Q1 2020 Earnings Call
[music].
Good morning.
My name is James and I'll be your conference operator today.
This time I'd like to welcome everyone to the Ritchie brothers Auctioneers first quarter conference call.
All lines have been placed on mute to prevent any background noise and after the speaker's remarks, there will be a question answer session.
If he would like to ask a question. During this time simply press Star and then the number one on your telephone keypad.
If you'd like to withdraw your question. Please press the pound key thank you.
I'll now turn the call over to Mr. Zaheed Mawani of Investor Relations to open the conference call Mr. money you may begin your conference.
Good morning, Thank you for joining us on today's call to discuss our first quarter 20, Tony results. Joining me today, and then Dozy, our Chief Executive Officer, and Sharon Driscoll, Our Chief Financial Officer, along with other members of management, who will be available for the Q any portion of the call.
The following discussion will include forward looking statements comments that are not a statement effect, including projections of future earnings revenue gross transaction value in other items are considered forward looking and involve risks and uncertainties.
The risks and uncertainties that could cause our actual financial and operating results to differ significantly from our forward looking statements are detailed in or FCC in Canadian Securities filings available on our Investor Relations website, and Investor Doug Ritchie Brothers Dot com.
Encourage you to review our earnings release, and form 10-Q, which are available on our website as well as Edgar and SEDAR.
This call we will discuss certain non-GAAP financial measures are the identification of non-GAAP financial measures. The most directly comparable GAAP financial measure reconciliation between the two zero earnings release and form 10-Q.
Presentation slides to accompany or commentary today. These slides can be viewed through the library recorded webcast or downloaded from our website. All figures discussed on today's call. Our in us dollars unless otherwise indicated I'll now turn the call over to and vendors.
Thank you and good morning, everyone.
These are truly extraordinary time and on behalf of all of Us at Ritchie brothers.
I'd like to express our deep gratitude to sell cliff individuals on the front line as we battled us global pandemic.
Every day, we I reminded of a few things.
The critical roles are sort of claims in the lives of our customers.
Persevering combined pulling in the face of adversity.
And the resilience of our business.
Reinforced by our unique technology enabled multichannel platform.
Before we get into the details at the quarter I would like to share some insights on the impact Cobot 19 has had in our company.
As you all know Cobot 19 has created a tremendous amount of uncertainty and financial strain or people in businesses around the globe.
And although our business has not gone I hope that we have rallied and strengthen around the common purpose.
Which we call are truly.
Being there for our customers, while keeping them and our employees safe.
This is our true north and we are aligned and committed to this common purpose.
At a time when our customers need liquidity, mostly I.
I'm so proud of the resiliency is demonstrated by our employees and their commitment to our customers and each other.
One off and here is about a company's culture.
Sometimes things difficult put into work.
Well actually just a few months at Ritchie brothers I can tell you our culture, it's all about customer focus.
Perseverance.
And heart.
I am proud of how quickly we pivoted our business.
In a matter of 96 hours.
We transitioned 100% of our business to online sales.
What's flexible work arrangement.
And our people remotely supported by technology, and working and safe environment.
It's clear than ever that our multiyear investment and digital capabilities have prepared us well at this moment, which has turned very much into a competitive advantage for us.
It's also important to recognize.
We entered this situation with an exceptionally strong balance sheet and liquidity position.
And from a financial and business continuity standpoint.
We are well positioned to continue operating in creating long term value for our stakeholders.
Despite challenges that arose during the quarter from Corbett 19, our team delivered very strong first quarter results.
Sharon will take you through the operational and financial highlights.
I can deliver 24% earnings per share growth, while achieving better than expected outcomes for our consigners in the midst <unk> prices.
Is nothing short of exceptional.
Now turning to slide five.
I will spend a few minutes, describing our response to covert 19.
But in the beginning of the crisis, we established three key priorities would you govern our response effort.
First the health and safety of our employees, our customers and their family.
Second continuing our operation safely to ensure we were there for customers and third strictly adhering to all safety regulations and guideline.
Such as those implemented by the CDC World Health organization and other government entities. There was no compromise there.
Our crisis management hearing team with swiftly put in place with a mandate to implement business continuity plan.
While responding to a quickly evolving safety and regulatory climate.
As a result of the coated 19 can damage.
We instructed employees at many of our offices across the globe, including a corporate headquarters to work from home and a temporary basis.
And we implemented companywide travel restrictions.
Our non field based employees, 94% transition in accordance with working from home.
For our field teams and employees at auction sites approximately 55% are working remotely while the remainder are working and shift alternating between auction sites at home.
To the Ritchie brothers platform up auction technology solutions, our company was able to largely continue operations and serve our customers liquidity.
In addition to our digital only solution.
Which include our Ironplanet weekly marketplace, he and the Gulf Planet online auction.
We modified and transitioned all of our traditional live auction the online bidding.
Well go live events transition to 100% online bidding.
Sellers were granted access to drop off their equipment to our physical auctions ours.
Under the strip system safety and health guidelines.
We were equally able to keep our buyer safe.
Staggering pre auction inspections, and keeping equipment pick up the similarly staggered schedules.
In addition to these steps we have also implemented measures to change how we physically interact with our customers.
Installing plexiglas buckets of guards transitioning away from cash to accepting only electronic payment.
And as fewer set here in the hygiene and disinfection protocols.
From a technology standpoint, we proactively looked for ways to optimize our transactional website and customer experience.
We quickly scaled up our systems to be able to handle 400%.
More online activity at a single period of time.
As a result of these efforts and others are business remains operational with limited disruption.
To date, we've only had to postpone for live events due to lock down situations in certain regions, where it was impossible for consigners buyers or our employees to be at our site for equipment drop off a pick up.
I'm pleased to say that Los Angeles in Montreal, where we schedule and very successfully executed in April.
Moving to the next slide.
I'd like to take a moment and discuss how we report our results today using lie even online to delineate our business.
Online is what you would expect a full digital auction experience.
But if the peeled back our live auction business, we find something interesting.
Even before quoted 19 across all channels, 65% of our winning bids were already coming in on line.
And today, 100% of the live auction digital.
So what then does lie versus online real evening.
As I've gotten to know our business I've come to learn that the demarcation line versus online has little to deal with the transaction at the auction itself.
The demarcation has to do with where the physical equipment.
For many customers they simply preferred to drop the equipment off at our auction site. So we can manage the entire process on their behalf storing the equipment inspecting it onsite scheduling delivering post sale et cetera.
For other customers they prefer to hold onto the equipment and for us to provide our services like inspection.
Title and lean search closing that transaction et cetera remotely.
The bottom line is that.
We are a digital company that also has a world class live operations.
This is a key source of competitive advantage, allowing us to be there for customers, however, and wherever they are.
With that.
Let me transition the call to sharing to discuss the quarters operational and financial highlights.
Thank you Anne and good morning, everyone.
We had a lot to cover today, so I'm going to jump right in.
Our first quarter GTV were down 2% and was adversely impacted by four auction postponements in Japan, Italy, Los Angeles and Montreal.
For a comparable reference these four auctions generated $63 million and GTV in Q1 last year, so on that basis and adjusting for these timing differences are GTB would've been up 3% on a comparable basis.
Total GTV purchased online was 75% this quarter up from 60% in Q1 of 2019.
This includes the last two weeks of March where 100% of all purchases were completed online.
In addition, our pure play online GTV from Ironplanet weekly marketplace E and Gulf Planet had robust growth of 17% in the quarter.
Our live auction GTV declined 6%, primarily due to the auction postponements or essentially equal to last year on a comparable basis. After removing these events from the 2019 base.
In the U.S., both the regional and strategic accounts teams once again delivered another strong quarter.
The team delivered positive GTV growth across all channels and posted its largest quarter in the history of our U.S. business.
The live event growth was particularly impressive as the team rallied to overcome not only the lower comparable year over year Orlando event, but also the effective the postponement of R.L.A. auction.
The Canadian team came off of a challenging Q4, and we're trending well through mid March, but ultimately posted a decline of GTV for the quarter due to the postponement of the Montreal auction.
Excluding this postponement our Canadian team would have delivered positive GTV growth.
Eastern Canada continues to outpace the rest of the country and once again delivered strong results.
We also had strong online growth from marketplace, he which was up 111% in the quarter.
[noise] GTV in our international group was down sharply in the quarter, principally driven by three factors.
First the international region was already navigating economic uncertainty and a general slowdown in Europe and Asia.
Second we were also cycling strong nonrepeating inventory packages from Q1 of last year.
Third the compounding effects of Cobot 19.
The coldest 19 impacts were more pronounced in our international region as the spread of the virus began in mid February resulting in Lockdowns and social distancing challenges ahead of North America.
[noise] with much of the European region at region, and Asia Pacific and locked down we had to postpone our auctions in Japan and Italy.
International team moved all other live auctions over to online or timed auction lot capabilities.
Notably our Australian team moved their live auction event over to the Ironplanet weekly featured platform and have huge success with that online model in the quarter with both positive buyer and seller reactions.
Overall, our operational metrics remained strong with year over year growth in most of our key measures.
With the shift to 100% online our digital marketing team kick into high gear, creating strong demand and bringing the buyer base like no others in our industry can do.
Moving now to the financial highlights.
Our total revenue decline of 10% was primarily from our 31% decline in inventory sales revenue, partially offset by the 6% increase in service revenues.
Commission revenues increased 1% with fee revenue up 12% in the quarter.
Fee revenue was up as a result of our fee harmonization, which incidentally, we will laugh on June 1st.
A higher volume of small lots and our lake and Gov plant at auction events.
Our BFS also produced double digit revenue growth of 16%.
Our operating income was up 1% driven by our service revenue growth and solid operating leverage partially offset by approximately 2 million of nonrecurring depreciation and amortization and other expenses.
These costs relate to the termination of a UK business arrangement for our Gulf Planet business unit, the collapse of a U.S. property transaction and executive departures announced during the quarter.
Net income improved 26% from the combination of operating income growth lower interest expenses, a lower year over year effective tax rate and a receipt of 1.7 million of proceeds on contingent consideration from the sale of our machining no investment in 2019.
Before I move on I would like to inform everyone about a subsequent event, which will need to be considered for Q2.
On April eight Twentytwenty, the United States Department of Treasury, and the internal revenue service published final regulations related to hybrid transactions that were introduced in the initial U.S. tax Reform Act.
Based on earlier preliminary Reg regulations and in accordance with generally accepted accounting principles. We recorded income tax benefits of approximately $6 million in the 12 months ended December 30, Onest 2019, and 1 million in the three months ended March 31st 2020, which will.
The effectively nullified by these final regulations.
As a result, we will be reflecting an unfavorable adjustment of approximately $7 million in our second quarter earnings.
Excluding the impact of this retroactive charge, we expect our go forward tax rate to be in the range of 25% to 27% for subsequent quarters.
Turning to our auctions and marketplaces segment service revenue was up 8% in the quarter.
On a regional basis U.S. service revenue increased 17% driven by higher fees from our harmonization GTV growth and very strong guarantee rate performance versus Q1 of last year.
Canada service revenues decreased 6%, primarily due to lower commissions and fees earned on lower service GTB as a result of postponing our Montreal event.
This was partially offset by an increase in revenues driven by fee harmonization.
Our international service revenue decreased 23%, primarily due to lower commission and fee revenue from sharply lower GTV, resulting from the postponement of to live auctions impacted by the covert 19 pandemic and lower older lower overall volume of contracts in this region.
On a rate basis, we were pleased with our Nm service revenue rate coming in at 13.5%.
Roughly 130 basis points higher than last year.
The rate improvement was due to fee revenue growth from the harmonization, plus our lake auction and Gulf Planet sales.
Moving onto our auctions and marketplaces segment inventory sales revenue.
The 31% decline in our inventory sales revenue was due to lower inventory volumes in our international and U.S. regions, partially offset by stronger performance in our Canadian region.
The 31% decline was not attributable to any cobot 19 related impact our Canadian inventory sales revenue was up 117% over last year with international revenue declining, 58% and our U.S. region also declining 16%.
On a rate basis, our implied rate of return on inventory deals in the quarter was 9.5%, which was 141 basis point improvement over year over year, and roughly a 400 basis points sequential improvement from Q4.
Looking ahead based on our strong balance sheet, we're very much open for underwriting quality inventory deals, but we are applying a higher degree of rigor in our valuations.
Moving on to ask DNA expenses are SGN, a dollar increase was driven by continued investments in strategic growth initiatives and key growth enablers like technology and improving our customer experience.
These investments combined with higher travel and entertainment expenses through mid February accounted for the majority of the growth in our SGN, a and were partially offset by lower cost of share based compensation due to the mark to market volatility of our D.S. Yoo program.
Notably we continue to apply a strong discipline on expense management as our S. DNA only grew 3% which was half the rate of growth of our service revenues.
Since the Cobas 19 pandemic began we've been critically looking at our cost across the company.
And we are taking steps to manage expenses as we apply companywide efforts to control discretionary spending where possible and monitor productivity levels in response to the new operating environment.
Due to our strong cash position and our ability to keep generating revenues, we have taken some moderate actually in a cost actions to date.
We have been able to keep our business operational through this pandemic the future impacts are uncertain and not easily predictable.
Should our business experience material volume declines, resulting from increased severity or duration of the downturn, we are fully prepared and ready to take necessary cost actions to optimize our business structure, while preserving our ability to rebound when market conditions improve.
As over 70% of our costs are fixed in nature, primarily people and site cost.
We do anticipate possible erosions to operating margins in future quarters in the event of service revenue declines across certain regions.
Our disciplined capital allocation and the substantial efforts, we have put into de leveraging our balance sheet over the past three years has made a tremendous difference and as a result, we believe we are very well equipped from a liquidity standpoint to navigate the unprecedented global environment that we are facing today.
In addition to our ongoing ability to continue to generate cash flows.
We ended the first quarter, we had $356 million in cash cash equivalents unrestricted cash in addition to available credit facilities of $640 million.
Which 462 million was on used at the ended the quarter.
Additionally, at this time, we're comfortably within our debt covenant threshold and don't have any material debt maturities until October of 2021.
And in this context, our capital allocation priorities shift to cash preservation.
And investing wisely to support our business operations, while continuing to prioritize our dividend.
Specifically with regard to the dividend. We currently have no intention to change our approach at this time, but our carefully monitoring the ongoing situation as a pandemic impact unfolds.
We have also repositioned our capex program to support only essential property spends and our technology programs.
As such we are revising down our full year Twentytwenty expected capex spend to now be between $35 million to $45 million.
Consistent with our directive of repurchasing shares to offset option dilution, we purchased 1.5 million shares for $53 million during the first quarter. However, suspended our instructions once the economic severity of the pandemic became clear.
Existing authority under our current and see I'd be share repurchase program expires on May eight and we have no intention to renew at this time.
Finally at the end of the first quarter, our adjusted net debt to adjusted EBITDA ratio was 1.3 times well inside of our target feeling of 2.5 times.
We believe we are very well positioned with a strong balance sheet and liquidity position to navigate a multitude of economic scenarios and we plan to maintain our disciplined approach to investing capital to enhance the long term value of our company.
Before closing our prepared remarks related to our balance sheet metrics I'd like to provide some color on our operating cash flow for the quarter of $4.1 million, a 95 up 4% decrease over the last year.
There were two primary drivers first 2019 Q1 operating cash flow was exceptionally strong as the higher than normal inventory positions held at 2018 year end sold through at our your U.S. and European events.
And second our cash flow was negatively impacted by approximately $30 million to $40 million due to the postponement of the two north American options into Q2.
Even with these considerations on a trailing 12 month basis, our operating free cash flow increased 94% to $228 million.
Lastly, I want to touch on our return on invested capital measure of 10% showing solid improvement from 7.7% in Q1 of last year.
We're pleased with our continued progress and pre Cobot 19, we were on track to achieve our stated evergreen ROI see target of 15% by the end of 2021.
However, with our priority shifting to cash preservation and focusing on stabilizing our business. During this crisis, we can no longer commit that this target will be achieved during this timeframe.
To conclude my remarks, I would like to thank our Ritchie brothers global team for their tremendous effort and results in this quarter.
Your dedication resilience and commitment to serving our customers is nothing short of amazing.
With that let me turn the call back to EM.
Thank you Sharon.
In these moments of uncertainty it is clear just how much of an asset and competitive advantage our multichannel platform tunius.
As an example of the Powerbar platform in our recently completed Los Angeles auction in April.
84% of the equipment received online bid.
Even before the auction started.
You will see true, we called priority bid, which opens up well in advance of auction day.
As a further now toward technical agility, we quickly shifted all our agricultural auction the timed auction lots.
Well in Australia, we combined several technology and offer the market a unique ironplanet you reserves solution.
The answer up how we were able to act so quickly is quite simple.
We were already an online company.
Cobas 19 highlighted the spears between our lie even online rounds are blurring interconnected and strengthen one another.
Well, there will be call it lives or we call it online youre, providing our customers with 100% digital auction experience combined with World class live operations, which managed to care and custody of their equipment, how whenever and wherever they need us to be.
Before I close out the prepared remarks I.
I would like to cheer some considerations I know second quarter.
Weve aligns our organization around key priorities.
First the health and safety of our employees are constantly.
Second being there for customers to serve their unique.
And third.
Focus on staying both position with a strong balance sheet and ample liquidity.
As we look ahead, we expect the uncertain environment to remain.
Current conditions indicate that Q2 could be the most challenging quarter 2020.
Historically Ritchie brothers does well in downturns, and we expect that to continue.
Q2 is unique because of the uncertainty surrounding the quarter.
As all of you can easily modeling right now with difficult given the number have been known.
However, let me share some of what we are seeing our business and in the broader macro environment.
Our international region is still very challenged by Lockdowns and border restrictive restriction hindering equipment movement, coupled with a high degree of uncertainty around the timing and strength of recovery as international economies start to slow easy open.
We mentioned earlier that our international service revenues Q1 declined 23%.
We expect a moderate recovery in Q2, but still expects the challenging operating environment in this region to compete.
Looking at North American now separately forecast for the U.S. economy are suggesting GDP declines of 25% agree.
The pandemic together with a dramatic plunging oil prices will put more distressed onto many of our customers.
And without question, many consigners will need liquidity.
This pressure may drive incremental supply.
But some consigners that are able to may hold onto their equipment and take a wait and see approach in this on certain pricing environment.
Equally bankruptcies in Creek those deals can take as long as 12 to 18 months before equipment finds its way into the auction channel with the disposition.
A further notable item for our North American business is that we're cycling over the massive $93 million Columbus, Ohio auction from last year.
I had a large liquidation package that will not repeat in Q2 21.
Looking at current trends.
We're about a month or quarter and so far we're off to a reasonable start.
Our rescheduling, Los Angeles sale was up 17% versus last year.
And the rescheduled Montreal's sale was 29% above last year.
Although our more like Netherlands April auction was down 74% versus the same event.
Last year.
Moving showing the impact of the can screens in our international business.
As for the balance of the quarter, it's still early as our auction calendar for the quarter is heavily backend weighted with the majority of our auction events scheduled in June.
Our cautious approach to Q2 is also informed by the macro conditions.
The 80, I and nonresidential construction data are showing uncertainty in decline.
And it is unknown at this point, how or when government stimulus can help offset any potential decline in demand for used equipment.
[noise] recently announced OEM production cuts and issues around OEM supply chain may affect the availability of new equipment.
In the release of credence affecting our used equipment supply.
And finally rental companies are cutting capex and eating out fleet, which could negatively impact equipment, but this vertical brings to auction.
All in taking everything into consideration you can understand why were between Q2 as likely that's helped this quarter of the.
As far as looking further into 2020 in the back half of the view it would not be responsible for us to speculate that far given the degree of uncertainty and lack of visibility that far out.
In closing, while the new to maybe challenging we remain very confident in the strength and resiliency of our business over the long so.
I want to think.
Our employees for their dedication and hard work.
There was nothing normal about the situation in which we find ourselves today.
And our employees have risen to the challenge, taking the extra steps necessary to keep each other safe and to serve our customers.
I could not be proud to be a part of this great.
With that operator, please open the line to question.
Oh.
Our construction work to tell everyone if you'd like to ask your question. Please press Star then one on your telephone keypad.
Our first question comes from one of my goal do me with.
Kosher Bank go ahead. Please your line is open.
Hey, good morning, first just congratulations on the successful transition.
So understanding it's still early.
I wanted to get a sense for one you know how long you expects to maintain online only auctions.
Two you know what long term implications you see from this transition.
And three just whereas places you from amongst your competitors in the implications from Merck going forward.
Hi, Michael and Sandoz. The here are happy to handle the question. So the answer to the first question Oh, how long we expect to be online only.
I think we're going to let the surrounding oh, the the environment dictate that our business has proven that we can continue to operate and candidly thrive.
Keeping our customers and employees say, oh, well driving a very healthy marketplace. So the timeline a bad.
Will continue.
Your broader questions about cobot 19 learning, it's actually been yeah. You know for me of kind of just through my fourth month, it's been a fascinating journey.
See all of the learnings in small ways and very very big ways. So on the smoke side of the blondes, it's been fascinating to see how the most workover arrangements can vary much work for us, allowing us to leverage a talent in many parts of the globe virtually that's for sure.
We're going to take that forward, but also really dispelling this lie versus online kind of.
Dichotomy of our business, so I'll kind of what I said in my prepared remarks. So when you think about the transactions between 100% online that was a incredibly fast to that I want to give a huge nod both to our customers, but also to our sales force is to really.
After the trusted advisors and change the entire sales process advisory services everything that we provide a to our customers a in a virtual away.
But equally important we can remember that lie still continues implied despite the fact that transactions happen on line lies again as I said is more about wirelessly equipments it.
So our customers simply prefer the vast majority to drop off the equipment at auction site. So then we can perform all of the services inspections old way to closing on the sale on their behalf and that continues even in this environment on the steps we've taken a staggering the drop off staggering the pickup.
Ensuring that you know all employees and customers. They say, but these are all of the learnings that we're going to taking forward with us.
Okay, great and just some a lot scar thanks for that animal Osbert. So you know I guess your competitive advantage stacks up against some of your competitors.
Yeah, you know it's interesting in our industry and I can so we will be new you don't really have great market share a mix.
This is actually something that we are going to be putting in place. So stay tuned for that as we build out our broader data competencies.
We've been investigating repeatability and developing them as youve seen with the launch of our market trends summary report we show started in March.
Deeply embedded data to in our our best product set so we're really leveraging in flexing the muscle good news, but the data source of Ritchie brothers.
To drive a lot of acumen about our business figuring out market share is just kind of next on the horizon appeal with the first and foremost it was about understanding what's happening with the market and bring being the leader a in the data space that we are and again that was the launch in March.
The market trends report and you've seen and then a much deeper integration into the our backs product is all of the data sources available school, but we do exactly that on almost any metric the trend is very positive though.
Okay great.
Thanks for that again, we shouldn't unrelated follow up once you get your thoughts.
I was just thinking about PNM rep revenue rate, particularly as it starts to run into some tougher comps into Q2.
Specifically for the near term or is there any consideration.
Okay and give it to flexing commissions are fees to just sort of optimize the overall flow through.
Yes, Michael its share of NUCYNTA, Oh handle that you know again, you're correct. We do start to cycle some pricing actions I'm on the fee side that we took in June 1st of last year.
But again, we're seeing you know continued growth.
Oh no you the mix of assets that are is really driving some incremental biographies and that's just the lower items and I'm not being capped at the top end of the rate. So you know and again the purpose of the virus seem to really should make sure the buyer was agnostic.
Between which channel they purchased on into a bad has been highly advantageous for us to enable this quick isn't that we can be so we expect that rate you know to what we told and grow slightly but not at the same patient we've seen over the last year.
Perfect. Thank you again this quarter.
[noise] or next question comes from the line of Gary Prestopino from Barrington Research go ahead. Please your line is open.
[laughter].
Your next question is from Gary Prestopino with Barrington Research Group. Your line is muted. Please unmute your line.
Our next question comes from the line of Michael Feniger from Bank of America.
Go ahead. Please your line is open.
Hi, everyone. Thanks for all thanks for taking my questions.
Just following up on on the way I mean, just just bigger picture I know what whopping. This harmonization fee June 1st, but just bigger picture churn Sharon and why you.
Can you give us the movie piece of Washington rate.
But go go down is that all I mean is it isn't the buyers for ready to go on the upside with seeing more of these small value lot of you guys are adding a lot more services.
Our BFS just walk us through the puts and takes him why in a year from now rate like continued to just continued broad higher.
[noise]. So again like all take got so just the first question was related to our CNN right. So that does not benefit from all the services that you talked about in terms of Ritchie brothers financial services, and we did say that we don't expect it to decline. We just don't expect rate increase a to be after.
Same late that we've seen for the last year. So we are still expecting you to hold and increase.
And you're absolutely right as we continue to drive further growth through our other value added service offerings that don't come with GTV. Each you wouldn't see top of the house you know revenue rate increases that we would expect you continue to drive.
Growth in future quarters.
Thanks, and the underwriting I mean, you guys are able to put up an impressive quarter with underwriting think of only 15% of GTV very low.
How do you guys man is this going forward because obviously, there's been some years, where you have supply demand imbalance and and you get caught off all sides with the went out with the at risk portion of the business I'm just curious.
If you see yourself driving that 50% of underwriting all and how you guys are going about that.
Yeah, So Michael and sharing again I'll handle that Ah you know clearly with the strength of our balance sheet. We believe we are one and the only competitor he space that can actually poor underwritten business at this time and that's going to be a much needed service that our customers.
Either they're looking for liquidity.
One of the things that we do look out we have tremendous data that they'll move on pricing and you know we certainly so I'll be a in you know over the road trucks, we called out in Q4 that we had already begun to see pricing compression in that category and so.
You know just all those and our valuation team have just done a really exceptional job of mitigating our risk exposure to those price decline.
By using that data and being very on top of where we see future pricing can be you know clearly with this both oil and gas shop and told was 19 that you know, there's certainly taking a very prudent approach to valuation.
And you know again, we will continue to take risk you know as its required both through in taking inventory positions or guaranteed contracts when right deals come along and then you know also deal did have a pitch for a new product that we have though.
The pricing tool, which we just launched this quarter and so certainly that pricing information is not only available to us but adult to now available.
Others, and you have access to that routable, our investor website.
That's helpful and it just when you are referring churn to other downturns and just look issues from a market I was hoping you could just flush out how cold. It is maybe impacting your ability to gain share in other asset categories. Obviously, you have government the planet and other platforms are you seeing.
And because of your platform investment in technology are you guys seeing an increase in ability of the auction market other asset categories. Aside from just the construction and heavy equipment, but you guys have served in prior cycles. Thank you.
Oh, So I can start then maybe and you can add some color you know clearly our primary business is construction assets and over the road trucks transportation assets. You know those are and will continue to be are prime focus area, particularly in the underwriting a deal.
Yeah. So we don't you were not at this point looking at sector Spansion Oh. It we do expect that with the pressure. This now on oil and gas assets, you believe that that will bring more construction transportation uncle oil field service.
Just transportation assets to markets you know certainly we will you endeavor to support consigners in whatever way they need and whatever assets. They have but you clearly our marketing reach you know is is really focused on driving our core asset category. So.
Action and a over the road trips.
Yeah, Sharon and I would only add to the Suzanne that's a platform that we have the technology investment is ubiquitous.
So it's really there to provide a service where their customer for our customers are in whatever way they need us to provided our core customers. Obviously, the construction sentiment, but if you take a look at any of our sales, especially to be who featured and marketplace in there.
Like the span of equipment that so across categories anything from you know vehicles all the way some very very heavy mining equipment. So the technology allows it to be whatever we need it could be a and in fact, it's.
For our customer focus our land 60 use of expertise in this industry that is kind of causing construction to be our bulls eye, but lots and lots of brings all round up center, allowing customers to use our platform for liquidating anything there.
Your next question comes from line of Scott from some of see RBC go ahead. Please your line is open.
Thank you good morning, so given the pain to the.
Your competitors and physical auction are you planning to put some initial efforts into identifying the a competitor's assets it could bolster certain geographies or auction product lines or or you're already well into this process.
Okay.
So Scott, yes, its share and you know I I don't know that.
Acquisition finds his question is that what you're asking.
Exactly.
Yeah. So I'll start you know clearly our first priority is to get through this crexus, a and make sure that we have cash available just import you know the needs of our operational business and again supports the dividend.
So although there may be opportunistic Oh, you know options it become available.
Still state and our primary focus we will look at 10, if they do fit our network, but right now you I would not say that's a top priority for us to add on additional regional competitors.
This is something that you'd look up further down the line or do you need to see how things really should coke.
Yeah. So you know clearly we're always looking at acquisitions that we didn't make sense. A you know we bought the technology that you actually takes us beyond regional boundaries.
Yeah. So our approach on regional acquisitions in consolidation, we believed that our technology is actually the primary who happen to basically allows for that growth, but as as I said, we're always open to looking at opportunities as they rod.
That's what makes sense of is this pandemic permanently changes the.
Kinda the landscape of how auction is done.
Thanks, that's very helpful.
Our next question comes from the line of Ben Cherniavsky from Raymond James Go ahead. Please your line is open.
Good morning.
Hello can you hear me.
Yes, Hi bond that we can you.
Hi, guys.
I guess I'm trying to figure out how you like what.
What's the net impact for you guys are from the current macro environment I mean, because a couple of puts and takes.
As you've outlined she's got.
Become the one source of liquidity you moved your auctions online you how their capability.
You drive off dislocations.
And yet on the other half and you know you're protecting the balance sheet, you sort of withdrawn targets on our or see I understand the that we we just don't know where were like the you know visibility and modeling this isn't just virtually impossible right now but.
I guess I'm trying to figure out what the not take away is here is this is something that's going to be even beyond the second quarter, which I appreciate just already quite visible.
How does this impact your business. This is the suit.
Not negative for the timing.
Yeah. So let me start and so this is an high band or and then we'll sharing and of course, Oh, adding so modeling I think as is the keyword here Ben So we are running scenarios, taking all of the publicly available information.
And running model. After models, we have models that looks like El that says you know, we probably will be a ways away. We have models that look like me that how much deeper trough, but then a fairly quickly bonds and then we have W. That's kind of bounce around.
And on the all of the scenarios first and foremost a we want to make sure that from a balance sheeting liquidity same thing you know, we definitely shoes and that's what you heard from Sharon So that's something [noise].
Number two if Q1 is a microcosm then you see the puts and takes for our company are largely a kind of neutral to positive <unk> in the long run Oh, we're confident it is very positive.
Question for offices, what is the link on the uncertainty, but less than the length of the recovery, but really the length of the uncertainty I'm, So if things get worse.
And we know there maybe even more need for liquidity, because you know books or let's say going out of business those things for sure come our way, but they can take as much as 12 to 18 months to work through the system. The bankruptcy process until it finally makes its way to auction.
During the snap back and recovery then obviously all the stimulus packages and you know kind of construction boom that bodes well for us I.
I think what you're hearing from losses in the long run we're very bullish obviously, a very strong Q1. We believe Q2 is our biggest challenge I get on April started while but the uncertainty around so I mean Q2, you know something we just can't look away from.
It's a reality.
[noise] and I appreciate that you migrated these events online and that most people who already bidding online anyway, but.
How do you feel the pipeline of true like your businesses dairy relationship driven very transactional your territory managers are out there how sling deals every day, how do you how do you filled the pipeline of lots and transaction Glenn you're under a lot don't travel restrictions customers will watch.
Sean their sites to inspect or if they do it's very difficult to do that.
What's the net impact of those kinds of variables on your business.
Yeah. So Ben the you know I have had some really incredible learning since I've been here and a very positive surprises. So I think for when you're highlighting has been maybe the most positive of demo. Besides the fact that we were a digital company along.
And now just acting like it with a very strong live operations. So what has been very surprising in a positive way is that our sales organization is actually not missing a beat.
They have moved all communications and Oh advisory services to our client base, which of course, we've had over 60 years into virtual environment.
So completely staying on top of every development finger on the polls.
Candidly been busy her now.
Than they ever have been before but needing to ensure that movie listening in understanding our customers are and what their needs are what their timelines are and its Sharon said, obviously, having all of the tools at our disposal all of the data the new pricing tool to help inform and guide a what our customers should do so that's been really.
An incredible turn of events.
And then secondarily with those stay in place orders, we have had no issues and stuff are very very.
Very spotty if any at all on inspection services. So arms factors are out in about obviously, taking all of the health and safety precautions, but inspecting kratos, bringing them to market. So on the sales side I'm inspection side on the supply side of the business.
If it stayed very very strong you know virtual environment. It's just we estimate suppose cousins.
Yeah, I'm, sorry, I can appreciate that might imagine that is very impressive I would still.
A question, whether you know what the human factor in is with all of this if you can really build relationships over a screen versus the fishing boat in the kind of dinner and the ways to business traditionally was developed relationships and the trust was built I don't know.
Maybe that's changed in the World I guess, we'll see but I I got to think that has an impact on the long term market development opportunities for Ritchie brothers for your sales force and territory managers.
Well, let's open the long run we can get back to both fishing trips and dinners, let's hope [laughter] forever.
Yeah No kidding.
And so I guess another long run question I'm, just given what's happened here and in your transition to the digital platform. What do you see a permanent change in the model when we do come to return to normal or do you think you need.
Live auctions anymore do you need the big a bidding boots and as many sites as you've got works and how does this.
I appreciate the central depository component to the business, but like the good to model could look radically different if you don't if you really don't think Jimmy these yards anymore.
For as many of okay.
So Ben that is that is a interesting question and that's been my biggest Baja since I've been here is really when I came in I was thinking about alive operations versus online mirrors, you would think about in a retail landscape right. So your shopping at a physical brick and mortar store tomorrow.
You know I'm home and I click on a button and the warehouse that used to chip something to the physical store just ship the Tonight.
That was my preconceived notion coming into Ritchie brothers, what I have found coming in here is that that is not what online doses by this graph kind of as I as I shared a little bit in his prepared remarks, and as you stated the majority of our actual transaction the bidding.
A couple of live auction already what's happening online. So when we say we were always a digital company that shift a was more about the technology Bakken ensuring we can handle the higher volume low, but all of our systems and processes. We're set up cuts to handle it already because that's where we work.
Well I can honestly is really about.
Putting ourselves in the shoes or the customer and understanding what they want to be with equipment and the vast majority of our customers want to hand over their equipment, you know when they no longer needed for us to handle soup to nuts, so dropping off at a site. We view the inspection we do all the pay the knee work, we probably the product we have.
No I, you know customers coming in to take a look the poor and auction. We obviously manage the transaction and then he are the ones that manage the kind of pickup and delivery part of it.
That is the vast majority of our customers want that desire that that's a huge source of advantage for us and really world class live operations that allow that to happen. Some portion of our customers. They know look I don't mind I'm going to keep up the product here. So you know when handle everything remotely where we send out instructors are kind of do everything.
Chili's appetite among search the customer than kind of handled the interaction with the seller to ensure pick up you know when we still close the transaction. So I think as he says we think about like sites. It actually has very little to do with auction or transactions. So it has to do with this critical service.
Provide for customers to procure capacity in control of their products, we intend to either for our customers. However, whenever they need us and though the thinking around number of sites and all of that would be food outlets.
In terms of providing service to our customers and not at all around you know they have auctions and even before this the vast majority of that did not happen is a live auctions like.
Yeah, and probably know proximity to airports and hotels to facilitate on site bidders and.
So those kind of factors in where you are located your auctions, how big they were live auctions I would all change could all change.
I think all of that isn't a you know in consideration, but first and foremost is ensuring that we provide the service that our customers want need Oh, and you really values.
Okay. Thanks luck insurance the questions.
Thanks.
[noise] and again as a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
Our next question comes from the line of Sherilyn Rod born with TD Securities Go ahead. Please your line is open.
Thanks, very much and good morning.
So on that on balance your outlook commentary for Q2 was pretty cautionary and I guess I'm just trying to square that against some pretty impressive performance at the Montreal and L.A. auctions in April really kind of at the height of the locked down.
In this part of the World is there a reason that we shouldn't see those is sort of encouraging data points.
Yep, So sherlund Hello with an.
That's why would we owe the answer is of course April encouraging. The answer also is Q2 is fraught with uncertainty for every and this is more kind of on the macro considerations, a you know or even company specific who just comes back.
But I highlighted during the prepared remarks, but let me bring them more to like right. It is a fast we're gonna be lapping a Columbus, Ohio auction versus Q2 of last year, that's not going away.
It is the fact that our international business, what's hit hardest ER and we don't expect that to significantly change in Q2.
Other macro considerations that you know we're hearing them candidly as much from you guys is as anybody else, which is obviously the volatility in the where gas that couldn't what does that mean, some Oems taking production cuts. So does that mean goes and short term supply chain impact a rental companies potentially putting cap.
That's a holding onto putting in a little bit longer again. We believe these are short term in nature of course the question is.
He is how short term.
And Ah. So again, that's why we all of that makes us cautious about Q2, and you know potentially making that the toughest quarter of the your your comments about sherlyn are exactly right Im sums up from any kind of reasonably long term perspective.
This is a company that does allow a period in good times and bad during the short periods of uncertainty that that we find ourselves pure for Q2 that we want to be cautious in or approach.
Okay and do you have any theories as to why you know the mobility of equipment and Lockdowns have had a greater impact on your international territory versus domestically in North America.
Yes, so I think it's a little bit Ah back towards children's common in the beginning which is they were those markets were ready so even in the back half of last year. So that's number one number.
Number two cobot hitting burst and it hit hardest obviously Asia them spreading to Europe, one of the first outbreaks in Italy happens to be very very close in close proximity to tobacco site. So I would say the backdrop with not a you know the trend is already.
Soft coming in and then it was hit hardest and now with slowly reopening. We're we're very cautious we're optimistic about what we're seeing but again the thought of that kind of turning on a dine in Q2.
God that is not not something that we think is a high probability event, yeah and Carole Park was also on the line.
You want to add anything from an international.
Sure Sherlund I think.
The question around the border control so the difference between North American in Europe, mainly.
In North America, if someone buys something in Washington State and watched it could be California, There's no quarantine when you go back and forth compared to Europe now with the border closures when a customer from Poland goes to Germany device something they drive rest quarantine for 14 days and vice versa, when thinking about pulling that quarantine. So that's kind of put a damper on.
How the equipments moving from country to country, even within the U.
Okay. That's very helpful color, maybe if I can just sneak in a last one you came to the end of your initial performance period on go planets, you renewed that free year, maybe you can just comment on how you would evaluate that first a two year performance period into.
In terms of cross selling with the existing Ritchie brothers customer base and you know the return on capital employed into things like warehouses in inventory.
Yeah. So let me start and then maybe you can't sharing to pick up the thread. So I would say the headline from gum plan Oh for me is learning.
About new competencies and new customers and candidly, it's in but it has been invaluable. So as we you know on the surface.
We're in auction house, but obviously, a and and we've been in the got plenty business on a rolling stock for quite some time really it's the non rolling up was named us required us to build warehousing competencies, a different kind of interaction with customers a and I feel like that's been a tremendous.
Oh, we obviously so good that me we extended.
And Ah really but we're going to be doing over this next period of time is thinking through our competencies how do we bolstered what can this business will drive a them at the unique value we could add to the various customers, obviously buyers and sellers. So we're still very.
He much and now taking the learnings that we had and then moving them into the space and so what does that in a long term and something in terms of additional investment or anything else looking forward. So we're very much transitioning to that now now what a state of thinking.
Sharon anything you would like the ABS.
No I think you a in handling that's good.
Okay. That's all for me thank you.
Thank you.
Our next question comes from the line of Covenant Condon with R.W. Baird go ahead. Please your line is open.
Good morning, and thanks for taking my question many of them have been answered, but I was hoping you could shed a little more light on what bothers you have with US you know expenses mentioned, a fairly fixed cost base, but you know would potentially an accelerated ship to a more digital model understanding you've had the omni channel for awhile and your physical infrastructure is still important [noise] advantage with online bid.
Thing, but are there opportunities to meaningfully change your costs are levers you can hole to reduce SGN, especially I'm going to potentially more challenging Gigi GTV environments.
Yeah, so its share and all all handle that and so good question you know weve been actively monitoring of our expenses for the last two years and yes, and so we are looking mostly get productivity on a daily basis now both regionally sites to really try to understand during the downturn.
And how best to respond and we've done some I'm very small action.
In a couple of business units in a couple of regions, but mostly our teams are fully active in particularly in our core U.S. and Canadian business. So we've not had to take significant actions. There you know I think you're you commented the shifting.
To the online model.
You know as long as customers still wants us to take care of custody in control of their assets.
The sites continued to be essential handling none of that equipment to make sure that they are cared for appropriately bother you not possession still essential. So we will take this opportunity to really learned during this period about what are the learnings around its just she sees that we could continue.
You with in the long term, but we you know just really want to point out. This is not a really good typical you know beaten she online business.
And just simply because of the needs of our customers and the need they have for us to store and handle their equipment to prepare for sale.
Understood. Thank you.
[noise] when there are no further questions at this time I'd like turn the call back over to Mr. more wanting for some closing remarks.
Thank you James and thank you everyone for joining us when it first quarter call. If you have these those are full of course you. Please don't hesitate to reach out to me otherwise we look forward to speaking with you all that and you know in August for Q2 calls we will complete our call. Thank you very much.
This does conclude todays conference call you may now disconnect.
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