Q3 2019 Earnings Call
This time I would like to welcome everyone to the Ritchie brothers Auctioneers third quarter conference call.
All lines have been placed on mute to prevent any background noise.
Because the speakers remarks, there will be your question answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
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I'll now turn the call over the mystery. So he's one of Investor Relations to open the conference call Mr. Bonnie you May begin your conference.
Thank you Chris and good morning, Thank you for joining us on todays call to discuss our third quarter 2019 results. Joining me today, our Sharon Driscoll you called Warner Our interim co Chief Executive officers, along with other members of management will be available for acuity portion of the cool.
Following discussion will include forward looking statements or comments that are not a statement 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 a forward looking statements are detailed in our.
So you see in Canadian Securities filings available on our Investor Relations website at Investor Dot Ritchie Brothers Dotcom.
Encourage you to review our earnings release in Form 10-Q , which are available on our website as well its adherents here.
On this call he will discuss certain non-GAAP financial measures for the identification of non-GAAP financial measures most directly comparable GAAP financial measure and a reconciliation between that you see our earnings release Form 10-Q .
Presentation slides to accompany our commentary today. These slides can be viewed through our life or recorded webcast were downloaded from our website. All figures discussed today on today's call or in U.S. dollars, unless otherwise indicated I'll now turn the call over to Sharon Driscoll drug.
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 markets.
We're very pleased with the progress on our strategic initiatives and particularly with the performance in our U.S. region and with our global online Blue.
We continue to make good progress in the quarter with our bars implementation and our RV assets solution product and services along with her marketplace. Each 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 heightened economic and political pressures.
Before we jump into the quarter I want to take this opportunity on behalf of both Carl and I think all of our team members globally for their tremendous energy and commitment in the quarter to deliver these results.
We delivered 80% 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 guaranteed contract rate performance and fee revenues, which contributed to our 11% service revenue growth in the quarter.
Our online GTB had robust growth of 37% led by marketplace E delivering another tremendous quarter or growth of 56% over last year, along with strong Ironplanet weekly options and over 120% growth seems a planet.
Another highlight in the quarter was the great work from a Ritchie brothers financial services team, which produced its 31st consecutive quarter, a double digit revenue growth at a very strong 29%.
Our results were favorably impacted by a 3% GTV decline in our lives auction channel and lower year over year inventory profit rate performance. The wide auction GTV decline was driven by a few factors first a shift in our more tech Netherlands auction to Q2 this year.
With challenging environments within the global agriculture and energy sectors.
Regionally, our U.S. team had an impressive quarter delivering double digit total GTV growth led by strong online performances from each of marketplace D. Ironplanet weekly and Gulf Planet together with high single digit growth in light 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.
Oh, Yes, we held 13 fewer on the farm auctions in Canada versus last year's third quarter and saw a softer agriculture performance at our wind event.
Notably however, we're already seeing them more positive story unfolds and good early momentum in Q4 with booked volumes from on the farm option significantly up over last year [noise].
GTV in our international group declined in the quarter and was heavily impacted by the decline in the euro versus the U.S. dollar.
Excluding the significant unfavorable impact of foreign exchange International was flat to last year. Despite the shift of the more tech auction into the second quarter and the softness in the middle East.
Finally, our international group posted another strong market place eat performance with GTV growth in the quarter up 148%.
I wanted to add that our operational metrics remain strong and we are encouraged by our increases in the number of lifted 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 and large strategic accounts are shifting their focus toward 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 the varied by geography as Consigners navigate such factors as the U.S. trying to 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 fleet 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 driver business forward and stay focused on our long term growth initiatives.
I'll now turn to the financial highlights.
Our total revenue improvements and 18% was driven by both at 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 read performance fee revenues were up 19% in the quarter as a result in higher GTV volume the impact of our feet harmonization and a higher mix of lower value wants.
Rvs. That's 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 Doug 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 SGN eight gross costs growing at about half the rate of service revenue growth.
Net income on an adjusted basis, which excludes the nonoperating 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 in marketplaces segment service revenue was up 12% in the quarter.
Regionally the U.S. posted 19% service revenue growth led by strong like an 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 fee revenues from the feed harmonization and 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 ranged from in our industrial live auctions. This was partially offset by the significantly lower activity 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 Nm 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 a gov planet surplus contract and increase 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 like some large strategic accounts in both the construction in transportation sectors.
Our Canadian inventory sales revenue increased 11%, primarily due to a large equipment dispersal in the west during the quarter. Our international region was up 2% from increased inventory contracts in Japan, India and 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 much great performance, which remains in line with historical levels and our expectation.
Moving onto U.S.G. M&A expenses, we continue to prioritize our cost initiatives.
The 6% increase in F G and H over the prior year quarter was mainly driven by higher year over year incentive.
Compensation due to improved financial results.
Excluding this impact asked you name it was only up low single digits compared to service revenue growth of 11%.
[noise] ongoing incremental Gulf planet cost investments in RV at best growth and the positive impact of foreign exchange fluctuations due to the devaluation in the Euro and Canadian dollar also affected our as Janet.
We are pleased with our overall salesforce productivity, which on a trailing 12 month basis was up 5% year over year into 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. It's currently tracking under our full year range for 2019, a 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 and 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.
Less than 2.5 times.
On a trailing 12 month basis, our ROI see 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 given continued confidence for the future.
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 or U.S. regions strong performance delivering solid positive growth across both live and online channels.
As discussed our third quarter like auctions were unfavorably impacted by the agriculture in energy sectors.
In mind.
At last year's energy comp is a tough when it falls, we had a major event with a large single customer disruption.
The shifted more dike foreign exchange lower middle East performance in trade concerns affecting exports. The various markets have also affected our international business.
While these doctors affected our liposuction performance this quarter, we kicked in stride because issues were not structural.
They were either market driven entertainment related and are not indicative of our teams widely auction execution in the quarter.
Looking at or Liposuction cost performance. These issues did not affect us region, which posted high single digit like GTV growth and 50% of our auctions globally delivered solid wide comps today, just a few of the standouts Edmonson is up 27% well then it was up.
The 4% she long Australia up 36% Sacramento.
19% in Atlanta, Los Angeles up 42, and 30% respectively.
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 machine to machine have equipment, which contributed to our overall unit growth.
With U.S. striking a significant sure about [noise].
[noise] purchase, particularly offsetting unit growth and some price declines in older Hi, our heavy equipment and transportation categories before I move onto online commentary I'd like to share some insights on priority bidding tool, which launched in the quarter.
I would bid will replace our current RB pretty good function, which allows customers to placed online bids two weeks before the event.
Priority bid already in use on Ironplanet. This will give our customers are more consistent experience across platforms I love customers more opportunities bleached goods more often and provides us with insights into how items. Some categories, maybe performed before live auction.
It's also opens potential opportunities for marketing to intervene through direct campaigns. If there are concerns of items underperforming.
Turning to all my performance, we had a strong quarter ongoing growth across all channels, 67% of our GTV was purchased by online buyers from Q3 versus 60% last year.
In line with our overall improving supply environment.
Also saw strong incremental volume through our incident, we believe including contributions from a large strategic accounts.
One of our growth initiatives as 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. He offers consign consigners complete control over pricing.
Disposition through variety of unusual formats marketplace. He offers consigners, an alternative to selling their own for UGI brokers, so much longer owner user brokers and by achieving strong prices.
Oh, you through leveraging the Arden platforms are global reach and network effects.
We officially launched marketplace. He in January 2018, since inception marketplace, even surpass the 5 million dollar Mark in June .
Hercules He says momentum.
Now and is fully embraced by our sales team.
Another capability to serve our customers needs, particularly those seeking.
Control for for every shared platform.
Marketplace.
We're now attracting customers, which in the passive not transacted with us in fact through our customer do that you're seeing that approximately 60% of our soldiers on marketplace. He and the last year in new sellers argued for I understand it.
Indicating that the channel is driving incremental new business marketplace. He is also giving us a beachhead for entering new international markets in an asset light format and markets, where there isn't the same level of comfort with an unusually tough for.
We are pleased which early strong momentum you're seeing and we'll continue to focus on scaling business attracting new customers.
As worlds growing share of wallet with existing customers to capitalize on significant market markets your opportunities within the midstream segment.
Turning now to our areas of focus in fourth quarter.
We are encouraged with momentum you're seeing in our business over the last two quarters we remained.
Focused on executing their 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 affecting the.
In this initiative called Sage was launched in Q2, and it's now been fully cascade into our sales teams.
Well there's still.
Take a few quarters to see real tangible outcomes. We are already encourage by early signs of engagement in adoption.
We remain firmly committed to our key growth drivers of extending or be slides and online auction distances and accelerating our growth initiatives, including marketplace gene.
RBS It 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 or people are customers and ensuring there's a high level of supporting and engagement as we progress through the CEO transition priority. One right now is to ensure this transition process. She.
Yes, that's possible.
While allowing our teams to see focused on her business can be full manpower to do the best each day.
We've been an auction business for over 60 years.
Sumit inflections in cycles come and go it's times like these were.
Determination shows.
That is when our customers considered implications of possible economic slowdown be turned to us seat counts on disposition auctions tightening and strategies, that's where we've so.
That is where trust experienced become the biggest asset position as well.
To support both buyers and sellers that's in place with our absolute best levels of service and commitment to continuously improve.
Improve overall experiences.
Finally.
We will continue to be focused on or expense discipline, and driving incremental leverage into our business, while maximizing or cashing fiction efficiency in operating free cash flow with that let me turn that pull back to shirt business.
Thank you Carl such a recap we're pleased that the execution of our multichannel strategy is showing positive results and with just one.
A quick comment on Carl's remarks that we have seen year in the two years since inception with marketplace. He over 500 million of GTB transacted on that format.
And then we have delivered strong financial performance across all of our core metrics of GTB revenue operating income earnings per share.
We also continued 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 government Gulf planet posting positive growth.
Our U.S. 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 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 at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from Sherlyn reform of TD Securities Your line itself.
Thanks, very much and good morning.
Ask about what feels like an ongoing shift to lower value lot.
Just curious whether that's principally the influence of Gov planet or.
That's a trend that you're also seeing across the live auctions and the online marketplaces.
Hi, Cherilyn, it's Sharon I'll take that so certainly go planet is an impact that is is a channel that has a very low kind of item item prices. So that's very similar to our towel options at our live events.
We equally are still seeing or the age of equipment is still tending to kind of the lower you 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 we didnt 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 selling price per watt.
How do you feel about that strategically because I I understand that lower value items attract higher fees enough positive for the revenue rate, but I assume that there's also more competition to sell lower value items versus higher value items.
Picture of the squirrel, we get a lot of those in packages of equipment. So mixed constantly changes, it's a bounce force and 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, even some nice leverage there this quarter.
Wondering whether there was anything we should be mindful of as we model like lower stock based compensation or anything of that nature.
So no. We didn't we were very pleased with a the discipline that the teams a showed in their achieving a spending is clearly things like travel and.
Notional cost were very well managed in the corner you know the compensation expenses. The primary driver of what you're seeing in Q3 is really related to.
Variable based performance, where we are seeing a strong performance in our financial results compared to where we were last year. So it's you know I don't think there's anything particularly unusual.
For you to be considering I do you know probably just would call out that there is currently a positive foreign exchange impact on our S. DNA as we translate our international in Canadian offices into U.S. dollar currencies.
Thank you those are my questions.
Your next question comes from Derek Spronck of 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 gonna be more the trend going forward here and the the margin seem to be a little bit more compressed than it has been historically is that correct and if so are there any LIBOR is that you can pull to to maybe changed.
Dynamic.
Last year, so I'll tackle that yeah, we are somewhat agnostic to the form 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 a guaranteed commission contract or in inventory position.
And the things that will cause inventory to fluctuate positively will be a 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 to basically complete those transaction.
And yeah. So I think you want. Unfortunately this is the new accounting standards. So you see the variability which is why we've been a recommending that from a revenue standpoint. The performance of our service revenue line is 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 goods sold that will offset any increases in revenue that you see some at home.
Okay that makes sense <unk> are you happy with the margin profile, though of the of that business.
Yeah. So you know again the margin profile is only part of the story, we do earn fees and other service revenues in those don't show up in that pure gross profit measure that you're really seeing on the faced with statements. Overall you know we go back to our overall at risk performance. We are very much in line with our history.
Oracle levels, and clearly on or expectations with respect to both performance of inventory contract and are guaranteed contracts. So we're very pleased particularly in light of of right now what we're seeing is a very fluid and dynamic pricing 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 atlas contracts.
Okay that makes sense, thanks, Sharen and just want to one more for myself African and then I'll turn it over a 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 a providing a growth.
Over the next one to two years.
So I think were very encouraged with what we see in the U.S. and that really has been a tailwind for us on for the last few years would just related to equipment supply. A you know so I'd say that that you know clearly what we're seeing in the quarter and but discussions that a U.S.T.
In a and the sales teams are having with their customers give us. Some degree of you know comfort that that the current trend you know 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.
The U.S. team has made and in addition, our you know the two key drivers of performance being our sage and sales it kind of effectiveness program and marketplace. He we're really pleased with how we're seeing that particularly the U.S. team adopting a those concepts to provide better value to our cuts.
Consigners as well as improve our overall sales productivity would that salesforce.
Okay. Thanks <unk>.
[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 venture any ASCII of Raymond James Your line is off.
Good morning, guys.
Hi, Dan.
Sorry, I'm I'm still trying.
Trying to.
Completely understand the deferring revenue reporting that's you know change since you.
Since the accounting.
Policies were changing you couldn't just reported a you know in a similar fashion or used to so.
The when it when I look at the.
The other revenue that you've reported.
Does that all fall into the feed bucket.
It's all other revenue or our piece, what or asking another way what exactly does that represent the other revenue.
So yes, so we 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.
Masking switches listing fee revenues and hosting fee revenues and our bass.
As well as a in February and Refurb take 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 that's kids and our about but a lot of the inventory that we sold through this quarter the it.
If the work that had been done on that for refurb paint et cetera had been done in prior quarters. So you're seeing some you know I'm 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 as that none of those commissions write that off all the other revenue as you described it would be fee based revenue.
Yes adult it's all in the feed bucket.
Right and other services includes a Ritchie brothers.
The our boss right.
Ah, Yes, our best masking the Jews logistics costs.
Yeah.
Our appraisal asset services group, 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 what I'm trying to back into your Sharon is what the because I know there's there's also been then some.
He harmonization.
And I'm trying to I'm trying to figure out how material that wasn't a quarter.
For your to do so the feet yeah. So the P. harmonization is not in the other sector is in options and marketplaces fee structure and it was a large driver.
<unk> of total fee growth of 19% and there's two real factors the.
Current year harmonization Ah, but also what we're seeing is this increase in small watch that you're getting year over year benefit not just from this year's harmonization, but the fee.
On the you know the fee implementation from last year, and you know to build on Cherilyn point those fees are essential for us to be able to make money on those small lots and make it more you make it up a more viable kinda part of our solution.
And you know 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 that there's also a mix component to it as as the loss gets smaller and you start imposing fees that aren't imposed on larger logs and not that'll drive some of that revenue growth.
I I would put into that differently than you know I think it's just because on small lots they don't hit the cap.
As a result, the percentage of the GTV ends up higher on a rate basis, even though the dollars may actually be smile on small lot.
It's just there not a if they just haven't hit the cap level.
Right Okay.
Okay.
And then.
So 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 would be revisited but.
And then I think I've asked this in past quarters, Aro I see improved but you know you're still roughly half of what are your target is in two years do you still think that's 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 a and earnings growth.
Okay. Thanks, very much as my question.
[noise] that was our final question. So now I'll turn the call to Mr. Molony 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 quarter call them and you either have great day everyone.
That concludes our call.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.