Q3 2019 Earnings Call
Thank you Pat if he would like to withdraw your question. Please press the pound Keith Thank you.
I'll now turn the call over to Mr. Zaheed Mawani of Investor Relations to open the conference call Mr. Molony you may begin your conference.
Thank you, Chris and good morning, and thanks for joining us on today's call to discuss our third quarter 2019 results. Joining me today, our Sharon Driscoll and call Warner Our interim co Chief Executive officers, along with other members of management will be available for the Q and a portion of the call. The following discussion will include forward looking statements comments that are not stay.
So in effect, 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 FCC and Canadian Securities filings available on our Investor Relations Web.
Site at Investor Dot Ritchie brothers Dotcom, we encourage you to review our earnings release and Form 10-Q , which are available on our website as well as at guarantee leader.
On this call we will discuss certain non-GAAP financial measures per the identification of non-GAAP financial measures. The most directly comparable GAAP financial measure and a reconciliation between the two to see our earnings release in Form 10-Q presentation slides to accompany our commentary today. These slides can be viewed through our light or recorded webcast or downloaded from our web.
Site.
All figures discussed today on todays call or in us dollars unless otherwise indicated ill now turn the call over to Sharon Driscoll term. Thank you Steve.
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're very pleased with the progress on our strategic initiatives and particularly with the performance in our us region and with our global online growth.
We continue to make good progress in the quarter with our margins limitation and our RV assets solution product and services along with our marketplace solution is resonating very well with customers.
This quarter highlights the solid execution by our sales and operations team to deliver positive results for our Consigners, particularly at a time when global markets faced heightens economic and political pressures.
Before we jump into the quarter I want to take this opportunity on behalf of both Carl and I. Thank all of our team members globally for their tremendous energy and commitments 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% GTB volume growth on a constant currency basis, and stronger guarantee 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 of 56% over last year, along with strong Ironplanet weekly options and over 120% growth in death planet.
Another highlight in the quarter was the great work from our Ritchie Brothers financial services team, which produced its 30 onest 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 first a shift in our Mourdock, Netherlands auction to Q2 of this year couples.
Jim environments within the global agriculture and energy sectors.
Regionally, our us team had an impressive quarter delivering double digit total GTV growth led by strong online performances from each of marketplace see Ironplanet weekly and Gulf climate together with high single digit growth in live industrial options.
The headline story for our Canadian business was slightly less positive as we experienced GTV decline, resulting primarily from the weakness in the agriculture sector and general uncertainty for industrial Consigners, primarily in Western Canada, leading into the federal election.
The agriculture weakness was driven by lower Ed commodity prices international trade uncertainty and unfavorable weather affecting harvest timing and leading to a deferral of equipment consignments.
All in we held 13 fewer on the farm auctions in Canada versus last year's third quarter and saw softer agriculture performance at our live events.
Notably however, we're already seeing a more positive story unfolds and good early momentum in Q4 with booked volumes from on the farm options significantly up over last year.
GTV in our international group declined in the quarter and was heavily impacted by the decline in the euro versus the us dollar.
Excluding the significant unfavorable impact of foreign exchange International was flat to last year. Despite the shift of the mourdock auction into the second quarter and the softness in the middle East.
Finally, our international group posted another strong marketplace performance with GTV growth in the quarter up 148%.
I wanted to add that our operational metrics remained strong and we are encouraged by our increases in the number of listed items and total number of overall bidders.
And over all in the market as it relates to use construction equipment supply OEM production levels appear to have caught up to new equipment demand.
In large strategic accounts are shifting their focus towards inventory management, which could indicate further loosening of equipment supply in the near to midterm.
Additionally, in the transportation sector, we've seen more assets come to market and coupled with some weakness in demand has led to pricing pressure on those assets in certain markets.
The impacts to supply will vary by geography, as consigners navigate such factors as the U.S, China trade deal Brexit the results of the federal elections in Canada, and a moderating economy in the U.S.
Looking ahead, we remain cautiously optimistic about the used equipment supply and as we've said in the past we do not expect to see a flood of equipment all at once but more general improvement as we go into Q4 and 2020 .
We are collectively focused on keeping the momentum going as we drive our business forward and stay focused on our long term growth initiatives.
Ill now turn to the financial highlights.
Our total revenue improvements of 18% was driven by both the 32% growth in inventory sales revenue and an 11% increase in service revenue.
Commission revenues increased 4% in line with GTV growth and strong guaranteed contract rate performance.
The revenues were up 19% in the quarter as a result of higher GTV volume the impact of our fee harmonization and a higher mix of lower value once.
Our BFS also contributed to fee revenue growth in the quarter with their strong performance.
The 32% growth in revenue from inventory sales was primarily due to a higher level of inventory deals transacted in the U.S. region and does planet inventory sales revenue from our government surplus contracts.
Our operating income on an adjusted basis, excluding the onetime severance costs related to acquisition synergy actions in the third quarter of last year was up 23% driven by our total revenue growth and operating leverage with our ESG and eight growth cost growing at about half the rate of service revenue growth.
Net income on an adjusted basis, which excludes the non operating gain on the sale of an equity investment in Q3 of last year improved 31% from both higher operating income and lower interest expenses.
Turning to our auctions and marketplaces segment service revenue was up 12% in the quarter.
Regionally the U.S. posted 19% service revenue growth led by strong lives and online GTV growth, including higher volume from our strategic accounts strong growth from Gulf planet as well as higher fee revenues.
Canada was up 2% on higher rate fee revenue from the fee harmonization, an increase in lower value lots, resulting in higher per lot fee rate in a 300 basis point year over year improvement in our guarantee conditions rate from in our industrial live auctions. This was partially offset by the significantly lower active.
I'd in the Canadian agriculture sector sector as mentioned earlier in my comments.
Our international service revenue decreased 3% due to the more deck auction shift softer performance at our Dubai auction, partially offset by higher commissions earned from online GTV growth.
On a rate basis, we were pleased with our am service revenue rate performance in the second quarter coming in at 13.8% roughly 90 basis points higher than last year.
The rate improvement was due to strong guarantee commission rate performance in both Canada, and GVE planet and in conjunction with fee revenue growth.
Moving onto our options and marketplaces segment inventory sales revenue.
The 32% growth in our inventory sales revenue was led by the U.S. region, which was up 106% over last year, primarily driven by the continued growth of GVE planet surplus contract and increased inventory contracts at the live on site auctions.
As well, we have seen a slight increase in distressed sale transactions and early signs of de fleeting by some large strategic accounts in both the construction and transportation sectors.
Our Canadian inventory sales revenue increased 11%, primarily due to a large equipment dispersals in the west during the quarter. Our international region was up 2% from increased inventory contracts in Japan and in Australia.
On a rate basis, our implied rate of return on inventory deals in the quarter was 8%, which was roughly a 250 basis point sequential improvement from Q2 levels.
The sequential increase in our rate was driven by disciplined inventory deal management as our sales and valuation teams navigated a very fluid pricing environment.
This increase was partially offset by some trailing effects from the remaining lower rate inventory in our international market, which was anticipated and which has now been fully sold through.
Overall, we are encouraged with our sequential inventory rate improvement and strong rate performance from our guarantee contracts delivering at risk rate performance, which remains in line with historical levels and our expectations.
Moving onto SGN, a expenses, we continue to prioritize our cost initiatives, the 6% increase in SDMA over the prior year quarter was mainly driven by higher year over year incentives.
Compensation due to improved financial results. Excluding this impact SDMA was only up low single digits compared to service revenue growth of 11%.
Ongoing incremental Gulf planet cost investments and RV at best growth and the positive impact of foreign exchange fluctuations due to the devaluation in the euro and the Canadian dollar also affected our SGN in.
We are pleased with our overall salesforce productivity, which on a trailing 12 month basis was up 5% year over year in the third quarter.
Turning to our balance sheet in liquidity metrics, our operating cash flow of $309.1 million for the nine months ended September Thirtyth improved 20, 218% over last year.
The improvement was driven by higher net income and improvements in working capital, primarily resulting from a decrease in inventory balances.
Additionally, cash flow this quarter was favorably affected by the timing of auctions closer to the ended the quarter and the corresponding timing of receipts and disbursements.
On a trailing 12 month basis, our operating free cash flow increased 214% to $334.4 million.
Our year to date Capex spend of $25 million is currently tracking under our full year range for 2019 of 45 to 55 million and with one quarter remaining we're now adjusting our full year 2019, capex guidance down to be between $35 million to $40 million.
During the quarter, we continue to reduce our long term debt position with additional voluntary payments of $10 million, along with a $4.5 million scheduled repayment.
Our strong cash position the reduction in debt as well as a 17% increase in adjusted EBITDA on a trailing 12 month basis has resulted in an adjusted net debt to adjusted EBITDA ratio of 1.4 times on a trailing 12 month basis, which continues to be well below our evergreen target of.
Less than 2.5 times.
On a trailing 12 month basis, our ROI seeing increased to 8.6% up from 7.1% in the third quarter of 2018.
Our overall financial position remains in very good health are clear strategic focus strong leadership across our business and a solid balance sheet give us continued confidence for the future.
And with that I'll now pass the call over to Carl Thank you shared and good morning, everyone.
To begin I'd like to echo share installments and highlight our us 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 seasonality in mind.
That last year's energy comp is a tough windfall as we had a major event with a large single customer distribution.
The shifted more dike foreign exchange lower middle East performance and trade concerns affecting exports to various markets have also affected our international business.
While these doctors affected our live auction performance this quarter, we taken stride because issues were not structural.
They were either market, driven and or timing related and are not indicative of our change live auctions execution in the quarter. In fact, we're looking at our live auction comp performance. These issues did not affect us region, which posted high single digit lied GTV growth.
And 58% of our auctions globally delivered solid lied comps today, just a few of the standouts Edmonson was up 27% Orlando was up 54% to long, Australia up 36% Sacramento up 19% in Atlanta, Los Angeles.
42, and 30% respectively.
I would also be remiss, if I did not mention are fantastic execution and record breaking 77 million dollar live auction in Houston earlier this week.
As mentioned, we're seeing some dosing of equipment, which contributed to our overall unit growth.
With us driving a significant share of that.
British particularly offsetting unit growth the some price declines in older Hi, our 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 pretty good function, which allows customers to placed online bids of two weeks before these in the priority bid already in use on Ironplanet. This will give our customers are more consistent experience across platforms allow customers more opportunities glacier goods more off.
Ian and provides us with insights into how items in categories may perform before 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 ongoing 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 volume through Ironplanet weekly, including contributions from our large strategic accounts.
One of our growth initiatives, which marketplace in solution.
Our objective here is to drive penetration of the midstream segment, which we discussed previously this part of our strategic roadmap a rapidly growing marketplace see offers consign consigners complete control over pricing time of disposition through variety of unusual formats marketplace.
Offers consigners and alternative to Sony their own for using brokers selling owner owner user brokers and by achieving strong prices value through leveraging the R&D platforms or global reach and network effects.
We officially launched marketplace in January 2018, since inception marketplace, you surpassed 5 million dollar Mark and GTV.
Mark Fleecy says momentum right now and is fully embraced by our sales team.
As another capability to serve our customers needs, particularly those seeking.
Control or for a research platform.
Marketplace.
We are now attracting customers, which is a passive not transacted with us in fact through our customer do this we're seeing that approximately 60% of our soldiers on marketplace seed in the last year in new sellers RV for Ironplanet.
Indicating that the channel is driving incremental new business marketplace. He is also giving us a beachhead for entering new international markets and an asset light format and markets, where there is the same level of comfort with unreserved platform.
We are pleased which early strong momentum you're 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 momentum you're seeing in our business over the last two quarters. We remained acutely focused on executing our priorities as we move into 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 or sales effectiveness.
In this initiative called Sage was launched in Q2 and has now been fully casketed to our sales teams.
While there's still.
Take a few quarters to see real tangible outcomes, we're already encouraged by early signs of engagement adoption.
We remain firmly committed to our key growth drivers of extending our based slides and online auction businesses and accelerating our growth initiatives, including marketplace fee.
RV assets solutions Ritchie brothers financial services growing our priority international markets and our government business.
Together with Sharon and the entire executive team, we've been committed to focusing on our people are customers and ensuring there is a high level of supporting an engagement as we progress through the CEO transition priority. One right now is to ensure this transition process is seen.
Most as possible.
While lowering our teams to suit focused on our business can be fully empowered to do the best each day.
We have been an auction business for over 60 years.
We've seen many inflections in cycles come and go it's times like these were.
Our determination shows that is when our customers considered institutions of possible economic slowdown the turned to a seat counts on disposition options timing and strategies that is where we sell that is where trust experienced become the biggest asset position as well.
To support both buyers and sellers that comprising of the with our absolute best levels of service and commitment to continuously improve overall experiences.
Finally.
We will continue to be focused on or expense discipline and driving incremental leverage into our business, while maximizing our cashing fiction efficiency in operating free cash flow with that let me turn the call back to sharing to close itself. Thank you Carl such a recap we are pleased that the execution of our multichannel strategy is showing positive result.
And with just one.
Quick comment on Carl's remarks that we have seen year into two years since inception with marketplace Z over 500 million of GTB transacted on that format.
And then 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 and governance Gulf planet posting positive growth.
Are you at team delivered a solid performance with positive lives 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're 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 and a portion of the call. Operator. Please open the line two questions.
Thank you.
This time I would like to remind everyone in order to ask a question press star from the number one on your telephone keypad.
Your first question comes from Sherlyn reform of TD Securities. Your line is open.
Thanks, very much and good morning, I wanted to ask about what feels like an ongoing shift to lower value lot.
Just curious whether that's principally the influence of Gov planet or whether that's a trend that you're also seeing across the live auctions and the online marketplaces.
Hi, Charlotte Sharon I'll take that.
So certainly Gov planet is an impact that is is a channel then has.
Very low.
Item by item prices. So that's very similar to our towel options at our live events.
But we equally are still seeing the age of equipment is still tending to kind of the lower.
Not later models like 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 lives 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 watt.
And how do you feel about that strategically because I understand that lower value items attract higher fees enough positive for the revenue rate, but I assume that theres also more competition to sell lower value items versus higher value items.
Picture of this Carl.
We get a lot of those in packages of equipment. So the mix constantly changes to bounce force.
We don't see the competition is mainly on the large packages and those are just a component of those.
Okay Fair enough and then just on SGN eight you had some nice leverage there this quarter.
Just wondering whether there was anything we should be mindful up as we model like lower stock based compensation or anything of that nature.
So no we get we were very pleased with the discipline that the team showed in their achieving a spending is clearly things like travel and.
Promotional costs were very well managed in the corner.
Compensation expenses 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 it's.
I don't think Theres anything, particularly unusual.
For you to be considering I do you know probably just would call out that there is currently at a positive foreign exchange impact on our SDMA as we translate our international and Canadian offices into U.S. dollar currencies.
Thank you those are my questions.
Your next question comes from derives from RBC capital markets.
Your line is open.
Okay. Thank you for taking my question.
It was another quarter of a pretty high inventory sales do you think this is going to be more of the trend going forward here and.
The margin seem to be a little bit more compress than it has been historically is that correct and if so are there any lever is that you can pull to to maybe chains that dynamic.
Well I share saw all tackle that.
We are somewhat agnostic to the forum, which are contracts are written and it really is up to consigner demand in terms of whether or not we take something as a straight commission.
Guaranteed commission contract or in inventory position of the things that will cause inventory to fluctuate positively will be increases in insolvency transaction increases in our international business because those are the areas that really where you do need to take.
Title to the assets.
Today's if we complete those transaction.
So I think you on unfortunately this is the new accounting standards. Please see the variability which is why we've been a recommending that from a revenue standpoint, the performance of our service revenue lines is more indicative of our overall growth and health of our business because.
It will continue to be variability in those in that revenue from inventory sales and it does come with commensurate cost of goods sold.
We will offset.
Any increases in revenue that you see from that loan.
Okay that makes sense.
Are you happy with the margin profile, though of that business.
Yes, 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 with statements.
Overall, 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 contract and our guarantee contract. So we're very pleased particularly in light of of right now what we're seeing is a very fluid and dynamic.
Racing environment, our teams have done a very good job of ensuring there looking forward to where prices are going to be as we price out those at risk contracts.
Okay that makes sense, thanks, Sharen and just one more for myself Africa, then I'll turn it over.
There's been obviously multiple different areas in segments that are delivering growth are there any particular areas. Our segments that you are most optimistic about in terms of.
Providing.
Growth.
Over the next one to two years.
So I think we're very encouraged with what we see in the U.S. and that really has been a.
A tailwind for us for the last few years would 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 you know comfort that that the current trends.
May not continue at that rate, but it actually looks like those tailwinds to supply have really abated. So were we are quite.
Quite keen on the progress that the U.S. team has made and in addition, our you know the two key drivers of performance being our Sage AD sales instead of effectiveness program and marketplace see we're really pleased with how we're seeing that particularly the U.S. team adopting those concepts to provide better van.
Al you to our cuts are consigners as well as improve our overall sales productivity with that Salesforce.
Okay. Thanks.
[noise] again, if you would like to ask a question press star is on the number one on your telephone keypad.
Your next question comes from Ben Cherniavsky.
Raymond James Your line is off.
Good morning, guys.
Hi, David.
Coriums I'm still.
Trying to completely understand the deferring revenue.
Reporting Thats no change since two.
Since the accounting.
Policies were changing you couldn't just reported.
In a similar fashion or use do so.
The.
When I look at the.
The other revenue that you've reported.
Does that all fall into the fee bucket.
It's all other revenue or our fees, what or asking another way what exactly does that represent the other revenue.
So yes so.
I assume you're referring to the other segments or the other classification, which is made up of other segments. The what predominantly in there is Ritchie brothers financial services.
Mascus, which is listing fee revenues and hosting.
Fee revenues and our bass.
As well as.
In February and Refurb type revenues that are related to the equipment that comes into the transaction.
Transactional sites, but is not related to the auction.
So what you would've seen as we've got very good growth in Ritchie brothers financial services, we see are seeing some good growth in mascus and our about but a lot of the inventory that we sold through this quarter. The it if the work that had been down on that for refurb pains et cetera have been done in prior.
Quarters, so you're seeing some.
Declines in those and celery revenue buckets purely because of timing and when that work is performed.
But it's all but that is all classified.
But none of those commissions right that all fall all the other revenue as you described it would be fee based revenue.
Yes adult is all in the fee bucket.
Right.
And other services includes.
Ritchie brothers.
The our boss right.
Yes, our vast masking the juices logistics costs.
Refurbishing.
Our appraisal asset services growth, it's a it's a mix of a lot of service related fees that we actually do.
Outside of our auction a fee structures.
Right I guess, what we're trying to back into your Sharon is what the because I know there's there's also been been some.
Fee harmonization.
And im trying to I'm trying to figure out how material that was in the quarter.
For year to date, so the seat yes as of the harmonization is not in the other sector is in options and marketplaces fee structure.
And it was a large driver.
Of total fee growth of 19% and there's 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.
You know the fee implementation from last year.
And to build on Sherilyn point.
Those fees are essential for us to be able to make money on those small lots and make it more.
Make it up a more viable kind of part of our solution and then it is definitely working.
Without having impact to what we see as price realization rates.
Or impact to our customers.
Right. So you're saying if there is also mix component to it as as the loss gets smaller and you start imposing.
Is that aren't imposed on larger logs and that'll drive some of that revenue growth.
I would put in a bit differently, then 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 lot. It's just there not a if they just haven't hit the cap level.
Okay.
And then I you know you did you didnt make one reference to the evergreen targets, but.
I realize you're in transition to some new leadership and and I don't know, maybe those will be revisited but.
Then I think I've asked this in past quarters, ROI see improved but you're still roughly half of what are your target is in two years do you still think thats achievable, 15% in 2021.
So we do look at that we've done our planning out all of our models indicate that that evergreen target is still very much achievable through a combination of continued reduction in debt.
And ER and earnings growth.
Okay. Thanks, very much as my questions.
[noise] that was our final question I will now turn the call to Mr. Maloney for final comments.
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 great day, everyone.
That concludes our call.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.