RB Global, Inc.
Q3 2019 Earnings Call Transcript

Published: 8 Nov 2019

[Operator:]

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Ritchie Bros. Auctioneers Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.I will now turn the call over to Mr. Zaheed Mawani of Investor Relations to open the conference call. Mr. Mawani, you may begin your conference.

[Zaheed Mawani:]

Thank you, Chris, and good morning and thank you for joining us on today's call to discuss our third quarter 2019 results. Joining me today are Sharon Driscoll and Karl Werner, our Interim Co-Chief Executive Officers along with other members of management who will be available for the Q&A portion of the call.The following discussion will include forward-looking statements. Comments that are not a statement of fact, including projections of future earnings, revenue, gross transaction value and other items, are considered forward-looking and involve risks and uncertainties. These risks and uncertainties that could cause our actual financial and operating results to differ significantly from our forward-looking statements are detailed in our SEC and Canadian securities filings available on our Investor Relations website at investor.ritchiebros.com. We encourage you to review our earnings release and Form 10-Q, which are available on our website, as well as EDGAR and SEDAR.On this call, we will discuss certain non-GAAP financial measures. For the identification of non-GAAP financial measures, the most directly comparable GAAP financial measure and reconciliation between the two see our earnings release and Form 10-Q.Presentation slides accompany our commentary today. These slides can be viewed through our live or recorded webcast or downloaded from our website. All figures discussed today on today's call are in U.S. dollars, unless otherwise indicated.I'll now turn the call over to Sharon Driscoll. Sharon?

[Sharon Driscoll:]

Sure. Thank you, Zaheed. Good morning, everyone and thank you for joining our third quarter earnings call. Our solid results in the quarter reflect continued progress against our strategy to provide multichannel solutions for buyers and sellers in all segments of the used equipment market.We are very pleased with the progress on our strategic initiatives and particularly with the performance in our U.S. region and with our global online growth. We continue to make good progress in the quarter with our MARS implementation and our RB Asset Solutions products and services, along with our Marketplace-E solution is resonating very well with customers.This quarter highlights the solid execution by our sales and operations teams to deliver positive results for our consignors, particularly at a time when global markets faced heightened economic and political pressures.Before we jump into the quarter, I want to take this opportunity on behalf of both Carl and I to thank all of our team members globally, for their tremendous energy and commitment in the quarter to deliver these results.We delivered 18% total revenue growth, with a 28% improvement in adjusted diluted earnings per share and generated greater than 200% improvement in our operating free cash flow. These results were led by the strength of our 5% GTV volume growth on a constant-currency basis and stronger guaranteed contract rate performance and fee revenues, which contributed to our 11% service revenue growth in the quarter.Our online GTV had robust growth of 37% led by Marketplace-E delivering another tremendous quarter of growth, up 56% over last year along with strong IronPlanet weekly auction and over 120% growth in GovPlanet.Another highlight in the quarter was the great work from our Ritchie Bros. Financial Services team, which produced its 31st consecutive quarter of double-digit revenue growth at a very strong 29%.Our results were unfavorably impacted by a 3% GTV decline in our Live Auction channel and lower year-over-year inventory profit rate performance. The Live Auction GTV decline was driven by a few factors

[Karl Werner:]

Thank you, Sharon, and good morning everyone. To begin, I'd like to echo Sharon's comments and highlight our U.S. regions strong performance delivering solid positive growth across both live and online channels. As discussed, our third quarter live auctions were unfavorably impacted by the agriculture and energy sectors.Keeping that in mind that that last year's energy comp is a tough one to follow us we had a major event with a large single customer dispersal. The shift to [indiscernible] foreign exchange, lower Middle East performance and trade concerns affecting exports to various markets have also affected our international business. While these factors affected our live auction performance this quarter, we take them and describe because issues were not structural. They were either market-driven and/or timing related and are not indicative of our team's live auction execution in the quarter.In fact when looking at our live auction comp performance. These issues did not affect the U.S. region which posted high single-digit live GTV growth and 58% of our auctions globally delivered solid wide comps.To name just a few of the standouts; Edmonton was up 27%; Orlando was up 54%; Qigong [ph] Australia up 36%; Sacramento up 19% in Atlanta, Los Angeles up 42% and 30% respectively.I'd also be remiss if I did not mention our fantastic execution and record-breaking $77 million live auction in Houston earlier this week. As mentioned we are seeing some of the same of equipment which contributed to our overall unit growth with the U.S. driving a significant share of that. Particularly offsetting the unit growth with some price declines in older high hour heavy equipment and transportation categories.Before I move on to online commentary, I'd like to share some insights on priority bidding tool which we launched in the quarter. Priority bid will replace our current RB Prebid function which allows customers to place online bids up to a week before the event.With priority bid already in use and IronPlanet, this will give our customers a more consistent experience across platforms and allow customers more opportunity to place bids more often and provides us with insights into how item and categories may perform before the live auction. This also opens potential opportunities for marketing to intervene through direct campaigns if there are concerns of items underperforming.Turning to online performance. We had a strong quarter of online growth across all channels. 67% of our GTV was purchased by online buyers in Q3 versus 60% last year, in line with our overall improving supply environment. We also saw strong incremental volumes through IronPlanet weekly including contributions from our large strategic accounts.One of our growth initiatives is Marketplace-E solution. Our objective here is to drive penetration of the midstream segment which we discussed previously as part of our strategic roadmap.Our rapidly growing Marketplace-E Offers consigners complete control over pricing, time of disposition through a variety of unreserved formats. Marketplace-E offers consigners an alternative to selling their own or using brokers -- selling on their own or use of brokers and by achieving strong prices value through leveraging the RD platforms, our global reach and network effects.We officially launched Marketplace-E in January of 2018. Since inception, marketplace has surpassed the $5 million mark in GTB. Marketplace-E has momentum right now and is fully embraced by our sales team as another capability to serve our customers' needs, particularly those seeking control over every reserve platform.With Marketplace-E we are now attracting customers which in the past have not transacted with us. In fact through our customer data, we are seeing approximately 60% of our sellers on Marketplace-E and the last year have been new sellers to RBA or IronPlanet indicating that the channel is driving incremental new business.Marketplace is also giving us a beachhead for any new international markets in an asset-light format and markets where there isn't the same level of comfort with an unreserved platform.We are pleased with early strong momentum we are seeing and we'll continue to focus on scaling business attracting new customers as well as growing share of wallet with existing customers to capitalize on significant market – market share opportunities within the midstream segment.Turning now to our areas of focus in the fourth quarter. We are encouraged with the momentum we are seeing in our business. Over the last two quarters, we remain acutely focused on executing our priorities as we move in the fourth quarter and into 2020. We are focused on what we control and that starts with sales execution, leveraging our multi-channel platforms, and driving overall sales productivity improvement.Our sales effectiveness initiative called SAGE, was launched in Q2 and has now been fully cascaded to our sales teams, while they still take a few quarters to see real tangible outcomes. We are already encouraged by early signs of engagement and adoption. We remain firmly committed to our key growth drivers of expanding our base live and online auction businesses and accelerating our growth initiatives, including Marketplace-E, RB Asset Solutions, Ritchie Brother Financial Services, growing our priority international markets and our government business.Together with Sharon and the entire executive team, we have been committed to focusing on our people, our customers, and ensuring there's a high level of support and engagement as we progress through the CEO transition. Priority one, right now is to ensure this transition process is seamless as possible, while allowing our teams to stay focused on our business and be fully empowered to do the best each day.We've been in auction business for over 60 years. We've seen many inflections in cycles come and go. It's times like these where our determination shows and that is when our customers consider the implications of possible economic slowdown, they turn to a seat council on disposition options, timing and strategies. That is where we excel. That is where trust, experience become the biggest asset position as well to support both buyers and sellers apart from driving into – with our absolute best levels of service and commitment to continuously improve overall experiences.Finally, we will continue to be focused on our expense discipline and driving incremental leverage into our business, while maximizing our cash efficiency and operating free cash flow.With that, let me turn the call back to Sharon to close this out.

[Sharon Driscoll:]

Thank you, Karl. So to recap, we are pleased that the execution of our multi-channel strategy is showing positive results and with just one quick comment on Karl's remarks. That we have seen in the two years since its inception with Marketplace-E over $500 million of GTV transacted on that form. And that we have delivered strong financial performance across all of our core metrics of GTV, revenue, operating income, earnings per share. We also continue to make great strides towards achieving our evergreen model targets. Our online acceleration this quarter was very strong and with all of our core solutions of IronPlanet weekly Marketplace-E and GovPlanet posting positive growth.Our U.S. team delivered a solid performance with positive live and online GTV and very strong revenue growth. We continue to be very disciplined and are pleased with the strength of our balance sheet and our positive cash flow generation.Finally, we are very encouraged with the continued momentum in our business and confident our multichannel strategy positions us well for continued growth and value creation. At the end of the day this is a people business. And we would like to thank our entire team for their energy and passion for serving our customers and driving value for our shareholders.And with that, we are ready to move to the Q&A portion of the call. Operator, please open the line to questions.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from Cherilyn Radbourne of TD Securities. Your line is open.

[Cherilyn Radbourne:]

Thanks very much and good morning. I wanted to ask about what feels like an ongoing shift to lower value lots. Just curious whether that's principally the influence of GovplaNet? Or whether that's a trend that you're also seeing across the live auctions and online marketplaces?

[Sharon Driscoll:]

Hi, Cherilyn it's Sharon. I'll take that. So certainly GovPlanet is the impact that is a channel that has very low item prices. So that's very similar to our tow auctions at our live events. But we equally are still seeing, the age of equipment is still tending to the lower -- not later models but it's not in our sweet spot the way we would like it to be. So that is also having an effect. So it is being seen in our live events as well. And as we again continue to expand our capabilities in that small sector and in transportation, we do start to see downward pressure on our average sale price per lot.

[Cherilyn Radbourne:]

And how do you feel about that strategically? Because I understand that lower value items attract higher fees and that's positive for the revenue rate. But I assume that there's also more competition to sell lower value items versus higher value items?

[Karl Werner:]

Hey, Cherilyn, this is Karl. We get a lot of those in packages of equipment. So mix constantly changes. It's a balance for us. And we don't see -- the competition is mainly on the large packages and those are just a component of those.

[Cherilyn Radbourne:]

Okay. Fair enough. And then just on SG&A, you had some nice leverage there this quarter. Just wondering whether there was anything we should be mindful of as we model like lower stock-based compensation or anything of that nature?

[Sharon Driscoll:]

So no we were very pleased with the discipline that the teams showed in our SG&A spending. It's clearly things like travel and promotional costs were very well-managed in the quarter. The compensation expense is the primary driver of what you're seeing in Q3 is really related to variable based performance where we are seeing strong performance in our financial results compared to where we were last year.So I don't think there's anything particularly unusual for you to be considering. I do probably just would call out that there is currently a positive foreign exchange impact on our SG&A as we translate our international and Canadian offices into U.S. dollar currencies.

[Cherilyn Radbourne:]

Thank you. Those are my questions.

[Operator:]

Your next question comes from Derek Spronck of RBC Capital Markets. Your line is open.

[Derek Spronck:]

Okay. Thank you for taking my question. It was another quarter of pretty high inventory sales. Do you think this is going to be more of the trend going forward here? And the margins seem to be a little bit more compressed than it has been historically. Is that correct? And if so, are there any levers that you can pull to maybe change that dynamic?

[Sharon Driscoll:]

Sure. So I'll tackle that. So we're somewhat agnostic to the form at which our contracts are written. And it really is up to consign or demand in terms of whether or not we take something as a Straight commission, a guaranteed commission contract or an inventory position. The things that will cause inventory to fluctuate positively will be increases in insolvency transactions, increases in our international business, because those are the areas that really where you do need to take title to the assets to basically complete those transactions.So I think unfortunately this is the new accounting standard. So you see the variability which is why we've been recommending that from a revenue standpoint the performance of our service revenue line is more indicative of our overall growth and health of our business because there will continue to be variability in those -- in that revenue from inventory sales. And it does come with commensurate cost of good sold that will offset any increases in revenue that you see from that loan.

[Derek Spronck:]

Okay. That makes sense. Are you happy with the margin profile though of that business?

[Sharon Driscoll:]

Yeah. So again the margin profile is only part of the story. We do earn fees and other service revenues and those don't show up in that pure gross profit measure that you're really seeing on the face of the statements. Overall, if we go back to our overall at-risk performance, we are very much in line with our historical levels. And clearly, on our expectations with respect to both performance of inventory contracts and our guarantee contracts. So we're very pleased, particularly in light of -- right now what we're seeing is a very fluid and dynamic pricing environment and our teams have done a very good job of ensuring they're looking forward to where prices are going to be as we price out those at-risk contracts.

[Derek Spronck:]

Okay. No that makes sense. Thanks, Sharon. And just one more for myself if I could and then I'll turn it over. There's been obviously multiple different areas and segments that are delivering growth. Are there any particular areas or segments that you are most optimistic about in terms of providing growth over the next one to two years?

[Sharon Driscoll:]

So I think we're very encouraged with what we see in the U.S. and that really has been a tailwind for us for the last few years which is just related to equipment supply. So I'd say that that -- clearly what we're seeing in the quarter and the discussions that the U.S. team and the sales teams are having with their customers give us some degree of comfort that the current trend may not continue at that rate, but it actually looks like those tailwinds to supply have really abated. So we are quite keen on the progress that the U.S. team has made. And in addition the two key drivers of performance being our SAGE sales kind of effectiveness program and Marketplace-E, we're really pleased with how we're seeing that particularly the U.S. team adopting those concepts to provide better value to our consignors as well as improve our overall sales productivity with that force.

[Derek Spronck:]

Okay. Thanks, Sharon.

[Operator:]

[Operator Instructions] Your next question comes from Ben Cherniavsky of Raymond James. Your line is open.

[Ben Cherniavsky:]

Good morning guys. Sorry I'm still trying to completely understand the different revenue reporting that's changed since you -- since the accounting policies were changing. You couldn't just report it in a simpler fashion the way you used to. So the -- when I look at the other revenue that you reported, does that all fall into the fee bucket? Is all other revenue or fees – what -- or ask another way what exactly does that represent the other revenue?

[Sharon Driscoll:]

So, yes. So I assume you're referring to the other segment or the other classification which is made up of other segments. So what's predominantly in there is, Ritchie Bros. Financial Services, Mascus which is listing fee revenues and hosting fee revenues in RBAS, as well as ancillary and refurb-type revenues that are related to the equipment that comes into the transaction -- transactional site, but is not related to the auction.So what you would have seen as we've got very good growth in Ritchie Bros. Financial Services, we see -- are seeing some good growth in Mascus and RBAS, but a lot of the inventory that we sold through this quarter, the work that had been done on that for refurb, paints etcetera have been done in prior quarters. So you're seeing some declines in those ancillary revenue bucket purely because of timing and when network has performed.

[Ben Cherniavsky:]

But it's all -- but that is all classified as -- none of that is commissioned right, that all fall -- all the other revenue as you described, it would be fee based revenue?

[Sharon Driscoll:]

Yes, it's all in the fee bucket.

[Ben Cherniavsky:]

And other services include Ritchie Brothers, fee RBAS, right?

[Sharon Driscoll:]

Yes. Mascus, Logistics…

[Karl Werner:]

Logistics, refurbishers.

[Sharon Driscoll:]

Asset Class, Services group. It's a mix of a lot of service-related fees that we actually do outside of our auction fee structures.

[Ben Cherniavsky:]

Right. I guess what I'm trying to back in to here Sharon is, what the -- because I know there's also been some fee harmonization. And I'm trying to figure out how material that was in the quarter or year-to-date?

[Sharon Driscoll:]

So the fee -- yes so the fee harmonization is not in the other sector. It's in auction and marketplaces fee structure. And it was a large driver of total fee growth of 19%. And the two real factors, the current year harmonization, but also what we're seeing is this increase in small lots that you're getting year-over-year benefit not just from this year's harmonization, but the fee implementation from last year.And to build on Cherilyn's point, those fees are essential for us to be able to make money on those small lots and make it more - make it a more viable kind of part of our solution and it is definitely working. And without having impact to what we see as price realization rates or impact to our customers.

[Ben Cherniavsky:]

Right. So you're saying that there's also a mix component to it. As the loss gets smaller and you start imposing fees that aren't imposed on larger lots. And that will drive some of that revenue growth.

[Sharon Driscoll:]

I would put it a bit differently, Ben. I think it's just -- because on small lots, they don't hit the cap, so as a result the percentage of the GTV ends up higher on a rate basis, even though the dollars may actually be small on small lots is just they're not -- they just haven't hit the cap level.

[Ben Cherniavsky:]

Right. Okay. And then, you did make one reference to the evergreen targets, but I realize you're in transition to some new leadership. And I don't know, maybe those will be revisited. But -- and then, I think, I've asked this in past quarters. ROIC improved, but you're still roughly half of what your target is in two years? Do you still think that's achievable 15% in 2021?

[Sharon Driscoll:]

So, we do look at that. We've done our planning out. All our models indicate that evergreen target is still very much achievable through a combination of continued reduction in debt and earnings growth.

[Ben Cherniavsky:]

Okay. Thanks very much for answering my question.

[Operator:]

And that was our final question. I will now return the call to Mr. Mawani for final comments.

[Zaheed Mawani:]

Thank you, Chris, and thank you to everyone for joining us on our third quarter call. And we look forward to speaking with you again on our fourth protocol in the New Year. Have a great day everyone. Bye-bye. That concludes our call.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.