Q3 2023 RB Global Inc Earnings Call
Okay.
Good day My name is Chris and there will be your conference operator today at this time I would like to welcome everyone to the <unk> Global third quarter Conference call. All lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question. Please press Star then the number two thank you.
I'll now turn the call over to Mr. Sameer with THAAD, Vice President of Investor Relations and market intelligence to open the conference call. Mr. THAAD you may begin your conference.
Hello, and good afternoon to everyone. Thank you for joining me in our Chief Executive Officer, Jim Kessler on today's call. The following discussion will include forward looking statements, which can be identified by words, such as expect believe estimate anticipate planned.
<unk> opportunity and similar expressions.
That are not a statement of fact, including but not limited to projections of future earnings revenue gross transaction value debt and other items.
And market trends and expectations regarding integration of IAA, including anticipated cost synergies are considered forward looking and involve risks and uncertainties.
The risks and uncertainties that could cause actual results to differ significantly from such forward looking statements are detailed in our news release issued this afternoon as well as our most recent quarterly report and annual report on Form 10-K, which are available on the Investor Relations website, as well as Edgar and SEDAR.
On this call. We will also discuss certain non-GAAP financial measures, including forward looking non-GAAP financial measures for the identification of non-GAAP financial measures. The most directly comparable GAAP financial measures.
Applicable reconciliation of the two see our news release Form 10-K Form 10-Q, and Investor presentation posted on our website.
We are unable to present quantitative reconciliation of forward looking non-GAAP financial measures as management cannot predict all necessary components of such measures.
Investors are cautioned not to place undue reliance on forward looking non-GAAP financial measures.
Figures are discussed on today's call are U S dollars unless otherwise indicated at this time I would like to turn the call over to Jeff.
Tim.
Thank you Samir and good afternoon to everyone, our marketplace platform and growth initiatives showcase their strength and effectiveness again in the third quarter as we achieved 17% growth in gross transactional value on a pro forma combined basis.
CTV growth across all our verticals reflects our teammates dedication to being a trusted partners to our customers are.
Our focus on cost and execution drove strong flow through resulted in robust adjusted EBITDA growth.
We continue to make significant strides in integrating.
During the third quarter, we brought together our global senior field leadership team.
Two day session.
In this meeting served as a platform to emphasize our foundational values of being one team all in all about the customer and easy to do business with.
I was excited and energized to see how the teams came together learn from each other and how eager everyone was to drive our shared vision of success as one cohesive team.
It is this one cohesive team of 8000 plus members that works hard every day to drive successful outcomes for our customers.
And to US success for our customers comes from consistency.
You can see over delivering on our commitments concerning to see of being proactive with our customers and consistency of driving the best outcomes for the transactions they entrust us with.
This consistency continues to build trust with our customers and ultimately positions us to unlock more market share in all the sectors we service.
We have taken quick decisive steps to improve consistency in our automotive sector.
This journeys first step was in the second quarter, where we streamlined the senior leadership team the new structure made it easier for our customers to partner with US as we transition management of service level agreements or <unk>.
Our holistic customer based approach.
Apart from the prior segmented by SLA approach, which caused a lack of accountability.
We are now implementing new business process to measure our escalates in real time, and I personally scrutinize, our progress against our commitments weekly.
It needed I actively involved myself in addressing any potential concerns.
Through this process, we have also donated.
Critical responsibilities held by our team members, whether various paths should be owned at the branch level or Hal to have corporate best support success in the field.
We're looking to implement permanent solutions, not temporary fixes where customers have to yoga when their experience.
We are also implementing tech improvements and prudently invest into gave our teammates the tools they need to drive consistency for our customers.
I am delighted to say that we have already seen an uptick in our SLA performance.
With one example, being improved onetime vehicle pickup we will also implemented new incentive structure for our branch managers at the start of next year. So they are better aligned with the performance they are responsible for driving.
We are happy with our SLA performance recently have made substantial strides since closing.
Despite these recent improvements in SLA performance, one customer has notified us that they intend to ship all their assignments away from us by the end of the year.
This customer accounted for approximately 4% of total GTA V and approximately 5% of total unit volumes annually.
Disappointed that we were not given a chance to continue our partnership, especially considering our demonstrated ability to exceed SL as in the recent months.
We're going to continue to over deliver.
On our commitments to all of our partners like we had in the past quarter and continue to do so in the current quarter.
Beyond this our proactive approach has not gone unnoticed by many of our partners, especially regarding cats.
This year, we have had cat events ranging from wildfires in Hawaii to Hailstorms in Texas to floods in New York.
And of course, there was hurricane Odile.
I and other leadership team members went to Florida.
<unk>, where we have more than 1500 acres available for cat storage.
Although the impact of these events was relatively small compared to large hurricane our ability to mobilize our resources across multiple geographies, including internal tow capacity in some regions within overlapping timeframe allowed us to showcase the breadth and depth of our capabilities.
Overall, we have sustainable competitive advantage when respond into cat events stemming from our combined company footprint the flexibility afforded by our NASCAR partnership and our ability to pull teammates from across RV global to process cat volumes with remarkable efficiency.
Moving to the construction and transportation sector within the sector, our endurant robust and trusted partnerships have consistently placed us in the prime position as the preferred disposition partner in the industry.
This quarter, we saw strong contributions from both our strategic account groups and our regions business supply chain in the construction space continued to normalize aiden and users to obtain new equipment as.
As they purchase new equipment at powers to trade in cycle, ultimately leading to the need for disposition services.
On the transportation side, there continues to be stressed in the industry accelerating the need for liquidity solutions for our customers. Our recent illustration of this was the yellow corporation bankruptcy, which involved a highly competitive bid in process. This unique advantage of having IAA in RBR at our disposal.
Allowed us to demonstrate that 90% of yellow assets were within 100 mile radius of any Barbie global location, a distinction no other bidder could claim.
The combined physical footprint, not only redefines industry standards, but also reinforces our commitment to serving our large enterprise customers precisely where they desire and in the manner that best suits their unique needs to.
To be clear even with this transaction, we have more than enough capacity at our yards to effectively service all our customers.
We are dedicated to optimizing price realization and our industry, leading global buyer base provides our customers with unparalleled depth and breath of liquidity.
Like any other transaction, we attend to harness the analytical capabilities eyebrows and leveraging our pricing teams to identify the most effective format location and channel to drive the best outcomes. We currently anticipate it will take three to four quarters to work through the bulk of the yellow consignment.
Combination of yards, our marketplace liquidity and our size allowed us to win the trust of this customer and showcases our ability to do transactions of any size.
We never take our customers trust for granted and we are committed to continually enhancing their experience.
Moving to integration, we realized 12 million in actual cost synergies in the quarter and have action that total of 51 million in annual run rate cost synergies since the close of the transaction.
Based on our progress we expect to deliver at least $100 million to $120 million of annual run rate synergies by the end of 2025.
As part of our integration efforts, we evaluated our land strategy.
<unk> the decision between leasing and own it.
And discussions with our valued partners. It became evident that land ownership is not a prerequisite for meeting our service level agreements or secure and market share.
We maintain a surplus of land capacity across our asset classes, allowing us to accommodate our operational requirements easily.
However, our capital allocation strategy is guided by financial Prudence.
We were strategically and Opportunistically purchase property in regions successful to cats, or where the market opportunity to me makes strong financial performance sense for us to make this investment.
Given these considerations, we are increasing our 2023 net capital expenditure outlook to approximately $310 million.
Let me now hand, the call to Samir to discuss our financial results for the third quarter Sameer.
Thank you Jim before I jump into the details. Please note that year over year comparison for GTA V and revenue referred to the comparison to the pro forma combined results of Ritchie brothers in IAA for the prior year period.
Total <unk> increased 17% with Franklin lock volumes across all sectors automotive G. TV increased 11% benefiting from the higher unit volume and higher average selling prices.
The existing customer portfolio drove the growth in unit volumes has the salvage industry continues to benefit from a rebound in the total loss ratio in the third quarter <unk> indicated that the loss ratio increased approximately 19% compared to 17, 5% in the same period.
Last year recall that the total loss ratio as the number of vehicles team Salt Lake as a percent of total accidents youth automotive prices continue to trend lower year over year, while repair cost in place remains elevated creating a fertile environment to be in a car a total loss after an accident.
<unk> TV in the commercial construction and transportation sector increased 22% driven by increases in lock volumes, partially offset by a decline in average price per lot sold part of the average price per lot sold decline was due to mix as lock volume growth came from rental and transportation customers, where asset values are intrinsically lower.
Compared to traditional yellow iron construction assets. Additionally, we continue to observe declines in price year over year on an apples to apples basis.
Next slide.
Moving to service revenue.
Revenue increased by 20% with our service revenue take rate expanding approximately 60 basis points, 20% service revenue increased due to GDP growth and a higher average service revenue take rate the increase in average take rate was driven by higher average buyer fee rate and growth in our micro place services revenue.
New partially offset by lower commission rates.
That lower average commission rate was driven by a higher mix of construction transportation asset sourced from our strategic accounts.
And lower realized rates on guaranteed commission contracts, we expect the lower average commission rate trend to continue in coming quarters.
Moving to inventory inventory declined 7%.
With lower revenue contribution from the automotive and commercial construction and transportation sectors, the inventory rate for the quarter contracted 220 basis points year over year to approximately six 5%.
The decrease in inventory rate can be primarily attributed to the performance of a few large deals in our construction and transportation sector, where pricing declined faster than initially anticipated between the purchase date and the sales state as previously noted we expect the environment for at risk deals to remain competitive in our commercial construction and transportation sector.
Turning to earnings.
Adjusted EBITDA increased 32% compared to the combined adjusted EBITDA of IAA and Ritchie brothers for the year ago period. The strength resulted from solid flow through from <unk> and service revenue growth combined with disciplined cost management.
Additionally, SG&A exclusive of CRB payments and other adjusting items with a $179 million.
Which came in below the low end of the range, we communicated last quarter adjusted earnings per share increased 36% on strong operational performance, partially offset by higher share count higher interest expense and the impact of the series a senior preferred shares looking ahead to the fourth quarter, we expect the adjusted effective tax rate to be between 23.
And 26% corresponding to a GAAP tax rate of 23% to 25%.
Next slide.
At the end of the third quarter, our adjusted net debt to trailing 12 months adjusted EBITDA was three two times adjust.
Adjusted net debt to trailing 12 months combined adjusted EBITDA was two four times down approximately two tenths of a turn compared to last quarter. We remain focused on deleveraging to approximately two times by the end of the first quarter of 2025.
In the fourth quarter, we expect interest expense to be between $65 million to $69 million.
I will now return the call to Jim to discuss the outlook for the fourth quarter and closing remarks.
Thank you Samir looking ahead to the fourth quarter I wanted to lay out our current thoughts.
We expect <unk> growth to be between high single digits and low teens year over year on a combined basis.
Note that this anticipates, an approximately 200 basis point headwind due to cycling over cat related GTA V and our automotive sector last year.
Regarding the cost of service so in fuel costs continue to trend higher due to the rebound in diesel prices. Additionally, we continue to experience inflation in our labor costs and an acceleration in rent expense associated with lease property.
Turning to SG&A, we expect SG&A to be between $180 million and $190 million exclusive of share based payments and any other adjustment items.
Thank you again for your interest in RB Global I Hope you can hear how excited we are as one team all in and I want to thank our team for their focus on execution and dedication to our customers with that operator, you can now open the call for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone.
We'll hear three town prompt acknowledging our request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by two if you're using a speaker phone. Please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Michael Dumais Scotiabank, Michael Please go ahead.
Hey, good evening guys.
Hi, how are you Michael.
Very good.
So I mean, I think everyone is going to circle around this with different questions but.
I understand customers, particularly for I can make decisions based on different variables.
So the question is how can you come away feeling like the loss was customer specific rather than potentially.
Potentially a leading indicator.
Hey, Michael its Jim. Thank you for your question and look for me our main focus.
When we came in to IAA and looked at their performance was really thinking about how do you turn it around and in.
In my mind I never thought about this as a V shaped type of all of a sudden.
When our company was going through.
Decline in market share over the last number of years that it was just magically going to come up and I have always thought about this as a U shape.
Type of curve of what we're going to have to deal with.
So to be able to make this U shaped happened what I feel really great about is the progress that we've already made on the SLA and the commitments to our customer which are well ahead of where I thought we would be at this point.
Unfortunately, the timing of when those changes start to happen in the decision that a carrier had to make just to in line up but what makes me feel really good as the progress we've already made.
And we continue to make going into the current quarter is what I get very optimistic about.
As we think about slowing down market share growth flattened out and then ultimately growing it.
Okay, perfect and then just to maybe expand on that a little bit the 4% of GTA V headwind.
Can you walk us down from there to maybe gross profit EBITDA, just trying to think about the operating leverage.
Yeah, Hey, Michael.
I think you have enough historical information.
Get to that number we were not necessarily guiding to a gross profit or.
Adjusted EBITDA range associated with a loss.
As you can imagine we've improved the efficiency of both organizations.
The transaction.
Tim do you want to talk about the cost savings.
Yes look I think as you can see reaffirming where we're at with the cost synergies I'm really comfortable with the range that we gave as we think about but to <unk> point.
We wanted to make sure you had the GTP guidance and I think theres, probably enough information to kind of get down to the levels that you're talking about.
Okay. Those are way too we'll leave it there guys.
Thank you.
Thank you. Your next question comes from Craig Kennison Baird Craig. Please go ahead.
Yeah, Hey, thanks for taking my questions as well circling back to this insurance topic can.
Can you just confirm that it is.
Different insurance carrier than the one that's impacted results in recent quarters.
I think we can confirm that yes.
And then Jim I guess I'd just ask were you surprised by this decision and if so like should investors be concerned that IAA and that team Didnt see this change coming.
Look as I mentioned before in the previous question in my mind I always thought this was going to be a U shape that.
When we did our due diligence and I E. We knew about market share losses, and we knew where their performance was in.
And what we're going to have to do to slow that market share loss down them flatten it out and bring it back up.
So.
Again, not surprised would I have loved the.
This decision not to have happened and had more time with the performance that we're seeing right now and have nine months of the current performance is set at three I would.
But look time into everything, but again I would.
We never thought this was going to be a V shape. We always thought this was going to be more of a U and so from that fact, I am not surprised.
Thanks, and then just on the.
You had announced some new.
Incentives for your territory and branch managers, starting next year could you give us a sense for what those kpis might be in the kind of impact do you think it may have on your business.
Look I think it's just keeping the company in sync with our SLA that we make for our partners and the commitments that we made in those contracts.
Think about the previous more company level regional level, but these are very specific around the commitments that each branch has delivered compared to the SLA that we've agreed to.
Okay. Thank you.
Okay.
Thank you. Your next question comes from Steve Hansen, Raymond James Steve. Please go ahead.
Yes.
Hey, guys. Good afternoon, thanks for the time.
Can you perhaps speak to the cadence of the expected yellow the physicians when he was asked a couple of quarters, but do you expect with the evenly disbursed or how do you think about that pattern.
Yeah, Hey, Stephen that's a good question I think some of this will be market dependent on how to best optimize price.
You know, where we've already actively mobilized our resources against the.
But at a high level I think what we've said is you know it will take us three to four quarters to get through the bulk of the disposition.
Okay. That's helpful. And then if I'm just going to circle back and beat the horse a little bit here on the carrier.
You made the decision can you maybe just speak to the rest of the portfolio and any expected renewals that are coming up over any particular timeframe and whether there.
Those milestones that we should be mindful of as we sort of an extra two to three quarters are there any other renewals that are going to surprise us.
Look I wouldn't get.
Definitely nothing that will surprise us, but like everything as you can imagine every insurance carrier has a different cadence of when their contract comes up and whatever is going on in the environment, but I can at least tell you. There is no active RF queues that we're dealing with right now.
Okay. That's helpful. I appreciate that.
Thank you. Your next question comes from <unk> Khan RBC capital markets. So perhaps please go ahead.
Great Thanks, and good afternoon.
Just on the yellow based on.
Kind of your view of the channels that you might utilize to disperse of that equipment, how should we think about that.
The take rate on that disposition relative to maybe the company average <unk> seen some numbers on a number of units the value the yellow held it out but just curious when you think about take rate based on the mix of channels.
Hey, Bob.
As you can imagine this is a complicated multifaceted deal and it will depend on a percent of assets that are actually transacted via strategic bulk sales.
That said as you would imagine the deal of the size of the total take rate is lower than our current average much like how we've spoken about strategic accounts more broadly speaking.
Very accretive to profit dollar we're happy with this transaction and how it is structured.
Okay, Great and then I guess, maybe just on the kind of the same topic on the customer I guess as you look out to 'twenty. Four are you able to maybe give us some perspective.
As we tweak our models on net.
Net where you think you might what might look like what the exit of this customer and then just kind of second part is do you have a cadence of how this customer sort of leaves their numbers is it all at once at the beginning of the year or does it happens slowly throw out there.
Hey, sorry about so we're not going to talk about 2024.
Just quite yet, but the way the contracts are structured.
No.
They have the right they've indicated that the curtail assignments by end of this year. So typically there is a cycle time associated with the inventory. We currently have on our book. So most of the impact would happen in the first quarter and you won't get kind of a clean run rate until the second quarter.
Waiting for anymore.
Okay sounds good.
Thank you. Your next question comes from Maxim <unk> National Bank Financial Maxim. Please go ahead.
Hi, good evening gentlemen.
Hi, how are you a blue.
I was wondering if you don't mind, maybe commenting.
<unk> sort of a lower magnitude of sugarcane.
<unk> activity and how that impacted the auto business in the quarter, I presume plus margin accretive but any.
The way that you can maybe quantify that would be helpful. Thanks.
Okay.
So Maxim you mean, what it was from last year since there was really nothing this year.
Exactly yes, yes, just.
So that will get them.
Gauge kind of the cadence on the one four basis.
Yes, Im not sure if we've quantified what the cat impact.
In terms of <unk> TV.
In the third quarter of last year.
Let me take that away and I'll get back tail from that.
Maybe just directionally, so like new activity kind of negative margin less than from <unk> is that how we should be thinking about this.
No for last year, the cat event was accretive to EBITDA.
So with.
With the level of volume it wasn't negative for IAA side.
So I would think about it as it was accretive in last year's numbers.
When no cat events this year, but kind of think about less than $100 million of G. T V.
Type of level.
<unk> definitely accretive from an EBITDA standpoint.
Okay. Thank you and then just going back to sort of the ops capex expectations. I mean, the first question I guess, what does that really going to generate for you guys in terms of.
Returns and should we expect this kind of bumped us three hundreds to start moderating and by Wyndham to how much well can you call. It won't get there would be helpful. Thanks.
Yes, no as we described in the script Max.
Either we're making these investments for strategic reasons or Opportunistically, we're able to purchase plan in some cases.
Below market value since our leases are up.
We're not going to quantify the exact impact.
It would show up in our cost of service.
Next here.
And then no real outlook for 'twenty 'twenty four capex.
But stay tuned and we'll give you more color on that.
Next quarter.
So just to clarify so cost of service will go down on a prospective basis.
Yes, I mean, when you buy property, you're reducing your rent expense.
But at the levels we are doing.
We're not we're not giving any specific numbers around the exact dollar savings or the margin impact, but where you would see it is in the cost of service.
Okay. Okay. That's helpful. Thanks, Thanks, a lot.
Thank you. Your next question comes from Michael Feniger Bank of America. Michael. Please go ahead.
Hey, everyone. Thanks for taking my question just just one Jim you kind of discussed earlier.
Around the V shape U shape and your goal is to kind of slow down the market share flatten out and grow it and just kind of piggybacking off the last question I know you guys raised your capex and just going forward.
Given this customer loss is as your assessment that you need to invest more to kind of achieve that U shape I understand you're not giving specifics on 2024, but just.
With your assessment.
And taking over is it that we need to is this going to be a higher capex, maybe even more investment in the business to kind of get that U shaped just curious like how you are kind of thinking about that now look for specific numbers, but if there is a little bit more intensity that's needed for us to get that U shape, yes.
Yes, no so.
And Samir were jump in but just at the highest level.
For our partners on the auto side, what we need to achieve is operational consistency against our commitments that we've made to them.
And look there's very little Capex that has to be invested to do that this is all around execution consistency clarity and accountability.
At the field level, so I'm not expecting to be able to retain and grow capital.
To invest capital to be able to do that.
I think as we think about real estate and.
A financial decision to make around lease versus own that's going to be a financial decision that we make that's best for the company, but the two are disconnected from having to go out and get business.
From our auto partners.
And Samir to have anything that you wanted to and I think you hit it Jim.
Michael at a high level.
Yeah.
Purchasing land, having land is not a prerequisite for leading our allies.
The capital intensity to improve.
Consistency.
Relatively minor.
Purchases, we are making as a financial decision just lease versus own economics that sort of thing.
Okay.
Fair enough and just lastly, just curious Jim's mirror like in the last.
Towards the end of October maybe even what you're seeing in early days in November just is there hasnt been any step function changes when we think of used equipment values either on the auto side are either on the construction and transportation as we kind of start to look to finish off the year theres anything you'd notice through the quarter and towards the end.
And to know thank you.
Yeah, Michael Great question. So if you think about the month of October.
Used equipment pricing year over year for construction in the U S was down call it 6% and our transportation was down 19%.
We're still above 2019 levels.
By a healthy amount, but I wouldn't say there was.
That function change.
The month of October.
Perfect. Thank you.
Thank you. Your next question comes from Steve Hansen, Raymond James Steve. Please go ahead.
Oh, yes, thanks at all because I am not sure. If it was covered I might've missed it earlier in the remarks, but can you perhaps speak just for the year.
Efforts, thus far on the whole car market.
In the aftermath of the street agreements.
Last quarter or two.
Yes, so Steve just as we talked about probably a couple of months ago barely early on in our stages. We are done our strategy plan in Florida, and our early stages of the execution against that so from a scene in a number standpoint, nothing in the past quarter or so.
It was something more in 2024.
Then anything thats going to help 2023.
Okay. Thank you.
Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star one on your Touchtone phone you're.
Your next question comes from Larry de Maria William Blair literally. Please go ahead.
Thanks, and good afternoon everybody.
Hey, Larry.
Hey, Sarah.
Tim two questions first any color or timing on the filling out of some of the C level positions that are open and secondly, you talked about the <unk>, which are a nice change obviously.
For clarity and for a little bit more information are they being rolled out staggered by customer or are they fully rolled out.
You mentioned better pickup times, what are the some of the other things that will get better over time and potentially towards more business coming in.
You got it all I'll start with the second question first from an SLA standpoint, so think about.
Same daytona and being able when you get an assignment to pick up the car. We're feeling really good about our progress from a toe standpoint, and the next big one is around total in making sure. The time after you get the car.
We're as quickly as possible and then as you can imagine gross returns, but look with each passing day, our position is improving and is strengthening.
And what we really need to get is that longer track record of consistency under our management.
<unk> of the company and once we see that building trust with our customers.
And then just to answer the other the other question just to repeat it for me.
Just filling out some of those C level positions that are open yet got it yes, no. So really the major one that we're going after is the CFO first and we are down too.
A handful of candidates that have now made their way through our committees and we had an internal committee going through it and then a couple of members of our board.
Going through the process and.
We're hoping that in the next 30 days, we're going to have someone in seat as we're going through it but now we're down to the financial part of the of the position.
Great Thanks, and good luck.
Thank you there are no further questions at this time. Please proceed.
All right everyone. Thank you for taking the time, we really appreciate it and looking forward to catching up with everyone. Thank you so much.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.