Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q2 fiscal year 2020 liquidity services earnings Conference call.
This time all participants are in listen only mode. After the speaker presentation. There will be a question answer session to ask your question. During the session you will need to press Star then one on your telephone.
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I like to hand, the conference over to your speaking today Ms., Julie Davis Senior director of Investor Relations. Thank you. Please go ahead ma'am.
Thank you, Jamie Hello, and welcome to our second quarter fiscal year, Tony Tony Financial results Conference call joining us today, our bill and Greg, Our Chairman and Chief Executive Officer, and Jorge for a while our executive Vice President and Chief Financial Officer.
We will be available for questions after our prepared remarks.
Following discussion or responses to your questions reflect management's views as of today may seven.
Tony Tony and we will include forward looking statements actual results may differ materially.
Additional information about factors that could potentially impact our financial results is included in today's press release and in our filings with the FCC, including our most recent annual report on form 10-K.
As you listened to today's call. We encourage you to have our press release on synovial, which includes our financial results as well as metrics and commentary on a quarter.
During this call, we'll discuss certain non-GAAP financial measures and our press release on her filings with the FCC each of which is posted on our website you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. We also use certain supplemental operating data as a matter of certain components of operating performance.
Which we also believe is useful for management and investors. The supplemental operating data includes gross merchandise volume and should not be considered a substitute for or superior to GAAP results.
At this time I'd like to turn the presentation over to our CEO Bill Angrick.
Thank you Julie good morning, and welcome to our Q2 earnings call.
I'll review, our Q2 performance and provide an update on key strategic initiatives.
Next Jorge so while we'll provide more details on the quarter.
During one of the most difficult periods in global markets.
What did he services has responded quickly.
To protect our employees.
Our customers and our shareholders.
In March we move rapidly to address all health and safety issues.
Our employees and customers.
And to control costs.
In order to mitigate the impact of reduced volumes.
And our business.
Your humbled by in very proud of our team's effort.
The work together and quickly adapt to the new environment.
To continue to deliver value to our buyers and sellers.
Our primary focus during the global pandemic, and resulting economic crisis is to help our sellers monetize assets and generate liquidity and the safe and reliable manner.
Oh, providing fires online access to the inventory and equipment they require to meet their business needs.
Leveraging our marketplace solutions to find high paid for in ship assets commercial and government customers are able to conduct commerce safely and efficiently.
Our results for the second quarter, largely aligned with our expectations through mid March.
The last two weeks of March were impacted by the economic fallout surrounding the pandemic, which had an adverse effect.
On our overall results.
Our our C.G. segment grew GMB by 6% over the prior year period.
Despite declines in seller activity at the ended the quarter its online retailers prioritize their attention and resources to meet demand almost exclusively for you central goods.
We also saw mixed higher demand with some buyers increasing their average purchases and some decreasing depending on the varying circumstances.
Prior to this slowdown we experienced strong volume in our Rscg segment from existing sellers.
And we launched new programs with both mid sized and large retailers and we continue to see strong higher demand for retail goods in our liquidation dot com marketplace.
And our CAG segment, we saw a significant slowed down really in the second quarter as travel restrictions in facility closures in China interrupted supply from our sellers and prevented buyers from inspecting goods already for sale.
This trend affected or a media and north American regions in March as the pandemic spread.
We are starting to see seller facilities reopen across the globe and anticipate activity will increase steadily provided governments continue to reduce restrictions related to cobot 19.
Our Gulf deal segment was on track to report record second quarter, GMP, but volume from sellers slowed significantly during the last two weeks of March as governments enacted shelter in place orders.
And closed facilities.
There's also prevented fire pickups and their ability to complete related transactions.
Finally, our machine Neo segment revenue grew 24% over the prior year. Despite a slow down in traffic during March as equipment buyers many of whom are small businesses.
Waited for better visibility on the depth of the economic downturn.
During Q2, we further enhanced our new consolidated market place all surplus dot com, including the addition of new self service features that enable a low touch solution to sell assets online, which eliminates the need for live in person contact.
We have seen early adoption of this model from sellers that have historically relied on our traditional managed services approach as a shift to primarily cloud based business processes.
And early March we began to transition our marketing focus from legacy marketplaces to all surplus and I've seen a 92% increase in traffic from targeted buyers and the increase in transactions completed through the new marketplace.
We believe our self solution self service solution over time will be an attractive growth opportunity as business sellers and buyers adapt to social distancing guidelines due to the pandemic.
Moreover, by aggregating supply on all surplus.
We are providing buyers and sellers more opportunities to quickly transact across a wide array of products, including heavy equipment energy and manufacturing equipment.
Looking forward.
It is very difficult for us to forecast the impact of the pandemic honor business.
We all understand the near term impacts of the pandemic had been quite negative.
Public policy actions in the U.S. and abroad have included meaningful restrictions on economic activity, including business closures travel restrictions limitations on the operations of business activity or significant prior to separation of the central business functions over reverse supply chain functions.
As a consequence of these actions the flow of assets into our marketplaces has been reduced.
We expect sharply lower volume from our Gulf deal segment until state government reopening [noise].
Reopening phases take place.
As the economy reopens in that business climate improves we believe our government sellers will resume their selling activity over time.
We are starting to see an increase in activity as governments prepare to reopen facilities in the coming weeks.
However, at this time, the overall financial impact.
State and local government agencies.
On the pandemic remains unknown.
And this could influence their decisions to sell surplus assets in the future.
Our our C.G. segment.
Expects to continue to support.
Retailer needs, including online retailers through our liquidation dot com marketplace, even if they lower than average volume in the short term.
As long as we can ensure the safety of our employees we will maintain.
Or Feldman center operations and support the essential supply chain needs of our sellers and buyers.
As the pandemic restrictions subside, we expect retailers to address the reverse supply chain needs no more comprehensive way turning to third party vendors such as ourselves to address any accumulation of returns or excess inventory.
Accumulated during the shelter in place and safer at home phases of the pandemic.
We also expect our CAG segment see reduced volumes as many seller facilities are close.
And restrict buyer inspection of assets asset pickup and in many cases.
Employee cataloguing of assets for sale.
Yeah, we believe the need for liquidity from our sellers in the CAG segment.
And the demand for value price equipment from our buyers will create future positive conditions as supply and demand within our CAG segment.
We have a longstanding market maker reputation for selling high value equipment globally across numerous industries.
And we'll continue to support the needs of our traditional seller base.
The same time, we will offer a new expanded and timely solution to sell in place with our self service low touch solution on all surplus dot com, which aligns with our long term strategy.
Our long term strategy remains focused on creating efficiencies for ourselves our sellers and buyers.
Focusing on the people processes and technologies that deliver optimal liquidity in the reverse supply chain.
And enables our growth.
Through an asset light low touch marketplace solution.
In closing during the pandemic.
We have witnessed.
Shining examples of our team's ability to consistently show our customers. We are the most reliable partner for delivering results and the reverse supply chain no matter the circumstances.
We believe we are well positioned to weather the global Pandemics, if cobot 19, and that the strength of our online platform and the ingenuity of our team will enable us to adapt and solve evolving challenges our sellers and buyers across the industries we serve.
I'll now turn it over to Jorge for more details on the quarter.
Good morning, we finished the second quarter of fiscal year 2020.
Within guidance range for all our metrics, except gross merchandise volume.
It was $144.3 million and only slightly below.
$145 million.
For the low end of guidance.
As compared to the second quarter fiscal your 29 team.
CMV and adjusted EBITDA were down on one.
Lower volume in our Cogs segment related to cope with 19 impacts across.
EMEA in North America.
To lower volumes than expected in our gut feel segment related to cope with 19 impacts in March.
Offset growth in volumes in January and February.
Three.
Slower activity in our Rscg segment.
At the end of March related to cope with 19 impacts.
Which offset increased volumes from existing sellers through mid March.
For the impact of the wind down of our view of the scrap contract last year in our card segment.
Five.
Previously planned increases in our sales expenses.
And a higher marketing expenses to promote our new ecommerce technology platform.
And further develop our consolidated marketplace.
We have been closely monitoring the cobot 19 pandemic.
By mid March we began to experience an impact operations.
Resulting from the actions taken by government and private sector entities to limit the spreads.
As a result, the flow of assets into our marketplace.
Was hindered solar facilities close which in turn reduce the ability of their employees to process assets and for buyers to pick up or range for shipping about.
Compared to the second quarter fiscal year 2019.
GMB declined 7%.
And revenue was also down 7%.
Including the impact of the wind down of the deal the.
Crop contract.
In the second quarter GAAP yield GMB was flat as compared to the second quarter fiscal year 2019.
As a result of reduce Bobby beginning in mid March with many government facilities closed due to cope with 90.
Our retail supply chain group Dnbi was up 6%.
Given by growing volume within existing seller account. Despite the mid March effect of corporate 19.
There are a C.D. began to experience reduced volumes result, resulting from retailers prioritizing their resources to meet the band.
Central goods in response to the pandemic.
These improvements were partially offset by 30%, 37% year over year decrease in our Cogs segment.
Impacted by the wind down of our deal the scrap contract.
An impact from the Cobot 19 pandemic.
As travel restrictions and facility closures in China first uninterrupted supply from sellers and prevented buyers from reflecting good.
This trend affected our EMEA North American regions in March as a pandemic spread.
Including.
Excluding.
The impact of the deal the contract the Cogs segment declined 28%.
We reported second quarter fiscal year 2020 revenue of 52.8 million dollar.
Despite the cobot 19 related headwinds.
Got deals revenue increased 1.6% on better product mix.
And RCG increased 6.6%.
Our product segment revenue decreased 49% compared to the second quarter fiscal year 2019, including the wind down of the deal the crop contract.
Excluding the deal the contract.
Todd segment revenue was down 25% compared to same quarter last year.
Our second quarter fiscal year 2020, GAAP net loss was $4.2 million.
3% improvement from a loss of $4.4 billion in the second quarter fiscal year 2019.
As top line impact were offset by lower operating expenses than last year.
Adjusted net loss was $3.2 million.
An increase from a loss of $719000 last year.
Which reflected.
Mainly higher stock compensation in the prior year.
Our second quarter, adjusted EBITDA was negative $1.6 million.
Hey decline from a positive $937000 in the same period last year also reflecting lower stock compensation expense this year.
We have a debt free balance sheet.
At March 31st.
Many 20, we had a cash and short term investment balance of $51.8 million.
An increase of $2.6 million from the prior quarter ended.
Number 30 for.
2019.
During the quarter, we paid a 5 million dollar machine you earn out payment.
Based on achievement of performance benchmark.
Looking ahead.
Bill laid out we expect the cobot 19 pandemic may cause GMB, adjusted EBITDA and cash to declined in the short term although.
Actions taken to conserve resources and the speed of which business activity might return may mitigate these short term decline.
The likelihood magnitude and timing of these events across our segment.
Difficult to predict.
And we expect to be negatively impacted by lower number of transactions on our market places in the short term and possibly longer which will affect our operation and cash flows.
We are therefore, not providing quarterly guidance.
Thank you.
We'll now take your questions.
Thank you as a reminder to ask a question you will need to press Star. Then wondering you touched on telephone to withdraw your question press the pound key please standby while he compiled the Q when they roster.
Our first question comes from Colin Sebastian with Baird. Your line is now open.
Thanks, Good morning, everyone Hope you all are safe and healthy.
Couple of bigger picture questions for me first on on all surplus.
And and sort of consolidating the the buyer and the merchant base of bids or you are you seeing any synergies yet in terms of aggregating those larger groups and will be reasonable to expect overtime and improvement in auction participants.
And then and then secondly, just given your experience bill in prior downturns in the event that we have more of a prolonged recessionary.
Scenario, how should we think about the timeline for a potential lift and liquidation volumes, particularly looking at the.
Retail in the in the CTG divisions. Thank you.
Sure.
Well regarding your first question part of our long term strategy has been to drive.
Scale benefits of aggregating supply and demand and.
Our consolidated marketplace, which has been branded all surplus we know that in marketplaces scale matters. It helps us leverage marketing spend.
It also.
Allows us to.
Support cross pollination of our buyers buyers who might buy in a category such as transportation may also have needs and adjacent categories, such as material handling equipment or construction equipment.
So it's a natural place for us to know, we see a lot of overlap and.
The industrial categories.
You know the thing so weve managed and sold for many years for both commercial and government sellers and early returns there are positive.
We're taking it methodically. This is a long term effort. This is not something thats going to turn on a dime, but we've had.
Good validation with the customers that have come in and we're seeing.
Good receptivity for both.
The marketplace and self service capabilities.
Hello sellers to upload advantage transactions directly on the marketplace and reach the 3.6 million buyers that we have regarding recessions I think what's interesting. This time cone is.
I think we've had history of doing well in recessionary periods for a variety of reasons.
As far as how well we do in Pandemics.
Pandemics, which result in travel restrictions.
Facility closures.
Shelter in place orders, so thats an entirely different.
Environment and I think in the short term there's no question.
That has a severe restriction in commerce.
For everybody not just liquidity services.
But in the mid and long term, we are counter cyclical marketplace. We know that our buyers are frugal are looking for value.
And we know that sellers, whether they'd be retailers manufacturers are in government agencies are looking to monetize assets those speak to our strengths.
And so.
Periods like that 2008 2009 downturn.
We've had steady progress and we would expect once you normalize for some of these very extraordinary.
Restrictions in society and restrictions and government.
Hollysys once you normalize from that we are accounted cyclical.
Play if you will.
But I don't want to sugar coat.
What we've witnessed I think April was very difficult for this economy.
We had many longstanding.
Never meant sellers, who simply closed up.
No access to those facilities no employees no ability to listen sell assets. So in many parts of that.
Market business was closed.
And did that that's going to have a very negative short term impact.
How do we predict the future well, we can't tell you if it's a V recovery in L. recovery.
Some folks are talking about a W where do you have.
A recovery and then maybe a second wave that's why it becomes very difficult to provide.
Near term guidance.
And maybe on that note.
Do you we've seen.
Different companies adapt to the environment and you talk about sell in place and companies will need to liquidate assets and inventory things like that.
Are there and you did reference some of this but.
Our their programs are methods being put in place, which given some of the friction out physical locations and lack of.
Like of bodies in warehouses to manage this or there are there ways that companies and municipalities are adapting to that so that flowed can start to start to start to happen again.
Well, what's fascinating as you see.
The same problem set address differently different locations.
And.
These are ultimately local decisions.
Many of our.
Clients, our local municipalities pounds villages counties and so they all attack it slightly differently, we certainly have.
Educated the market on the availability of the technology and able to approach that eliminates the need for in person interaction.
And that that's a great solution in this in any environment, we believe particularly when there is.
The health care issue or a concern so.
That message overtime, we think resonates.
And is the strength of ours.
That that value proposition is strong.
But subordinated to whatever the governor or the mayor of a local town decide you understand that.
And your facilities are still open is that correct.
Well, we have we have a couple different.
Aspects to our.
Operations, our retail supply chain fulfillment centers are an essential part of the supply chain and have been continuing to function and operate although.
Less than full capacity, because we're maintaining strict guidelines.
In line with.
Recommendations from healthcare and other experts.
Our offices.
While technically open.
As most of America has adapted so so what we adapted to a virtual work from home environment primarily.
And that will continue to be the case.
And we'll continue to be governed by state local ordinances.
And you know outside the United States much the same much the same.
We don't have distribution center fulfillment centers outside the United well in Canada, we do and that that is more or less the same as our.
Our U.S. retail supply chain operations open.
Operating but less than 100% fulfill capacity and the other parts of our marketplace or more more or less than a virtual.
Virtual online.
Status of operation at this stage.
And then Jorge comments on cash and.
Just the near term dynamics I mean, how are you feeling in general about liquidity position of the company and.
Different scenarios that may play out over the coming months.
Well, we're managing.
The drop.
He's me from the topline.
And managing the expenses accordingly.
You saw we finished march with a.
Reasonably good.
Cost position a stronger than we ended last quarter as we thought and that's despite of course having spent.
5 million during this last quarter on the machine you earn out so it was reasonably good strong cash generating quarter.
As the business.
Picks up.
Obviously.
The cash will will improve.
You know for the short term.
Being over $50 million on the balance sheet given our.
Are you actions that we took in March for the month of April.
We're feeling comfortable with that which is why we took those actions and as we go forward, we'll continue to reassess.
We do have.
Avenues for.
For other capital but for now.
Although we've explored the ball and know what they are.
We're.
We're sitting tight with all around.
With our cash on hand and zero debt.
Okay, great. Thank you guys.
Thank you and our next question comes in Great Gary Prestopino with Barrington Research. Your line is now open.
Hey, good morning, everyone.
Yeah, I just want to get there's a number of things I want to ask here, but the first thing is obviously it looks like.
Your cash.
Hello free cash flow was was pretty good in this quarter and is is that because of some of the that really a function of some of the expense reductions that you've taken.
Yes, I'm just trying to get a handle on that it was 52 million versus 40 something million and then you paid machine for 5 million for machines. So.
Could you give us a details there and then the other question I would want to explores how much have you flex down your costs from what you've done here.
Response to the pandemic [noise].
So I'll take the first one on plus the second to Bill.
The answer is no.
Yes, we've always had a little bit of.
Cost reduction as we've gone.
But when we're talking about the actions that we talk in March for April those were for April.
So more significant reductions, including furloughs and so forth did not impact.
January February March quarter.
Okay.
And regarding.
Operating costs well.
We realized that we are knowledge business, which means our primarily a primary asset is our our people.
<unk>, followed by our technology platform.
And.
Largely that's a fixed cost however.
At the margin there are lots of.
Measures that one can take too.
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Modulate that spend based on visibility of.
GMB or transaction volume.
Ed that variable cost.
Has been managed down.
It's certainly not the majority of our costs, but it's material.
And it's one where.
The job of any of these businesses in this environment is to try to match that modulation with the activity on the downside and then on the upside.
So I think we would see that.
April was a very difficult months.
In the and the nation's GDP.
And.
That number will probably be fairly well correlated to what you're going to see in a lot of businesses, including our marketplace.
Right, we have as I said, a spectrum of businesses retail supply chain has been on balance.
Pretty resilient, it's an essential part of the supply chain.
On the other end of the continuum.
When governments decide to close up shop, I mean, theres really no answer for that other than to be patient and a follow all prescribed guidelines and then.
Resume activity when they're ready.
So that's what we've done.
The controllable costs, we've managed.
Certainly taken out travel cost discretionary spend and marketing costs and certain things to map to what the transaction volume is add that's helped.
And well maybe I'll maybe.
Thank God.
Sure.
Just to add and give you kind of a sense we've always.
Been very attentive to.
Our volumes coming off our forecasting.
Our cost structure.
And how we look ahead.
But especially starting Luckily starting last late last year, we were very focused on that had made some improvement with our system changes.
So forth that we.
Had better visibility by the way on cash on a more frequent basis.
But clearly starting in March as we made all of these changes with furloughs and.
Oh work from home.
Which we quite frankly turned all of our.
Plans and actions on a dime it was within a 10 day period.
In March.
We've also instituted.
Pretty granular.
Look forwards and daily view of our topline of GMP of our transaction volumes across or marketplaces. We're tracking that daily were translating that into weekly we're looking at our cash routinely and on a weekly basis, we're looking at our expenses commensurate with what we're seeing.
Not a quarter out.
Which would be your normal formal forecasting process.
Even just.
Monthly forecasting which were definitely doing but even.
Hi, monthly and weekly assessments of what we see.
Currently in the business and using that to translate what we think is got to be happening.
A week or two weeks or three weeks time.
So we're being extremely attentive and putting our resources and focus on this more short term assessment of the next week. The next month in the next quarter that we might be on what might be the financial performance.
Two quarters for Merrell for three quarters from now which is.
Moreover.
Business focus where we're headed.
And less about the nitty gritty numbers so in the long term right on the short term is.
It's pretty well focus so we know what's coming in we're able to react.
Pretty quickly one way or the other.
Yes, so I guess I guess, what I'm trying to get out here is that.
Maybe I asked the question wrong can you try and get to specific but you know what percentage of that 57 million of cost and expenses that you had in the quarter would be considered variable and here's what I'm trying to get at maybe you want to answer the question you know full transparency.
Given the level of what you're seeing a GMB Q3 and could possibly be in Q4. You know are you anticipating neutral cash flow or or a cash burn over the next two quarters if.
Things hold as they weren't April and then all the follow on question to that.
So well in line with enlighten would not have let built chime in but in line with not giving guidance.
Certainly not giving guidance on cash.
And but what we've said is.
That we put in things in place that will help us track.
As best we can the reductions in the top line.
Our cash spend.
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We're comfortable where we are today.
We will continue to manage that weekly monthly.
Going forward.
Kind of as we've indicated.
I think the most difficult part of that question is.
You tell me what the.
Relaxation of restrictions will be.
By county or by state throughout the United States. If you can give us the answer to that I think we can give you better forecasting I don't think anyone knows the answer to that precisely so we're managing it on a short term basis as Jorge indicated.
Yes.
Okay Alright.
And then.
Bill could you maybe as you looked at what happened in the last two weeks in March and then and then throughout April and then just in general could you give us an idea of you know the impact to your GMB.
Versus for the last two weeks of March versus the first two weeks of.
March and then are you know are you starting to see as you work through April are you starting to see any increase in G.M.B. weekly most companies we speak to saw some some really bad hit initially it was still pretty bad the first week or second week of April, but it's starting to come back slowly. So that's that's another quick.
I would have if you could answer that.
Yeah, I think I think regarding.
The.
Downward slope that people observed.
From March and April that was very pronounced owing to facility closures and when you start to look at metrics like.
The number of actual sellers, who are open for business and who are listing.
The number of assets posted to our marketplace that was that was down you know.
50% to 60%.
On the downslope in April.
Now.
From what we can see we think we've touched bottom and that's starting to move in the other direction I.
I think what but is that.
The question.
It's the slope.
Slope of recovery.
And that's largely dictated by.
Regulatory decisions.
Policy decisions that are that are being debated and discussed at.
City councils.
Burner.
Task force level.
Type of decision makers so.
Yes.
You know it was I think you know when you're looking at the U.S. down 40% in GDP and April that's brutal.
Right.
No no I understand that I'm, just trying to get a feel for at least on a short term, what's what's going on and then in terms of.
Realizations.
Throughout all of this on the on the buyer side have the sellers been willing to take a significant haircut on price just to move goods or.
Have you been seeing that.
Well I think a market forces still at play.
In terms of a price adding.
I don't think you're having.
Let's say like panic, selling I think people people are looking for an orderly disposition process.
I think one of the things that benefits us as we have coverage in multiple industries and so.
You know energy has been good the goods sector.
Weve retail supply chain has been a good sector.
There's there's clearly some.
Some limits on the volume of goods being processed in retail because of.
The prioritization.
Essential goods over other activities and you've all read about.
How retail stores have been closed and.
Some cases fulfillment center operations in retail supply chain haven't had enough workers or they've had to prioritize.
Getting healthcare supplies managed at the top of the Q well, that's a headwind for us all things equal.
But in terms of there is still price.
Price discovery through a you know orderly marketplace and we're bringing that every day I think the there is a demand to monetize assets, but it's not like it at a forced liquidation value at any price or panic selling I think people are looking for competitive pricing.
Okay. Thank you.
Thank you and as a reminder to ask a question you only to press Star then one on your touched on telephone to withdraw your question press the pound key.
Well standby for any further questions.
I'm showing no questions in the queue at this time I'd like to turn the call back to the speakers for any closing remarks.
Hi, Thank you all for joining our call today. Please reach out to me. If you have additional question or have any Paula. Thank you so much and have a good afternoon.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your programming you may now disconnect.
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