Q1 2023 Liquidity Services Inc Earnings Call
At this time all participants are in a listen only mode.
We will conduct a question and answer session on the call today are bill and Greg liquidity services, Chairman and Chief Executive Officer, and Jorge Celaya, Its executive Vice President and Chief Financial Officer.
They will be available for questions. After their prepared remarks, the following discussion and responses to your questions reflect liquidity services management's views as of today February 2nd 2023 and 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 filings with the S. E C.
The most recent annual report on Form 10-K, as you listen to today's call. Please have the press release in front of you, which includes liquidity services' financial results as well as metrics and commentary on the quarter. During this call liquidity services management will discuss certain non-GAAP financial measure.
Yes.
And its press release and in filings with the SEC each of which is posted on its website you will find additional disclosures regarding these non-GAAP measures, including the reconciliations of these measures with the comparable GAAP measures is available liquidity services management also uses certain supplemental opera.
<unk> data as a measure of certain components of operating performance, which they also believe is useful for management and investors. This supplemental operating data includes gross merchandise volume and should not be considered a substitute for or superior to GAAP results.
At this time I will now turn the presentation over to liquidity services, Chairman and CEO Bill angry.
Good morning.
And welcome to our Q1 earnings call I'll review, our Q1 performance and the progress of our business segments and next Jorge Celaya will provide more details on the quarter.
We delivered strong EPS and adjusted EBITDA results.
During the quarter, despite macro challenges, which limited the volume.
Our vehicles and real estate transacted in our marketplace.
We estimate the softness in the vehicle category alone reduced our <unk> by approximately $10 million during Q1.
This combined with abnormally low conversion rates on sharing sales and our government real estate vertical.
Lower than expected GMB during Q1.
While these are currently headwinds we.
We expect these trends to normalize and boost our business as we move through 2023.
Our solid Q1 financial results reflect the resilience of our business when challenge with macroeconomic headwinds, including cautious consumer and business behavior.
Our St Jude strategic priority.
Remains investing in market share expansion.
Diversification.
And longer term growth.
Our expertise in diverse categories.
Strong buyer base and global reach.
Continuing to provide advantages for our clients as they navigate the current volatile macro environment.
With a strong business pipeline trusted marketplace solutions.
And financial strength.
We are well positioned to gain additional market share.
Across our segments.
And create long term value for our shareholders.
Let's take a closer look at the progress of each of our segments.
And how they are driving market share expansion.
Our <unk> segment is making good progress in expanding the growth in activity of customers.
On its marketplace.
However, this progress is currently being asked.
Headwinds in the used vehicle market, where prices are 10% to 20% lower versus the prior year.
We estimate that lower pricing combined with.
Okay.
Reduced vehicle supply.
Will impact up deals GMP by $10 million to $15 million in the current quarter.
Our acquired bid for assets marketplace has been successful winning new contracts and driving digital adoption. However, the pace of rolling out these new programs and the volume of taxing judicial foreclosed real estate sales has been below expectation.
Part due to uncertainty associated with higher interest rates and a sluggish economy.
Our continued market share expansion is reflected in the ongoing growth in the number of new accounts and number of assets sold each quarter by Gov deals.
During Q1, we set new cap deals records for the number of active sellers and number of assets sold reflecting.
The strength of our marketplace.
During Q1, we signed several notable new accounts, including the state of Nebraska Real estate Division.
Philadelphia School District.
Boston public schools.
City of Reno, Nevada.
And the Sacramento, California Regional Transit authority.
Additionally, we continue to make progress penetrating our <unk> customers as their one stop solution for all asset sales, including their highest value assets.
For example, during the quarter we.
We sold a helicopter for the Polk County, Florida shared sheriff's office for $2.2 million.
We also continue to make progress with the beta version of our New Cup duals marketplace and expect the rollout of this new functionality later this year.
We expect our modernized got deals platform will increase our recovery rates and lift got deals GMB materially over time.
In summary.
As client vehicle replenishment and real estate cycles normalize.
Several infrastructure spending takes hold.
And we continue our pace of account acquisition.
We see the opportunity to significantly grow the size of our <unk> business over the next three to five years.
In our retail segment, our flexible service offerings have been well received by the marketplace and helped us grow G M B and direct profit by 22% and 12% year over year, respectively.
Margins in this segment have been pressured as customers have traded down to lower value merchandise to save money in an inflationary environment versus the prior year period.
Our new business development remains strong with notable interest in the housewares and pharmacy verticals.
Current results reflect that we have yet to fully leverage the investments we have made in three new distribution center facilities.
We expect retail segment margins to improve as we further leverage this additional operational capacity and drive productivity gains.
Our capital asset group segment, our CAG segment was below plan for Q1, but we delivered on plan for direct profit as we successfully executed numerous.
High value transactions during the quarter for our clients across the globe.
Indeed, we remain the most trusted market maker.
For industrial capital assets, and our inbound sales leads grew 60% in Q1 versus the prior year period with strong interest in several sectors, including automotive biopharma and semiconductor manufacturing.
Conversion of leads to executed transactions has been slower than normal as many of our enterprise clients continue to assess their operational plans amidst changes in the global economic climate.
Our ability to support global capital asset transactions has been increasingly valued given the broad application of the industrial assets, we sell and the variation of supply and demand in different regions and the global economy for.
For example, during Q1, we completed the sale of an unused high pressure hydro cracker reactor fabricated by Kobe Steel Japan.
Yes, it was located in South Korea.
And sold to a European buyer for renewable biodiesel applications and highlights the unique ability of our marketplace to create commerce across the globe.
Our <unk> solutions are well positioned to help industrial manufacturers, who are in a cost savings mode manage through the current recessionary environment.
As COVID-19 restrictions loosen in China.
We continue to have attractive growth opportunities in the Asia Pacific region, which had been limited recently.
Our tag heavy equipment fleet category also continues to make progress growing signed contracts, new sellers transacted opportunities and net new revenue.
Recent wins include several national accounts with strong upside potential.
Finally, our machining segment continues to grow its revenue and direct profit with enhanced traffic and more equipment categories. The introduction of self directed listings.
Financing services and market maker transaction services.
We believe our machining digital advertising and.
Online storefront solution offers business customers.
Cost savings and convenience that are well suited to the current macro environment.
In conclusion.
Where we're focused on executing multiple drivers to create value for our shareholders over time.
We have continued to grow awareness of our solutions in the marketplace.
And plan to double our core business over the next three to five years, which will be aided by the normalization of supply chains and our leverage.
Fixed investments, we have made in sales marketing technology and operational capacity.
Our capital efficient business with.
With strong operating cash flow.
$79 million in cash and zero debt.
Provides us ample financial flexibility to execute our plans.
We will continue to deploy our capital on.
Organic growth initiatives.
Share buybacks.
And tuck in acquisitions.
In closing we thank our team members across liquidity services for their dedication to our mission to power the circular economy, the benefit sellers buyers and the planet.
Now I'll turn it over to Jorge for more details on the quarter.
Thank you Bill and good morning, everyone.
As Bill said, despite the macroeconomic challenges impacting key categories. We have continued to focus on expanding market share.
While completing the first quarter of fiscal year, 'twenty, three with $278 million in GMP up 4%.
$72 $3 million in revenue are up 8% from $262 million of $66 $7 billion in the same quarter last year, respectively.
The uncertain economic climate and global supply chain disruption can affect volume timing type of asset and inventory available for sale in any given period.
Specifically comparing segment results for this first quarter to the same quarter last year. Our <unk> segment was up 3% on G M being down 3% on revenue and segment direct profit mainly.
Impacted by the supply of vehicles.
Our retail <unk> segment was up 22% on <unk> up 19% on revenue up 12% and segment direct profit that reflects current market driven increases in the mix to lower value products.
Our CAG segment was down 10% on <unk> is down 16% on revenue.
2%.
<unk> segment direct profit due to favorable margins on international transactions.
Our senior revenue was up 15%.
Segment direct profit was up 16%.
GAAP net income for the fiscal first quarter.
Was $4 million, resulting in diluted GAAP earnings per share of prop them up from 10 in the same quarter last year.
non-GAAP adjusted earnings per share for this.
First quarter was 19% up from 18000 for the same quarter last year.
non-GAAP adjusted EBITDA was $9 8 million up from $9 4 million the same quarter last year, mainly reflecting the higher <unk> revenue.
Partially offset by the planned year over year investments in operations and technology.
Higher sales and marketing expenses to support market share expansion diversification and longer term growth.
We hold $79 $9 billion in cash cash equivalents and short term investments.
Perform $7 $2 million of share repurchases during the quarter.
We have zero debt and $25 million of available borrowing capacity under our <unk>.
Credit facility.
Our fiscal second quarter guidance range for <unk> is consistent with the same period last year and reflects the headwinds being experienced currently across the global economy.
As our business is impacted by the macro supply and pricing of vehicles and macro conditions in real estate.
We would expect to see growth as these trends subside.
The usual seasonality trends for the Gov deals in retail segments are expected with the retail beginning the uptick in the post holiday returns activity.
We therefore expect higher volume of retail return yet combined with the current higher mix of lower value products in the short term from customer behavior in response to inflation and macroeconomic uncertainty.
Our current GMP mix expectations are reflected at a slightly lower total of segment direct profit as a percent of total revenue in the short term.
Contributing to the overall profit guidance range from the upcoming.
Fiscal second quarter.
We currently anticipate our consolidated revenue as a percent of GMB.
In the mid to high 20% range in the short term, reflecting our mix of business and products sold.
While the macroeconomic headwinds remain we are looking to stay positioned for market share gains and stronger longer term growth through continued emphasis on sales and marketing and in our operations and technology investing.
Management guidance.
For the second quarter of fiscal year 'twenty three is as follows.
We expect GMB the range from $260 million to $285 million.
GAAP net income is expected in the range of $1 billion to $3 $5 million with a corresponding GAAP diluted earnings per share ranging from three to 10 per share.
We estimate non-GAAP adjusted EBITDA to range from $6 5 billion to $9 billion.
non-GAAP adjusted diluted earnings per share estimated in the range of 9% to 16 <unk> per share.
The GAAP and non-GAAP earnings per share guidance assumes that we have between 33, 5% and 34 million.
Fully diluted weighted average shares outstanding for the second quarter of fiscal year 'twenty three.
And we will now take your questions.
Thank you we will now begin the question and answer session.
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One moment for our first question.
Our first question comes from the line of George Sutton from Craig Hallum.
Thank you Bill.
I wondered if you could explain in a little bit more detail. What you believe will be the normalization in the boost that you see for the business later in the year what are the drivers for that that you see.
I think that does relate to.
Sleep.
Supply reaching.
What I would call backlog demand in the government market and to some extent in the commercial market.
We know that there is budget and intent to buy.
A variety of.
Operational assets across our government and enterprise customers.
Grabbed that as vehicle fleets truck fleets.
Like safety.
Electronic.
Parts and other components it limited that supply so as that refresh.
Unfolds.
The.
Owned assets will make their way through our.
Asset disposition cycle and that will help normalize what we think has been a longer hold period for many of our clients and I think that also affects certain other segments such as.
The construction market and utility bucket truck market other things that would normally feed into our marketplace I think the real estate business has had.
Aberrational low conversion rates.
Some of that is related to.
Public policy by certain cities and jurisdictions and counties on delaying the normal.
Sale of judicial and tackling real estate.
And I think perhaps.
Sure.
That's going to normalize as we look at.
How borrower behavior changes with higher interest rates.
I think you're going to see a reversion of a lot of.
What we've seen is below average sales to average sales is that snap snaps back we will have more real estate sales well what are we doing to backfill that shortfall, which is frankly as I mentioned.
<unk>.
Tender at the low end 10 at the high end $30 million of quarterly GNP and a few million dollars of EBITDA. We're.
We're back filling it with new markets and diversification of market share growth.
Great progress with the heavy equipment fleet business in commercial markets National leasing companies are now looking at our marketplace as a viable solution.
We continue to expand our CAG reach and as I said.
60% growth in inbound leads is pretty good.
These are fortune 1000 companies with.
Intent to transact in this question of the exact timing of that so we'd like to see that on a sustained basis is a <unk>.
<unk> of where we can take that business and I think the global market, making is very relevant.
You have different pockets of demand for different assets and we can create that marketplace like no one else.
To generate liquidity.
We continue to block and tackle in our core retail segment.
20% plus GMB growth is not too shabby.
Yes, consumers have traded down and they're not buying.
No.
<unk> high end furniture, and fitness equipment that they did in <unk>.
The prior year period, but theres still a lot of utilization of our services and we are gaining market share there and I think across all of our segments. We have stronger relative strength then.
Other service providers and so if we continue to expand the market share.
I think we will overcome.
This short term headwind that has dogged.
G M D and the last.
A quarter that we're announcing today.
You mentioned in the CAG group your inbound leads up pretty significantly but.
The same token your conversion of those leads slower what can you give us some sense of what you are doing to improve that conversion and what sort of timeframe would we anticipate.
To see some improvement well I think.
What we're doing is making sure that we provide.
Flexible services.
Real time data to allow our clients to see what value they can achieve in the marketplace.
A lot of these are multimillion dollar transactions in may affect facilities in clients' decisions to stay in the market or exit a market. So a lot of that.
As CFO and operational decision, making on.
What is the strategy of the company selling the asset and you know when you have cross currents in and.
In the market, but we haven't seen in a while that's delayed decision, making and frankly, that's outside of our control, but what we can do is cement our role as the trusted solution.
A choice to make make the market when they are ready.
The semi con market semiconductor manufacturing has been roiled.
A lot of movement.
Re shoring activity.
That that's an opportunity for us and so we're covering that really well a lot of inbound leads and then when you actually think about selling.
And our manufacturing lines those there.
Very profound decisions by these companies so.
What we want to be doing like a lot of advisory businesses, where we're in in the boardroom, making that data available.
Providing precedent transactions so some clients understand what they can realize in the secondary market and so it's not a question of whether these transactional happens just matter of when.
And of course, George Johnson auction marketplace, we give you the real time guidance, we have at a point in time.
We're earlier in the quarter. So we can only tell you what we can see that visibility around that as I look at 2023 2024. The fact that we're able to increase awareness increase that that new business development pipeline gives US you know really strong conviction that.
We are a growth business center hands in the CAG segment.
And.
That's the best I can give you now.
One final question from me relative to machines.
Optical little superstar, but very small.
A lot of functionality and certainly with the number of participants looks like it could be a much bigger business can you just discuss.
We're effectively an overcapitalized business today has there been real discussion on trying to grow that business fairly dramatically and we have a very good team and plan.
To double the machining of business.
And the next two to three years and in that.
That's always going to be a good growth trajectory.
While while it may be small relative to the whole.
We've more than doubled it since we.
Began investing in <unk> and see a glide path to continue to build that business. That's a business that has global reach we have opened an office in.
China.
We see the broker dealer market for equipment categories is very.
Inefficient there.
We think that is opportunity for us we see opportunities to play the role of a market maker and introduce transactions to the advertising platform because we have a number of buyers.
We averaged four five unique bidders for every asset that we sell that means theres one successful bidder.
For unhappy bidders that.
What is exactly what they were interested in and hence.
Financial capability performed so matching that buyer demand from our auction platform with available inventory and machinery is a natural adjacency that we're beginning to attack.
Yeah.
In addition, our.
A lot of our buyers into need equipment financing and so we are standing up initially partnerships to reduce friction and get those financing and.
Matt.
And you know that can be a prelude to doing something more there.
We've had the ability to improve the tech.
And our platform to allow people to list directly out machine without really any interaction from our team, which is which is a positive. So there are a lot of drivers that will allow machine.
To double again this is a rule of 40 high margin business. So even though it's it's revenue might be.
Lower relative to the whole, it's a high margin business, so as we get track.
Traction there and double that business I think it starts to become material to the overall bottom line of the company.
Perfect. Thank you.
Thank you one moment for our next question.
Our next question comes from the line of Gary Chris Zaffino from Barrington Research.
Hey, good morning build Jorge.
Couple of questions here I would assume that.
The.
Issue with Gov deals on the on the vehicle side is really more of a supply issue. I mean, you did mention pricing a little bit, but it really stems from the fact that there is a lack of supply out there.
Because there was a lack of new car build last year and the fleets Couldnt briefly is that kind of a correct assumption.
Gary you're spot on because when you think about it the dealers their highest margin is taking whatever supplies available and selling at retail.
Last for me to get fulfilled as this fleet buyer.
And you've seen that in the rental market too.
So we know that we're sort of glass in line to at least our customers I should say our last in line to get there their needs fulfilled, but there's just a ton of money that's been approved and allotted for more efficient bus fleets.
Fire medical police.
Energy utility fleets.
That debt is waiting patiently to get their needs fulfilled and now the industry is working hard.
Increasing chip.
Supply capacity to fill component needs in the automotive supply chain and I think that ultimately is going to bear out in the second half of 2023, 2024 and will be there and we'll have a lot of supply that's freed up to come into the marketplace. So that's how we see it.
That's the data that we observed in track like you all probably in different sectors with different service providers. So we know that that is a headwind that will normalize and eventually become a tailwind.
Yes, alright.
Your opinion that.
Or the <unk>.
Knowledge base here that.
These.
Local municipal government state governments, whatever theyre not going to be as sensitive to price and interest rates. If they have the money allocated on a budget basis theyre going to buy the cars the cars are available.
And of a correct assumption, having worked having worked with government entities for over 22 years I can tell you the use it or use of cash.
It's always been there.
Okay, Great a couple of more questions here.
Maybe could you go into a little bit more detail on whats going on got deals on the real estate side.
Okay.
There should be given the environment I don't know if youre dealing with repossessions or whatever there should be more real estate out there.
Cell, but.
The conversions are coming down so so what happens to that real estate it conversions come down.
So we.
When the taxing.
<unk>.
Takes place.
<unk>.
Owner has the ability to recover the property they pay there.
Back to mortgage or tax payments and so.
We've seen we've seen a lower than normal.
Right.
Going through to final sale as.
Some borrowers and some entities have subsidized borrowers to get those those properties off of their delinquency rules.
We don't see that as sustainable.
Yeah, Theres a lot of.
Let's say.
Support and subsidization happening in 2021, and 2022 light of relief programs.
Sort of.
Kent held up okay.
Market probably artificially.
And that's part of a larger.
Effort too.
But a lot of payments on hold and student loan debt was another example, where you can get deferrals and so forth.
I think that all comes to normalize in 2023.
Because those aren't sustainable.
Policy decisions I think at some point you go back to sort of your normal cycle meeting your obligations.
And that means that instead of a 0.1%.
Great.
Okay.
Assets going to through the foreclosure process that will probably normalize to more like 2%.
And so what does that mean for us it means that.
Items that were queued up for sale that were listed in the marketplace instead of closing at auction they've been pulled well I.
I think more of those assets will go through to completion.
Will be sold and that will affect positively our G. N V and it's not like we have.
We're not rooting for one side as well.
The longitudinal data that says.
If you have 100 properties in a county every quarter that go to the sale process as directed by Sheriff.
When you normalize that.
We're going to we're going to sell lot more property than what we've seen in the last few quarters and what we currently have visibility on for Q2, our March quarter. The other thing I would say is.
I think interest rates are.
Have had.
No impact on whether these borrowers were willing to carry the property interest rate payments are much higher now and you know theres a couple of pieces in the journal this week around.
The fact that consumers are feeling a little bit of a squeeze.
So we think that's probably going to influence more real estate just lastly.
The broader secular trend and mission of liquidity services is to drive digital adoption of online sales methods by.
Government entities and that includes the counties that administer these sales.
And we have been successful in winning new contracts and in some cases those contracts have just taken.
A little bit of a.
Bureaucratic and slow slow rollout phenomena and.
It is to some extent people may resist change. So these sales have occurred in an offline way for 100 years and you're moving to online in certain people.
Local buyer might say no I don't want that competition I'm going to call my local mayor and city Council and say.
This isn't good and so then there's a little bit of a lobbying.
Process that goes on in delays Rollouts, but we've won some top 50 metro.
Contracts that have not.
Uh huh.
Byrd any fruit for us in the current year because at that type of a political process now that's going to go through.
And ultimately be operationalized, and we will we will have the benefit of those awards because these are competitively bid contracts.
The date is on the side of the decision to go online, but that's just part of what you deal with when you're pioneering a market.
Is dealing with significant change in that sometimes make certain incumbents.
Resist.
Okay. Thank you and then just two more quick questions number one it looks like the cash was down fairly substantially sequentially I know you bought back some stock but.
What accounts for the rest of that cash balance going down Jorge.
So we did have.
A little timing difference at the very very end of the quarter on our financial settlements with customers.
We normally would have.
How that happened in the last few days of December , but with the holidays and frankly with a change in our banking.
It just it's falling into January so that's actually a part of it but you don't see but it also explains on the balance sheet why that some of the payables the customers ended up.
Net ended up a little different.
And then yes, and then theres the buyback right.
Seven.
$5 million or whatever right. So.
Those are the two big things I'd say nothing.
Otherwise unusual.
Okay, and then lastly, it looks like your G&A expense was down about 10%.
I would assume that that is something with dealing with the reversal of accruals for bonuses or something like that.
Is that correct and is that seven $4 million to $8 million is that a good number for a run rate throughout the rest of the year the financial if the.
EBITDA generation continues to be.
Where it was in Q1 in that range.
So to the first part no there is nothing unusual in bonus accruals or for anything.
So there is.
I think I'll just the G&A in general.
The well managed G&A.
I would expect.
The rest of the year to be similar I think.
Even our tech and ops to.
It will be quite similar to the first fiscal quarter. It all goes up a little bit as you go right but.
The only thing that will dollar wise go up.
More than the others and but.
But still be steady on a year over year percentage growth is more variable sales and marketing.
Okay.
Thank you very much.
Sure.
Yeah.
Thank you ladies and gentlemen that concludes today's call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Okay.
Yeah.
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Okay.
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