of the integration team focused on kind of starting to put some of the tests in place to start testing hypotheses. And we have partnered with big, I don't know, we don't normally talk about it, but we partner with banks they're the name in integration. Many of us have worked with them over the years. They understand the speed with which we want to move the very high bar which in ourselves to in terms of execution and commitments to shareholders, and they are helping us drive the process forward. So again, very, very tight team with very high expertise.

[Sabahat Khan, RBC Capital Markets.]

Great. Thanks very much.

[Ann Fandozzi, Chief Executive Officer]

Thank you, Sabahat.

[Operator]

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

[Michael Doumet, Scotiabank]

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

[Ann Fandozzi, Chief Executive Officer]

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 the first part of your question, which is we are first and foremost committed to debt pay down and getting to the leverage, so that we committed to our shareholders. So that's number one. Number two, we were clear during diligence, we are even more clear now that to accomplish the goals that we set forward, we have the real estate footprint to accomplish 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 cap numbers. In fact, as Eric will speak, to some were supposed to actually happen last year, they just simply were delayed, which is why you kind of saw them recently announced.

That said we are obviously very, very focused on both driving Ritchie Bros. GTV using IAA real estate as part of our satellite yard strategy. In fact, we have gotten two pilots kicking off in the next 60 days without any permitting issues as we anticipated. And similarly looking to drive IAA share expansion through kind of SLAs and given where their utilization of the yards stands plenty of room to run. So, feeling very good about it. Eric, don't know if there's anything else you want to add to the real estate acquisition.

[Eric Jacobs, Chief Financial Officer]

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

[Michael Doumet, Scotiabank]

There 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 come with presumably at some point, lower salvage prices. IAAI has adjusted its fee structure. So I was hoping that you can walk us through the incremental contribution should dollar impact from higher volumes and lower prices? Ideally, really what the buyer fee is from a fixed variable standpoint?

[Ann Fandozzi, Chief Executive Officer]

Yes. So let me just drumroll this, 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, it's not linear, because a big portion of the fee basis fix. 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 and more complex, distracted driving a real thing.

So there's a lot of tail winds in the business. So the drumroll is that we're always better off with volumes, and we're seeing those churn and becoming a tailwind for IAA. And also, we are, obviously cycling next quarter should be the last quarter of the kind of years long loss of a single large customers. So it'll be clean numbers and allow us to perform and take a lot of the benefit from this total loss ratio recovery.

[Michael Doumet, Scotiabank]

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

[Eric Jacobs, Chief Financial Officer]

So, I mean, it's at least 150 to 175. We'll evaluate and see whether or not makes more sense. So the number could be higher. That was more of a minimum. We declared a dividend of $0.27 per share. For this for this coming quarter. We haven't sort of indicated what we're planning to do 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.

[Michael Doumet, Scotiabank]

I will pass lines. Thank you guys.

[Ann Fandozzi, Chief Executive Officer]

Thank you, Mike.

[Operator]

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

[Craig Kennison, R. W. Baird]

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?

[Ann Fandozzi, Chief Executive Officer]

Yes, correct. Hello. And yes, as I said, originally, it's been kind of a in some ways a homecoming, just for the folks 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 guys 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 the day in and day out, we deliver the very best service in the industry, and then 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 them mapping those plans. So very, very excited about driving those things that are in our control.

[Craig Kennison, R. W. Baird]

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.

[Ann Fandozzi, Chief Executive Officer]

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 as now route fleet manager as a critical building block of the marketplace. So when you think about a marketplace, think about the gateway in is this route fleet manager, the artist formerly known as 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, right. The reason you want that gateway strong is because you want to now start transacting, and 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 are going to 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 the journey, we've said all along the IMS now called route fleet managers and gateway. And so we're 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.

[Craig Kennison, R. W. Baird]

Great, thanks, Ann.

[Operator]

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

[Michael Feniger, Bank of America]

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 Obviously that includes a lot of other costs in the IAA. Did Ritchie cost come into 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 there's anything we should be aware of in the first quarter on the SG&A as growth picked up?

[Eric Jacobs, Chief Financial Officer]

Yes, Michael, so there's a little bit of noise in there, but it was a couple million dollars higher than we expected. And we kind of gave some of the reasons for that. The lower commission rates do the higher impact of strategic accounts, you had 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 sort of comparing EBITDA this year versus last year I mean, we had all time record high pricing last year. And so the flow through was significantly higher. Because you benefited all in price, and so on higher commission rates. So that that was a big if you're looking at sort of the trends, what happened.

[Michael Feniger, Bank of America]

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

[Eric Jacobs, Chief Financial Officer]

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

[Michael Feniger, Bank of America]

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

[Eric Jacobs, Chief Financial Officer]

Yes, so on a pro forma basis, we are 1% for Q1 kind of combined. So we say it's low to mid single, low to mid single digits for Q2 on a combined basis. So IAA had a tough comp for Q1 and it was down I think 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 of each since we're just giving a range but we expect both to do better. And I should say, we expect IAA to do better. Ritchie Bros. had had a very strong.

[Michael Feniger, Bank of America]

Thank you.

[Ann Fandozzi, Chief Executive Officer]

Thank you, Michael.

[Operator]

[Operator Instructions] Your next question will come from Maxim Sytchev at National Bank. Please go ahead.

[Maxim Sytchev, National Bank]

Hi, good afternoon.

[Ann Fandozzi, Chief Executive Officer]

Hi, Max.

[Maxim Sytchev, National Bank]

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

[Operator]

Please stand by.

[Ann Fandozzi, Chief Executive Officer]

Hello, Its Ann Fandozzi,

[Operator]

Yes you are. Please continue.

[Ann Fandozzi, Chief Executive Officer]

I believe I'm back in. sorry Max. It disconnected me. I didn't hear any question.

[Maxim Sytchev, National Bank]

No worries. I was just wondering if you don't mind please commenting on the pro forma CapEx intensity for the business, because in the slides, you talk about 275 to 290 on as reported. And if you don't mind, maybe combining your answer with your thoughts around the yard strategy and how that will fit for both businesses? Thank you.

[Ann Fandozzi, Chief Executive Officer]

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

[Eric Jacobs, Chief Financial Officer]

Yes, I think the CapEx goes down and the outer years in the proxy, because as we said that we have line of sight into the replacement properties for Bolton on the Ritchie Bros. side. And IAA had some current plans. Just to remind the group, the CapEx number that I gave him, what we talked about, the proxy really included CPE CapEx as well as capitalized software, internally developed software. And 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 of us gaining some of the synergies, particularly in finance, those have heard me talk about the lot of the manual nature, a lot of the processing for Ritchie Bros. that gets addressed with some of the technology enhancements that we're doing. That's in the CapEx numbers as well. So it's not just land, it's technology.

[Maxim Sytchev, National Bank]

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 IAA side. Just wondering where you stand on this right now? Thanks.

[Ann Fandozzi, Chief Executive Officer]

Yes. So Max, it is one of our Top 10 initiatives as we put forward. What we're doing now is think 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 on the one side. On the other side, bringing the teams together. So, part of the integration work is extended, to really connect the sales teams together to understand how it is they work. So they get a little feel for each other's business as we move forward and start executing. So very early days, very 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 a matter of starting to test.

Again, for those that are new to us, we are a big fan of tests and learn. I'm a geeky [ph] engineer. We have a hypothesis, we put tests in place, there was never a good or a bad, there is a learning cycle for us. And then we're very transparent reporting out to our investors about how we're doing. So, those tests are getting identified and put in place as we speak.

[Maxim Sytchev, National Bank]

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

[Operator]

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

[Larry De Maria, William Blair]

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. And AFPs and mix for headwind. But just for clarification, do we expect at some point, given what your comments are 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 on driving better mix? Because obviously pricing probably spoken better 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 and to test and learn and more likely 2024? Thank you.

[Ann Fandozzi, Chief Executive Officer]

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-early days. But we are expecting that to get better. And very hopeful for what that means for mix. But again, early 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 were dealt and I think team just incredible, 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 -- Eric said we're expecting Q2 there as well.

[Eric Jacobs, Chief Financial Officer]

Just to add, I'm sorry, Larry, how you doing? Just to your second part of your question regarding Florida. So, as we said, when we were in the pre-closed phase of this transaction. The way we look at Florida is really for overflow for catastrophic events. We didn't -- there's never -- it's not part of the plan. Not saying that it won't -- we won't be able in certain cases to leverage Ritchie Bros. yards but and 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, and over the last couple of years in terms of getting capacity availability when they need it. And so we should be, as we build out the business and grow that well covered in Florida and other places.

[Larry De Maria, William Blair]

Thanks. That's what I was getting at whether you thought we'd see some cat business on the Florida site this year. Thank you.

[Eric Jacobs, Chief Financial Officer]

Yes. That would be a total crystal ball.

[Ann Fandozzi, Chief Executive Officer]

Yes. And here's what's very interesting with the recent slide, and I know I'm going long and some years giving us a same guide. But with the recent flood in Florida, we were able to see firsthand, it's one thing when you diligence. Another thing to see the capabilities, exactly as they were accessed 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. It was just incredibly fascinating learning. And 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 saying, incredible performance, incredible kudos to the team. Hopefully some are listening because it was fantastic to see firsthand.

[Larry De Maria, William Blair]

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

[Operator]

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

[Ann Fandozzi, Chief Executive Officer]

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 deep, deep, deep into 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 how we're doing is driving 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.

[Operator]

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.