Ritchie Bros Auctioneers Inc

TSX:RBA

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen. My name is Michelle, and I will be your conference operator today. Welcome to the Ritchie Bros. Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to 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 your conference.

[Sameer Rathod, executive]

Hello, and good morning, and thank you for joining us on today's call to discuss the acquisition of IAA as well as our third quarter 2022 results. Joining me today are Ann Fandozzi, our Chief Executive Officer; Eric Jacobs, our Chief Financial Officer; and John Kett, Chief Executive Officer of IAA. The following discussion will include forward-looking statements.

Comments that are not a statement of fact, including, but not limited to, projections of future earnings, revenue, gross transaction value and other items and expectations regarding the proposed acquisition of IAA, including the anticipated timing, benefits and synergies of IAA transactions and future opportunities for the combined business of Ritchie Brothers and IAA are considered forward-looking and involve risks and uncertainties. These factors include, but are not limited to the satisfaction of the closing conditions, including shareholder and regulatory approvals for the proposed transaction.

So risks and uncertainties that could cause actual results to differ significantly from such forward-looking statements are detailed in our earnings and joint IAA transaction release issued this morning as well as the most recent quarterly reports and annual report on Form 10-K of each of Ritchie Bros. and IAA, which are available on their respective Investor Relations website on EDGAR and SEDAR as applicable. We will also make important filings with the SEC and applicable Canadian security regulatory authorities in connection with the proposed transaction. You are urged to read those materials carefully when they become available.

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 to the most directly comparable GAAP financial measures and applicable reconciliation of the two, see our news release, Form 10-Q and presentation posted on our website.

We are unable to present a 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 measures. We have two separate presentations on our website this morning, one for our normal earnings release and another stand-alone presentation for the IAA transaction.

All figures discussed on today's call are in U.S. dollars, unless otherwise indicated. Given that we will have a wider audience than normal, we may run long by a couple of minutes to make sure we have enough time for the Q&A session. I would now like to turn the call to Ritchie Bros. Chief Executive Officer, Ann Fandozzi.

[Ann Fandozzi, executive]

Thank you, Sameer, and good morning to everyone joining our call today. I will give a few quick highlights on our third quarter, after which Eric will give a brief update on our financial results before we move to discuss the exciting acquisition of IAA. We are pleased with our performance this quarter in what continues to be an uncertain macroeconomic environment.

I am proud of the efforts our teams have made across the organization, to deliver the third quarter in a row of double-digit service revenue and double-digit bottom line growth. We are accomplishing all of this while we continue to invest in improving our customers' experience, through the expansion of local yards, a new sales coverage model and modernizing our technology.

Let me now hand the call to Eric Jacobs to quickly highlight our financial results.

[Eric Jacobs, executive]

Thank you, Ann. Good morning to everyone. I'm sure we have enough time to discuss the expected strategic and financial benefits of the IAA transaction. I'm only going to touch on a few highlights about our strong quarter. Those looking for more information, our normal earnings deck with more details can be found on our Investor Relations website.

To start, we are very pleased with our 10% growth in GTV, excluding the impact of foreign exchange. This is especially noteworthy given that we cycled over the almost $100 million Barrilleaux deal from last year. Prices of used equipment are still relatively strong on an absolute basis. However, prices are down compared to the highs we saw earlier this year.

With regards to supply, we did see a rebound in volumes this quarter with total lots increasing 17% year-over-year. This growth in lots was driven by several significant deals from our strategic accounts group as well as growth in low value lots. While we're encouraged by the increase in lots, it's still too early to call this a trend.

Let me move to revenue and start with total service revenue. Total service revenue increased 15% and our take rate where service revenue as a percentage of GTV expanded 130 basis points to 18.2%. This was driven by a strong contribution from other services, higher buyer fees. Inventory return increased 40% to $17.5 million due to a 43% increase in inventory sales revenue. This was driven by strategic accounts and solid execution by the at-risk team.

With regards to earnings, our adjusted EBITDA increased 12% due to strong revenue performance, partially offset by planned investments, higher performance-based compensation and inflation. Overall, a very strong quarter.

Moving on to the fourth quarter. There are a few things that we'd ask you to consider. First, on GTV. Like most companies with international operations, foreign exchange headwinds are expected to impact us more meaningfully in the fourth quarter. FX could negatively impact our GTV growth by as much as 500 basis points. Therefore, despite the strong momentum in our business, may see low to mid-single-digit GTV growth in the quarter on a U.S. dollar basis.

Next, on selling, general and administrative expense, we're forecasting that SG&A expense exclusive of share-based payments, adjustments for unusual or nonrecurring expenses to be between $124 million and $129 million.

Lastly, for modeling purposes, we are forecasting interest expense of $10 million to $11 million, an adjusted tax rate of between 25% and 27%. Before I hand the call back to Ann, I wanted to highlight for you that the Globe and Mail, a leading Canadian newspaper, recently selected Ann as 1 of the top 5 CEOs in Canada.

She's being recognized as Innovator of the Year, a category that honors CEOs whose vision and guidance has been instrumental in the successful creation and commercialization of a truly disruptive product or service. The entire Ritchie Bros. team is extremely proud of Ann for this well-deserved honor. With that, back to Ann.

[Ann Fandozzi, executive]

Thank you, Eric. It is a privilege to accept this award on behalf of the incredible team at Ritchie Bros. As we continue our transformation to a global marketplace, we continue to innovate to enhance our customers' experience and being recognized for this strengthens our [ results ] to go even further and faster. It is in the spirit of this innovation that I'd now like to turn to the exciting news we announced this morning of having entered into an agreement to acquire IAA.

I'm going to walk through some of the reasons why we think this is such a compelling combination and our vision for our future as a combined company. I'm proud to be joined this morning by John Kett, CEO of IAA, who will also provide you with some background on the impressive business they have built.

Finally, Eric will highlight the attractive combined financial profile of bringing Ritchie Bros and IAA together through this transaction. This transaction is an important step in advancing the strategic vision that Ritchie Bros. announced in December 2020 to become the trusted global marketplace for insights, services and transaction solutions. For the last 2 years, our team has been hard at work executing on that vision, delivering impressive results and creating strong momentum despite a challenging operating environment. Our relentless commitment has resulted in significant progress in marketplace technology, our inventory management system, new sales coverage model and expansion of our satellite yard footprint.

In addition, we made strategic acquisitions such as Rouse and SmartEquip that are foundational to our marketplace and that accelerate our transformation. When evaluating potential transactions, we look for companies with great businesses that bring capabilities that can advance our marketplace vision. IAA does just that. Through this transaction, we will combine complementary businesses operating in adjacent verticals to unlock accelerated growth. IAA will increase our scale, allow us to diversify our business by entering the large vehicle market with a proven leader and allow us to leverage our marketplace investments over a much wider array of assets. At the end of the day, this transaction is truly 1 plus 1 equals 4.

As we add additional capabilities and our expertise, we will further amplify the work that's already underway at IAA. This transaction is all about creating a stronger Ritchie Bros. and IAA that will accelerate the long-term growth trajectory of the combined business. We believe that the combination will deliver significant value to our stockholders while unlocking compelling benefits for our customers, team members, and communities.

At this point, let me cover the key terms of the transaction. We are acquiring IAA for a mix of $10 in cash and 0.5804 shares of Ritchie Bros. common stock per share of IAA stock, which translates to a total per share consideration of approximately $46.88 per share. This leads to a transaction value of approximately $7.3 billion, including the assumption of IAA net debt. The purchase price also represents a transaction multiple of 13.6x IAA last 12 months adjusted EBITDA as of the end of the third quarter, or an implied multiple of 11.3x when including the midpoint of our full run rate cost synergies of $100 million to $120 million-plus.

Following the close, Ritchie Bros. stockholders will own approximately 59% of the combined company and IAA stockholders will own approximately 41%. We intend to fund the cash consideration of the transaction through a combination of cash on hand and new debt. We have already secured the necessary bridge financing commitment. Looking at what this means for our capital structure. At closing, we expect to have an approximately 3x net debt to adjusted pro forma EBITDA leverage ratio. As we have done in the past, we will prioritize deleveraging following the close in order to maintain our flexibility to continue to pursue our growth priorities and return of capital to stockholders.

In addition, we expect to maintain our quarterly dividend of $0.27 per share as we delever our balance sheet, while also considering future increases as our leverage continues to come down. Following the completion of the transaction, I will continue to serve as CEO, and we will welcome 4 current IAA Board members to our Board of Directors. Erik Olsson will continue to serve as Board Chairman, and we will provide further details on our Board as we work through the integration planning. While Ritchie Bros. will continue to be legally incorporated in Canada, and we will retain our officers and employees in Burnaby, British Columbia, IAA Chicago offices will serve as the official headquarters for the combined company, given our combined significant U.S. employee and customer base.

We expect the transaction to close in the first half of 2023 subject to approval by both companies' stockholders, regulatory approvals and customary closing conditions.

Now to tell you a little more about an IAA business, and the sector and geographies in which they operate. I'll hand it over to John Kett, CEO of IAA.

[John Kett]

Well, hello, everyone, and thank you, Ann, for that welcome. I share Ann's excitement about this transaction and the incredible opportunities that we see ahead for our combined business. In terms of 1,000-foot overview of IAA, we are a leading global marketplace that connects vehicle buyers and sellers. Simply Ritchie Bros. and IAA are very similar businesses in terms of what we do for our clients is just applied to adjacent verticals. We operate 210 facilities throughout the U.S., Canada and the U.K. and a digital platform that serves customers in more than 170 countries.

Over the last 40 years, we've built deep relationships with a global customer base across the vehicle ecosystem and have expanded our capabilities to create a true one-stop shop that supports customers at every step of the sale and purchase process, offering multiple bidding and buying digital channels, innovative vehicle merchandising and efficient valuation services. This transaction marks a new chapter for IAA, and we could not think of a better partner than Ritchie Bros. For our discussions, we've come to appreciate just how well Ann and the rest of the team understand our industry as well as how applicable Ritchie Bros. platform and capabilities are to our ecosystem.

Because of this, we are highly confident that, together, we can more effectively unlock the tremendous market opportunity for IAA. This is an incredible milestone and all the opportunities that this transaction creates is due to the passion, dedication and hard work of the IAA team. Our team has made significant strides to build out our technology, to enhance our data analytics and improve our efficiency to deliver improved value to our customers. With Ritchie Bros., we believe the best days are ahead of us as we'll be able to enhance our business for customers as we grow together. And of course, I'm pleased this transaction will also maximize value for our stockholders through the immediate cash component and the ability to participate in the substantial growth opportunities ahead for the combined business.

Turning to the next slide. This is a snapshot of the U.S. used vehicle market. The used vehicle market is stable and steadily growing supported by the consistent outflow of vehicles into the secondary market. On average, we see about 40 million used vehicle sales a year, about 1/3 of which leave the car park with the remainder going through the secondary sales that place them back on the road. That equates to approximately 12 million vehicles in our market at any time. If you do the quick math, given that they are on average 14 million vehicles entering the market every year and only about 12 exiting that means that the number of vehicles on the road increases each year, creating an expanding fleet of aging vehicles that propels the growth of our market.

Let me turn to the next slide. Our business has a long track record of growth through various economic cycles. Since 2004, we've driven consistent growth. In fact, over this period, the compounded average revenue growth rate has been approximately 12.7%. We have strong secular tailwinds in our industry that we expect to persist for the long-term. More vehicles are in operation and the average age of the car park has increased over time. Compounding these factors is the complexity of newer vehicles, particularly over the last 10 years-or-so, which has led to a steady rise in repair labor and parts costs.

And of course, as a result of the constraints in the new vehicle market, we've seen higher utilization rates for recycled parts. These factors together are leading to consistent growth for our market and appreciable runway for potential future expansion. We're confident that together with Ritchie Bros. we will be able to seize upon these opportunities.

With that, I'll turn it back to Ann to talk about the compelling combination of the similar business solutions and complementary customer bases.

[Ann Fandozzi, executive]

Thank you, John. In some ways, it's like a homecoming for me and many members of the leadership team as cars and insurance carriers represent a vast amount of our [ collective ] background. I'm personally looking forward to reestablishing those relationships as we look towards the future. It's important to recognize that despite IAA having different end markets, we both provide tech-enabled business solutions for our respective customers. As you see on the left side of the slide, our business processes are very similar from consignment of commercial assets or vehicles through appraisals and inspections to data and information analytics all the way through transaction solutions and services.

At the end of the day, the truly complementary nature of our businesses is why we believe this is such a compelling transaction. What gives us unparalleled conviction in this transaction is this leadership team's deep knowledge of IAA's business. We know the vertical, we know the players, and we know what it takes to achieve success, a relentless focus on the customer.

Moving to the next slide. The strategic rationale for this transaction covers a wide span of categories from driving best-in-class customer experience and engagement due to our omnichannel platform to accelerating growth and innovation across a wider array of vertical to increasing scale and diversification, which, as I mentioned earlier, will allow us to achieve significant annual run rate cost synergies of $100 million to $120-plus million by the end of 2025. We believe these cost synergies are highly achievable and will look to identify additional opportunities throughout our integration planning process. That said, the transaction is expected to be accretive to Ritchie Bros. adjusted earnings per share by low single digits in the first full year following the transaction and mid-teens after that.

Importantly, this accretion excludes potential revenue opportunities that we believe we can unlock together across our expanded addressable market. The complementary nature of our businesses including our well-aligned customer-centric culture will allow us to drive profitable growth and improve returns through efficiencies, as we combine our technology platform, similar business processes and yard footprint to unlock future growth potential.

Now let me focus on the diversification aspect of the transaction, which creates more resiliency in our business model. Our combined company would have a pro forma GTV of approximately $14.5 billion for the trailing 12 months. Both our businesses leverage a consignment and inventory revenue model. IAA diversifies our business by expanding beyond commercial assets into an adjacent vehicle vertical with our revenue derived more from sellers and IAA's revenue derived more from buyers.

Let's go back to the example that I just gave about our combined yard footprint. The transaction will also allow us to expand our presence in key U.S., Canadian and European geographies by combining Ritchie Bros. existing footprint of over 40 owned and 24 leased facilities with IAA's footprint of approximately 210 facilities, many of which are leased. Together with IAA, we will have new opportunities to advance our yard strategy more efficiently with a combined 13,600 acres of yard capacity in key regions across the United States and internationally. We will be able to leverage our broader footprint by strategically increasing capacity to serve both commercial assets and vehicle customers.

This will be particularly powerful in the case of catastrophic events, as we will have more yards where our customers need us most to ramp up capacity. In particular, Ritchie Bros. will bring additional capacity in states where catastrophic event risk is the highest, such as Texas and Florida.

Additionally, we will be closer to customers of both businesses, enabling us to serve them faster and more cost effectively than ever before.

I'll now turn the call over to Eric, who will speak to the significant value creation opportunities we see ahead for the combined company.

[Eric Jacobs, executive]

Thanks, Ann. As one could expect with similar business models, we expect to achieve $100 million to $120 million-plus in annual run rate cost synergies by the end of 2025. We expect these cost synergies will primarily come from the back office finance and technology, general administrative and operational areas. While we are only quantifying the expected cost synergies from the transaction today. As Ann highlighted, we also expect to unlock an array of incremental growth opportunities over time. These will include cross-selling opportunities for services such as Ritchie Bros. Financial Services, increased automation to support a frictionless customer experience, accelerated marketplace innovation globally.

On this next slide, let me discuss the highly attractive financial profile of the combined company. As previously discussed, the more than the doubling of our combined gross transaction value or GTV from $5.9 billion to $14.5 billion. Likewise, the last 12-month revenue is also more than doubled, growing from $1.6 billion on a stand-alone basis to $3.8 billion combined. What is equally compelling is the doubling of our profitability and cash flows. Even before we consider synergies. On a pro forma LTM basis, the combined company would have an adjusted EBITDA of approximately $1 billion. And as we consider a quick deleveraging post-close, with an expected initial leverage ratio of approximately 3x, combined company's LTM free cash flow of approximately $800 million pre-synergies is expected to be extremely helpful.

With that, I'll turn the call back to Ann to wrap up our comments before we take your questions.

[Ann Fandozzi, executive]

Thanks, Eric. I want to reiterate how enthusiastic I am for this transaction and the compelling benefits we believe it will deliver to both of our company's stakeholders. With IAA, we will be able to accelerate our progress to create a leading omnichannel platform with a comprehensive suite of tech-enabled services and empower our customers with insights to help them make the very best decision. We will do so by bringing together two of the most talented teams in the industry and fostering a customer-centric culture rooted the commitment to innovation. Running a business of this size will require the combined talent of both of our organizations, and we expect to create new and exciting opportunities for employees as we grow.

Scaling our business will also allow us to even better support our local communities with more jobs and by expanding on our ESG priorities to help advance a lower carbon future. With enhanced scale, an accelerated platform for growth and a more resilient business model, we expect to be able to deliver enhanced value to stockholders of both Ritchie Bros. and IAA.

Thank you all again for joining us today. We look forward to welcoming the IAA team to Ritchie Bros. and coming together as one organization to unlock the incredible opportunities we see ahead for our combined platform. Just as a note to participants, we please ask that you focus your questions on the transaction. And with that, operator, please open the line.

[Operator]

[Operator Instructions] Your first question will come from John Healy of Northcoast Research.

[John Healy, analyst]

Congratulations to everyone involved here, truly a transformative day that I don't think many of us had on our bingo card this morning. So congrats. Wanted to ask 2 questions. Ann and John, maybe you could give us a little bit of back story maybe just about maybe how this acquisition came together? Was this a process, John, that you guys were running?

And then secondly, when the deal closes, is there any sort of change in control provision relating to seller contracts on the insurance side of things in terms of how those relationships might evolve or be moving around a little bit?

[Ann Fandozzi, executive]

John, it's Ann. Let me start, and it's not often when we can surprise you guys. So I think that's a good thing. Thank you for asking about the back story because I do think that really is a fantastic setup. So first of all, IAA is a company that I have known and admired and John and his management quite some time. As a reminder to those on the call, the previous business that I was with -- I was in the collision repair space. So it was very much in cars. And then obviously, if a car cannot be brought back to its former -- or condition, it would be considered a total loss and then would obviously go into John's ecosystem.

Also as a reminder, a huge percentage of the leadership team has both a background in this vehicle and insurance ecosystem. So that's number one. We've known each other for a long time. What became apparent after we rolled out our strategy in 2020 for becoming a marketplace for insight, services and transaction solutions, we were really looking for anything that could accelerate our journey. So when you think about it, that really comes in two forms.

So either in terms of M&A, right, there's a lot of organic things. But in terms of M&A, we would look at incredible businesses that could accelerate us and some have to do with capabilities like a Rouse or SmartEquip. They added capabilities to us. And some have to do with scale, right? When you are a marketplace, scale, if you want to pick a single KPI, once the capabilities are behind you, scale is it?

Organically, it takes time to drive. If there is an M&A opportunity like this is to increase it, it's just magical. So let me just talk about how we saw the IAA business from our scale. So first, the completely complementary nature of the business. Let me just explain again. For our auction side of the business, which is our primary transaction solution, here's what happens. A piece of yellow iron shows up at a yard. And here's what happens for John and IAA, a salvage car shows up at the yard. After that, largely what happens is pretty much the same.

We check it in. We inspect it. We market it, if a title in lien is needed. We then auction it. And then were transact it across one of our many channels. We then collect money from buyers and then paid out to sellers. So it's wildly complementary, which gives us a lot of confidence obviously at the -- about the economies and the synergies, the cost synergies that we've signed up for.

What's also incredible about the salvage car business is although cars are cyclical in nature, the salvage business is actually very similar to ours, where it's both cyclical and countercyclical. So when prices of used cars are up and there's a lack of availability, it's the same with us. They have less units but higher prices. When the cycle turns, they have more units, lower prices. So it's actually very complementary in nature and also similarly acyclical to our business, which we love. And then there's growth, and then there's growth. And really, when we think about the growth of these businesses, think about a short-, mid- and long-term growth together.

The most obvious shortest example is our ability to leverage the collective yard footprint that we have. So we quadrupled the yard footprint for IAA's customers, that means that in case of catastrophic events, so on and so forth, they can leverage a lot more Ritchie's yards. For Ritchie customers, that means lower cost of transportation as we told you guys and an acceleration of our satellite yard strategy. So that's kind of the very shortest term.

Midterm, think about services. So again, we said the magic of marketplace, how you guys will know we're successful, is that our services revenue will outpace our GTV growth because you're going to see attachments of services much quicker, obviously, having an all-new vertical to attach services to be the insights or our own services or third party's, it's incredible.

And then you move to the kind of mid- and long-term and then you can leverage that scale of the global marketplace incredibly, whether you want to think about a return on any technology investments now being spread across a much bigger ecosystem and ability to accelerate innovation, 1 plus -- that's why we're so confident that 1 plus 1 equals 4.

So I know I combined the back story of we knew each other to -- we are constantly, since December 2020, looking for ways to accelerate the marketplace, the ability to both drive scale, drive synergies and move that much quicker, there are a few -- we couldn't think of any better suited than IAA with an incredible management team. And I will -- on the change of control for insurance carriers, number two, I am going to turn it over to John to answer that.

[John Kett]

Sure. Thanks, Ann. Yes, I mean -- and John, the answer is no, that obviously, as part of the diligence process, that there should not be any issues with our structures going forward. And yes, no, just excited about this, listening to Ann thinking about our journey to this spot, and it's actually very similar in as our Board and my team were looking at our strategies going forward, thinking about how we can continue to scale up and to build out our frictionless platform that we've been talking about, I mean, that fits right into our strategy.

And the more that we began to speak with Ann and her team, the more similarities we saw, and it really made for an exciting combination. So yes, I mean, it's great to be here and looking forward to the future of this combined business.

[Operator]

Your next question comes from Michael Doumet of Scotiabank.

[Michael Doumet, analyst]

Again, congratulations on the deal. The question I had was you quantify the cost synergies here expected from the deal in quite some detail. I'm just thinking about maybe a little bit more detail on the revenue synergy opportunity. How that compares, you think, to quantify cost synergies, obviously, longer-term, just to give us a sense?

[Ann Fandozzi, executive]

Yes. Michael, it's Ann. It's interesting as we were putting together kind of the package for you guys, the advice we were largely given is look, cost synergies is the stuff that, obviously, investors and analysts kind of can take to the bank. Revenue synergies are largely discounted kind of in the initial days of a transaction.

But I will tell you as excited as we are about the 100 and 120, that's the take it to the bank on the cost side, the revenue synergies are orders of magnitude above that, orders of magnitude above that.

So let me explain again. Even in the shortest term, the ability for us to leverage our collective yards to drive the critical customer experience, there's an incredible amount of growth on both sides every time we make it easier and better for the customers to do business with.

The incredible accretive nature of an ability to attach services to underlying GTV, and we've just more than doubled ours with this transaction. And then the idea of scale in the marketplace. Just think about the incredible power of every investment we make being amortized over that much more volume, even investments that are kind of -- we'll call them like basic building blocks of checkout and my account to things that actually drive revenue [indiscernible] services that we provide directly or through third parties and we take a fee, that scale is just incredible in the marketplace.

So again, we're not going to quantify the number, but then the global piece of it where for us, we have a global footprint, as you saw on the chart with the yards, IAA largely is -- it doesn't have a huge global footprint. The vast majority is U.S. We're also looking forward to our own global expansion as well as driving theirs collectively. And again, the single biggest cost for all of us is, and this is the beauty of an omnichannel platform is the yards, right?

Because let me explain what omnichannel is just for a minute, again, for those that are maybe new to 1 or both sides of this business. Even though we transact -- IAA transacts entirely online, we transact mostly online. We have a few like Orlando where we kind of do it both ways. Our yards are busier than they've ever been before as our [indiscernible] right? Because what our customers want is they truly want the omnichannel. The sellers want that equipment or the vehicles they want it gone and our yards are very busy. And then the buyers want to buy online.

And so the yard footprint becomes just an incredible unlock of value to both sides of the house and it just so happens that we have quite a few yards even in the U.S. that complement IAA's very large footprint, especially in the areas of catastrophic events where the insurance carriers need us most and then obviously, the global expansion. So I'm not going to quantify it less banker fall the [indiscernible] on a sword except to say it is orders of magnitude bigger than the cost synergies that we're quantifying today. It's really incredible.

[Operator]

[Operator Instructions] Your next question will come from Daniel Imbro of Stephens Inc.

[Unknown Analyst]

This is Joe on for Daniel. So on the insurance companies, I was wondering if Ritchie Bros. has pre-existing relationships here? And if not, does that potentially present a risk or what are your thoughts here?

[Ann Fandozzi, executive]

Daniel, it's Ann. Nice to meet you. Ritchie Bros. does not have insurance relationships, but Ann Fandozzi and the vast majority of the leadership team does. In the prepared remarks, we said it's a homecoming. The prior business that I ran right before Ritchie Bros. was called [ ABRA Collision ].

We were acquired by our biggest competitor. We were private equity-backed. Our customer base was these very same insurance carriers. So the relationships run deep including, I'm not going to say how many, but quite a few texts this morning, saying congratulations and welcome home. So that gives us a little bit of an indication about the relationships.

[Operator]

Your next question comes from Gary Prestopino of Barrington Research.

[Gary Prestopino, analyst]

First of all, I would assume there's no go-shop provision on this transaction?

[Ann Fandozzi, executive]

Gary, I think that's a safe assumption.

[Gary Prestopino, analyst]

Okay. Great. And then could you maybe explain these yard synergies? I'm trying to grasp where the synergies can come in? Because, obviously, IAA has much smaller yards and not going to be capable of handling a lot of heavy equipment or maybe I'm wrong on that and John, you can comment on that. But are you looking at the synergies more so that you can port some of IAA's business to your existing yards in the United States and Canada?

[Ann Fandozzi, executive]

Yes. So Gary, it's Ann. I would say both. So let me explain. Don't think of yards as our traditional yards with the big auditorium. Think of yards as our satellite yard expansion strategy that we have credited with driving the growth -- partially driving the growth numbers you're seeing from us. Those are much smaller than our historic footprint, so yes. And then don't forget the way we bring those to market now is that the equipment sits in the satellite yard, but we make it available across our various sales channels, be it marketplace with a reserve auction or we link it into a regional event and make them available virtually.

So the answer is both sides. And really think about the IAA yards as helping us facilitate the local yard strategy and our yards helping facilitate there at a minimum catastrophic events.

[Operator]

Your next question comes from Michael Feniger of Bank of America.

[Michael Feniger, analyst]

Just the first one, just to be clear, is there customer crossover here? The typical customer of IAA, who is that? And do they use Ritchie Bros? Have they used the heavy -- do they use heavy used equipment on a daily basis? I guess I'm trying to assess who the main customers that are being servicing on either buyers or sellers side of IAA and if they're similar to your current customer base?

[Ann Fandozzi, executive]

Yes, we'll turn that over to John to start.

[John Kett]

Yes. So our typical customers are insurance companies. So we're selling damaged or high-mileage vehicles for insurance companies, fleet providers and so on. So there's -- we do sell a small amount of heavy equipment salvage. So there is some overlap there, not very much, but there is some overlap.

So it is a different supply source for sure. And the buyers, there's going to be limited overlap to start. But certainly, I think the virtues of having a much bigger marketplace is going to allow us to expand who we're attracting on both the buy and sell side, broadening the supply of assets that we're putting through our platforms.

[Ann Fandozzi, executive]

Yes. And that was great, John, thank you. And Michael, let me just add to that. Think of this as diversification, but with the best possible synergy ability. So think about the fact that it's new sellers, right, giving us a much bigger base. It's new buyers, giving us a much bigger base.

Completely common business processes, allowing us to leverage all of those cost efficiencies, but then the needs of those customers in terms of services, in terms of yards, in terms of a frictionless marketplace, those are the same, they're just apply it a different way.

So it's really kind of think of diversification and scale in its best form with an incredible cost efficiency and leveraging of commonality that honestly you don't often find.

[Operator]

Your next question comes from Craig Kennison of RW Baird.

[Craig Kennison, analyst]

Ann, I'm curious what the implications are for IMS and what this says about momentum behind that platform?

[Ann Fandozzi, executive]

Yes, Craig, thank you for the setup. We are excited. So our inventory management system is being designed and executed as a ubiquitous kind of hub, if you will, for all customer needs. So again, when you think about IMS as the gateway, it then becomes the gateway into the entire ecosystem. So whether or not you're a construction piece of equipment, you're a mining piece of equipment, you're a vehicle, it all will kind of come together there. That's where all of the data and analytics then start getting attached. That's the basis on which services get offered.

And again, it just gives us an incredible scale, right? Because when you're investing in an IMS, you're investing in the underlying technology. The cost of that investment is largely the same, but now we can amortize it off on a much wider degree of units, so it's an incredible scale play.

[Operator]

Your next question comes from Sabahat Khan of RBC Capital.

[Sabahat Khan, analyst]

If you could maybe just share a little bit on, I guess, the buyer base for IAA, like is it as simple as salvage [indiscernible] or is it maybe a broader buyer base out there?

[John Kett]

Yes. Thanks for the question. Our buyer base is really broad. We've got thousands of buyers on our platform every week from across 170 countries. They're looking at the vehicles for a variety of purposes. There's sort of the kind of stereotypical. They're buying it to part it out to use the parts and repair, but we've got rebuilder buyers who are buying the vehicles to fix them up. We've got a significant export market where we're shipping vehicles out of our home markets into, again, 170 countries where they are primarily rebuilders. So they're arbitraging the labor and, to a certain extent, part costs that they can obtain in a secondary market where they can buy the damaged vehicle, buy the parts, ship it somewhere else and then repair it and put it back on the road to provide affordable transportation in all kinds of emerging in first world markets as well.

So it's a really deep and fragmented buyer base. We have very, very low concentration in our buyer base. We're adding to the pool every month, every year. And we're really continuing to reach out to all kinds of different buyers.

[Sabahat Khan, analyst]

Okay. Great. And then I guess just given the [Audio Gap].

[Operator]

Your next question comes from Carolina Jolly of Gabelli.

[Unknown Analyst]

[Audio Gap] any antitrust issues here? And then I just also just wanted to ask an actual question just about -- is there any -- I know IAA, is there any change or differences in the ownership of the vehicles or parts or how they impact the balance sheet across both companies?

[John Kett]

The first part of your comment got garbled. But in terms of -- so we are primarily a consignment model. So the vast majority of the vehicles in the U.S. and Canada for sure, we're just -- they're consigned to us and then we sell them on behalf of our sellers. We do buy a very small percentage of the vehicles in the U.S.

In the U.K., we do have a -- the model in the U.K. is much more of a purchased market. So we do buy the vehicles from the insurance companies there, but it's obviously a much, much smaller piece of the business than in the U.S. or Canada.

[Ann Fandozzi, executive]

Perfect. And then maybe Eric, our CFO, can take the antitrust portion of your question.

[Eric Jacobs, executive]

Yes. Thanks, Ann. So we don't expect any antitrust issues with this transaction as Ann and John talked about, we operate in different markets and such don't expect any challenges.

[Operator]

Your next question comes from Bret Jordan of Jefferies.

[Unknown Analyst]

A quick question for John. Did you run a full process in the sale? And then a question for Ann. On the recent market share shifts, obviously, some attrition from IAA. In your due diligence, I guess, what gives you confidence that market share has stabilized or is growing from here?

[John Kett]

So the details of how we came together, obviously, it will be in all the public documents, but this really was a merger. It was something that, I think, almost unparalleled path Ritchie Bros. was thinking about their future strategy as we were doing that same kind of work. And we connected and realized that there's just a lot of similarities to the businesses that we could leverage off one another to build a really, really powerful business going forward.

[Ann Fandozzi, executive]

Yes. Thank you for that, John. Well said. And let me answer the market share question. So the way that I look at market share is that market share is an output, it is not an input. It is the output of understanding your customer exceptionally well and then providing solutions for that customer that are market-leading and truly unique and innovative.

I am confident in our ability to do the latter. We've proven it time and time again. And so market share is just something that naturally follows.

[Operator]

Your next question comes from Bryan Fast of Raymond James.

[Bryan Fast, analyst]

John, could you just talk a bit about IAA results over the last couple of years? And maybe what led to the large jump in revenue? Just trying to get a gauge of the sustainability of that growth.

[John Kett]

Yes. So I mean, over -- I think as the team laid out in the presentation and even in my comments, we have a long history of solid growth in revenue. A couple of things happened over the last few years related to both initiatives that we undertook to move to a fully digital platform, which allowed us to drive higher levels of revenue per unit. And then at the same time, the marketplace prices had gone up as a result of what was happening in the used car market, we were able to leverage or take advantage of that because our revenue model is really -- it's a marketplace, so we're charging both sides, both the buyer and the seller.

The buyer fees are much more tied to the selling price of the vehicle. So as values were going up we were able to extract a higher revenue per unit for our services. And then the final thing I'd add to it is just we continue to also build out our ancillary services. So we're now providing much more comprehensive services, particularly on the sell side that we're -- has helped grow our revenue, and that really ties back into why this combination is so powerful is because of many of the ancillary services that Ritchie Bros. offers today in the in their vertical, we think there's going to be opportunities to take advantage of that and further provide levels of service in the insurance and fleet and dealer market.

[Operator]

[Operator Instructions] Your next question will come from Vincent Foley of Barclays.

[Unknown Analyst]

Two-part question. One is as we go through the press release and the slide deck, is it your intent to keep the IAA bonds in place and not trigger a change in control? And then what is the expected rating of the pro forma entity at this point?

[Eric Jacobs, executive]

So thanks, Vincent. It's Eric. So we will be retiring all the IAA debt as part of the transaction and taking out new debt as part of this. We have a $2.8 million bridge commitment. We have $500 million of bonds that we will also figure out the best way to deal with those. So the total borrowings will be $3.3 billion.

In terms of the other part of the question was...

[Unknown Analyst]

The expected pro forma ratings of the combined companies.

[Eric Jacobs, executive]

Yes. So I can't comment specifically on what the actual rating would be until we actually speak with the rating agencies, but we're confident that we are very strong credit. And if you look at the [ deck ], our free cash flow from the pre-transaction last 12 months is $800 million. So we expect to be able to delever very quickly post this deal.

[Unknown Analyst]

Okay. Again to clarify both the loans and the bonds will be retired upon closing?

[Eric Jacobs, executive]

They'll be taken out, yes.

[Operator]

Your final question will come from Michael Feniger of Bank of America.

[Michael Feniger, analyst]

The heavy used equipment market, the $300 billion TAM, that's always been the goal for Ritchie to penetrate that market. I understand you just doubled your GTV, you diversified. I guess just help some of us understand how this deal helps Ritchie Bros. overarching goal of driving penetration in the heavy used equipment market TAM?

[Ann Fandozzi, executive]

Michael, it's Ann. Yes, believe me, this is why I'm at Ritchie Bros. is our $300 billion TAM, that's what starts at all. So think about that this acquisition of IAA and the combination unlocks growth for both sides of the house.

Since your question is primarily on used equipment -- on heavy used equipment. I'm going to focus there, but understand a similar line of thought is on the growth on IAA side. So when we think about $300 billion of equipment, think about the conversations we've had about how do we intend to go after it.

First and foremost, a seamless customer experience and an ability to drive incredible recovery and then attach services to it. So think about what we've been doing. We've been doing local yards, right, to try to get at that. Again, what you just heard now is that, that ability just quadrupled, okay, number one.

We've been driving IMS and technology investments to do that. What you've just heard is that, that is going to get turbocharged, right? So all of those investments now have a much higher ROI, and we can move that much quicker. So now you've heard that.

The third is, as we keep developing and investing in services, now those services can be applied to not only the heavy equipment, but they can also be applied to vehicles, meaning that we can develop more services, we can do it quicker, we can do it at scale.

So the short answer to your question is we have our eyes firmly in place on our $300 billion and all of the pieces that IAA brings allows us to accelerate us getting after it as well as -- and by the way, there's a similar list on the other side for how we can help IAA achieve their commitments. So this is really an incredible scale. What's in it for the customer is our ability to move quicker and provide them even more than anything we have to date.

[Operator]

Ladies and gentlemen, at this time, I would like to turn the call back to Ann Fandozzi for any closing remarks.

[Ann Fandozzi, executive]

Perfect. Thank you so much. So first of all, thank you all for joining our call today. Let me end with this: at its simplest basis think about this combination and us acquiring IAA is it's a new vertical, right? We have a marketplace for, again, construction equipment, mining equipment, a lot of assets, and now we've added what is primarily salvage cars as a new vertical.

Everything else, the processes, the business, the technology, the marketplace is common. So it's very rare for an ability to drive scale and diversification while getting an incredible synergy on the cost side and a runway for revenue synergies that you rarely see.

We are super excited about this combination. I hope you hear it in our voices, we are excited about the IAA team joining the Ritchie Bros. team, and we thank you again for joining the call, sharing our excitement. And I think many of you, we will be having follow-up calls with later today. So thank you again, and have a wonderful, wonderful rest of your day.

[Operator]

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank everyone for participating, and you may now disconnect your lines.