RB Global Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 9, 2024

There are 8 speakers on the call.

Operator

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ritchie Bros. Auctioneers First Quarter Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer Thank you. I will now turn the call over to Mr. Samir Rathod, Vice President of Investor Relations and Market Intelligence to open the conference call. Mr. Rathod, you may begin your conference.

Speaker 1

Hello and good afternoon. Thank you for joining us today to discuss our Q1 results. With me on the call today are Jim Kessler, our Chief Executive Officer and Eric Darrin, our Chief Financial Officer. The following discussion will include forward looking statements, which can be identified by such words such as expect, believe, estimate, anticipate, plan, intend, opportunity in similar expressions. Comments that are not a statement of fact, including but not limited to projections of future earnings, revenue, gross transaction value, debt and other items, business and market trends and expectations regarding the integration of IAA, including anticipated cost synergies are considered forward looking and involve risks and uncertainties.

Speaker 1

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 ks, which are available on our Investor Relations website and on 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 and the applicable reconciliation of the 2, see our news release, Form 10 ks and Form 10 Q 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.

Speaker 1

At this time, I'd like to turn the call over to Jim. Jim?

Speaker 2

Thank you, Sameer, and good afternoon to everyone. We are off to a solid start to the year with Q1 gross transactional value growth of 10% on a pro form a combined basis. I am proud of the team as they continue driving GTV growth. This strong performance directly reflects our 1 team all in culture and our dedication to over delivering on our commitments to our customers. Furthermore, our focus on continuous improvement and drive in operational efficiency throughout the organization translate into strong adjusted earnings per share growth of 58%.

Speaker 2

Let's start by discussing trends in our commercial construction and transportation sector. The equipment consignment market remains strong. However, we are beginning to see a normalization of equipment supply following the surge we experienced post pandemic. Strategic accounts, specifically within the rental vertical, are carefully evaluating the cadence of their dispositions for the rest of the year as they access business conditions. Within the region's business, the higher interest rate environment, the higher replacement costs and the upcoming U.

Speaker 2

S. Election are leading some customers to postpone investments in new equipment, reducing their immediate need for transaction solutions. Growing our market share is a top priority and we're executing our growth algorithm by expanding sales coverage. In the Q1, we actively recruited new talent to strengthen the Ritchie Bros. Brand and to ensure we have the right coverage where we have identified the most significant growth opportunities.

Speaker 2

Our physical presence in digital omnichannel platform remain a key differentiator making us the partner of choice. The Yellow Corporation bankruptcy demonstrates the power and versatility of our platform and how we over deliver for our partners. We complemented the broader logistical efforts of moving their assets to RB Global locations by utilizing Burritrade, a marketplace service on our platform to source competitively priced transportation services. Our extensive network of locations bolstered by IAA acquisition meant that 90% of Yellow's assets were within 100 miles one of our RV global locations, enabling transportation cost savings and seamless care, custody and control of their equipment. At the end of the quarter, we had approximately 9,000 trucks and trailers at IAA locations, which were flexed as RB Global satellite storage yards.

Speaker 2

Our ability to flex these yards eliminated potential incremental expenses to execute short term leases for storage. To be clear, even with this transaction, we have more than enough capacity in our yards to effectively service all of our partners. Our omni channel platform's full potential is being deployed to optimize price realization. We began with strategic bulk sales late last year. As those continue, we are directing assets across various regions and channels and hosting yellow dedicated auctions.

Speaker 2

This dynamic approach ensures we are constantly matching the supply of these assets with the best buyers. All of this is a testament to our marketplace's ability to cater to business of all sizes with a robust offering of services and transaction solutions. Moving to the automotive sector, we hosted IEA's 21st Industry Leadership Summit under RB Global, which shattered attendance records. The event attracted new and potential partners across North America's insurance, fleet and remarketing sectors. This premier event served as a platform to introduce RB Global's leadership team, our culture, our unwavering commitment to exceeding customers' expectations through robust and consistent performance.

Speaker 2

As we maintain and grow our partnerships with those who share similar values and want to build long lasting partnerships based on trust and transparency, we hosted the inaugural session of the IEA Advisory Council in conjunction with the summit. It was a dynamic exchange between key insurance partners and our leadership team, yielding overwhelmingly positive feedback and actionable short and long term items. We're excited to keep the conversation going, tackle on these initiatives and solidify our industry wide partnerships. We also use this event to highlight our performance improvements in the accurate measure of our gains by launching our partner transparency program and dispelling any misconceptions. We laid out a framework and now communicate our service level agreement performance to the industry quarterly.

Speaker 2

The feedback from our partners, especially about our data driven operational improvements have been very positive. Speaking of operational improvements, I am proud of the team and pleased that our continuous improvement program continues to drive meaningful SLA improvements in the Q1. Our pickup compliance, an internal measure of our tow performance, continued to be strong at approximately 99% and our on time total performance, an internal measure of our ability to process vehicle titles that meet our customers' demands was approximately 98%. We also continue to make excellent strides in attracting new international automotive buyers to our marketplace, partially driven by IEA leverage and historical Ritchie Bros. Relationships in Europe.

Speaker 2

In the Q1, the percentage of vehicles sold to international buyers hit an all time high. These advancements combined with our focus on continuous process improvement and investment in technology continue to drive average sell on price higher with automotive ASPs climbing an industry leading 3.3% year over year. We're focused on continuous improvement because consistent strong performance is the critical lever in our growth algorithm to unlock market share in this industry and the results speak for themselves. Our partners are noticing the positive shift a transformed culture built on trust, transparency, collaboration and clear focus on consistently delivering exceptional results. This momentum propels us forward and we're optimistic it will translate into market share gains in the coming quarters.

Speaker 2

Now, I will pass the call to Eric to review our financial performance and outlook.

Speaker 3

Thank you, Jim. Before we jump into the details, please note that year over year comparisons for GTV and revenue refer to a comparison to the pro form a combined results of Ritchie Bros. And IAA for the prior year period. Total GTV increased by 10%, automotive GTV increased by 6%, benefiting from higher unit volumes and as Jim noted, a 3.3% higher average selling price. The existing customer portfolio drove the growth in unit volumes as the salvage industry continues to benefit from a rebound in the total loss ratio.

Speaker 3

In the Q1, PCC estimated that the loss ratio increased to approximately 21.1% compared to 19.6% in the same period last year. The previously announced customer loss partially offset organic growth. Note that starting in the second quarter, we will see the full impact of the customer loss on GTV and unit volumes. GTV in the commercial construction and transportation sector increased 20%, driven by increases in lot volumes, partially offset by declines in average price per lot sold. The decline in average price per lot sold was due to asset mix, as lot volume growth came from rental and transportation assets where asset values are intrinsically at lower ASPs and continued declines in pricing on an apples to apples basis.

Speaker 3

Note that GTV growth in commercial construction and transportation excluding the impact of the Yellow Bankruptcy would have been approximately 13%. Moving to service revenue. Service revenue increased by 14% with our service revenue take rate expanding approximately 80 basis points to 20.8%. Service revenue increased due to growth in GTV, a higher average buyer fee rate and growth in our marketplace services revenue. Marketplace service revenue growth was driven by higher ancillary revenue and a higher auction related fee structure.

Speaker 3

As you think about inflation or deflation asset values, it is essential to note that our revenue model has been demonstrated to be resilient to swings in asset values in our marketplace. Historically, we have seen unit volumes and price move in opposite directions. DTV growth and take rate expansion have allowed us to grow service revenue above broader economic inflation. Inventory revenue declined 12% with lower revenue contributions from the automotive, commercial construction and transportation sectors. Inventory rate for the quarter contracted 100 basis points year over year to approximately 8.8%.

Speaker 3

The lower inventory rate was due to commercial construction and transportation and automotive, partially offset by strength in our government surplus business. 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 earnings per share increased 58% on strong operational performance and the full quarter impact of the IAA inclusion, partially offset by higher share count, higher net interest expense and the impact of the Series A senior preferred shares. At the end of the Q1, our adjusted net debt to trailing 12 months adjusted EBITDA was approximately 2 times.

Speaker 3

This accomplishment comes nearly a year ahead of schedule, showcasing our commitment to over deliver, the strength of the strategy and our ability to execute. We wanted to lay out our guiding principles for deploying our capital to maximize shareholder value. Let me walk you through our priorities. We see our target net leverage around 2 times. That said, we could flex either way for a period of time.

Speaker 3

In the near term, we plan on continuing to pay down Term Loan A for the remainder of the year. We will continue to invest in the business strategically and are not changing our 2024 CapEx guidance. Historically, the company has grown through acquisitions. And as we advance, we will continue to monitor opportunities to help us accelerate growth and unlock our strategic vision. For 2024, we are principally focused on integrating and driving returns for the recent acquisitions.

Speaker 3

Delivering superior returns to our shareholders is a core principle. We believe in returning excess capital. This approach demonstrates our confidence in executing and exceeding expectations. Our financial strength assures our customers we can consistently over deliver on our commitments. Moving to the outlook.

Speaker 3

We are reiterating our full year GTV guidance as GTV growth in the Q1 broadly aligned with our expectations. As Jim noted in his remarks, we are starting to see a normalization of equipment supply in our construction and transportation sector. Additionally, we will see the full impact of the previously announced customer loss beginning the Q2. Given these two factors, we anticipate that our year over year GTV growth for the remainder of the year will considerably moderate compared to the Q1. That said, we are increasing our adjusted EBITDA guidance to $1,200,000,000 to $1,260,000,000 based on strong flow through from the top line and continued operational excellence.

Speaker 3

We're also tightening our tax rate guidance to reflect the lower than expected tax rate in the Q1. With that, let's open the call for questions.

Operator

Thank Your first question comes from Sabahat Khan, RBC Capital Markets. Sabahat, please go ahead.

Speaker 4

Great. Thanks and good afternoon. So I guess just taking the Q1 results into account and sort of the guidance increase, can you maybe just walk through a bit more of the details around sort of your expected cadence for the rest of the year and how you settled on sort of $30,000,000 increase to the EBITDA line? Just any more color in addition to the outlook commentary you just provided would be great.

Speaker 3

Yes. Thank you for the question. As I mentioned in the prepared remarks, Q1 came in pretty much in line with our expectations. So the guidance movement of $30,000,000 was based on our forecast and where we were seeing the year flow out. So again, Q1 was in line with what we were expecting and the increase of the guidance was tied to that performance.

Speaker 4

Great. And then probably a little bit of color on sort of the capital allocation philosophy here. With the leverage where it is today, I think indicating that you're at the levels, the 2 times and below levels 1 year in early. Can you maybe just talk about the preference between sort of the organic versus I mean, how are you thinking about some of these opportunities that you have in front of you? And what is directionally a comfortable leverage ratio for you as you look at the business mix?

Speaker 3

Yes. So the 2 times is comfortable for us. As I said in the prepared remarks, we are going to flex a little bit probably on both sides of that too. Our focus for the remainder of the year is to continue to pay down on Term Loan A and invest in the business. So we're going to continue our investment in technology and our footprint as we evaluate that.

Speaker 3

So those are our priorities. And as I noted as well, we'll continue to look at acquisitions, but that's not our focus this year. It's really to focus on integrating IAA and the other acquisitions we've done. So we'll continue to focus in that space.

Speaker 4

Great. Thanks very much.

Speaker 3

No problem.

Operator

Thank you. Your next question comes from Steve Hansen, Raymond James. Steve, please go ahead.

Speaker 5

Yes. Thanks for the time guys. I appreciate it. Congrats on a great quarter. I just wanted to go back to the auto performance here.

Speaker 5

Jim, I think you referenced some of the things you've been doing to outperform on the ASP basis. But can you maybe just unpack that a little bit further and just give us a sense for where you think you're getting the best upside to the performance versus what we're seeing in the broader indices?

Speaker 2

Yes, I will. Look, I don't think it's one thing. So it's a hard question to go through all the tactics that we're applying. But I'll just give you a basic one. We did a press release and we've added trim level data for the buyers, right, a technology improvement.

Speaker 2

We were one of the first to implement something like that. We know when we can give the buyers more information and we can achieve a higher ASP on the auto side. But our whole team is we've heard from our partners, the areas where they deem very important to them and ASP is one that they're focused on. So as we think about our tactics, we have many different things we're trying from different auction channels, trim level data, data for buyers to make sure we maintain ASPs we can.

Speaker 5

Okay, that's great. And then I think as you described, your SLA performance has been in the high 90s now, and it sounds like relatively consistent on a consistent basis. The discussions with the partners that you described at your recent event, I mean, it sounds like this is paving the path to potential market share gains over time. But I mean, any visibility on when that might come to fruition or any sort of color on timing in terms of some of these contracts coming due?

Speaker 2

Yes. No, great question. And look, I'm going to stick to kind of what I went over last quarter when we had this question. As an organization, we're very focused on what's in our control and what is in our control is how we deliver against our commitments and our SLAs. And I am extremely comfortable that we're over delivering for our partners.

Speaker 2

And as we do our quarterly QBRs with each partners, we're getting that feedback from them. But look, I'm a realist. When we talked about the U shape, we just hit a year anniversary of the 2 companies coming together. But we're going to stay focused on what's important to us and our partners and that's what's in our control. And then I expect good things to happen as we continue down this path and being consistent.

Speaker 2

And my expectation is we're going to be consistent with where we're at right now.

Speaker 5

Appreciate the color. Thanks.

Operator

Thank you. Your next question comes from Michael Doumet, Scotiabank. Michael, please go ahead.

Speaker 6

Hey, guys. Maybe circling back just to the guidance. I mean, if I use the midpoint of

Speaker 3

the guidance, you're effectively calling for 0 GTV growth through the balance of the year and very little EBITDA growth. And obviously, I understand the dynamic with the customer loss, but just trying to understand the assumption on the commercial side because it does feel

Speaker 6

conservative. Just is the expectation for negative comps effectively in the second half?

Speaker 2

Look, I just want to remind everyone, I'll start with the auto side of the obvious thing that we're going to experience in the back half of this year of the carrier loss that we announced last year. Those cars are out of our network at this point or they're very small as we are into the Q2. So an obvious thing of what everyone is already aware of on the auto side of what's going to happen. And then when you get into the construction and industrial side, and we said this in our remarks, when the pandemic hit and people couldn't get equipment, they held onto the equipment longer, new equipment started to come in. So last year, we got an influx of rental equipment, certain sectors that really came to us and rental transportation.

Speaker 2

So as we go into the back half of the year, it's a heavy comp that we have to go up against. We believe our partners are going to normalize in the back half of the year, which is still a great place for us to be. It's just not the place where we were a year ago when you had the pandemic and all that pent up equipment and everything came in. So that's where you're using to set the guidance.

Speaker 6

Understood. And then maybe just flipping the cost. If I look at the SG and A, I mean, look, you've been on a flat trend for several quarters here. How much more can you do with this cost base? Or has the rationalization kind of run its course here?

Speaker 6

Or is there maybe more you can do either way, depending on whether you

Speaker 3

want to support more volumes on it rollover costs?

Speaker 2

Yes. Let me just answer that by just from a philosophy that we have as a leadership team. We are never going to stop managing this business effectively and efficiently. It's core of what we do every day. It's part of what our directors, our vice presidents, our extended leadership team.

Speaker 2

So we are never going to stop of how do we optimize this business, right? And that goes to margin expansion, that goes to SG and A Management. It is what we're building in the culture. So we're just never going to stop. So I really don't have an answer of a start and stop.

Speaker 2

We're going to be diligent and constantly look to make sure we're as efficient as possible.

Speaker 3

Perfect. Thanks, Jim.

Operator

Thank you. Your next question comes from Maxim Sytchev, National Bank Financial. Maxim, please go ahead.

Speaker 7

Hi, good afternoon, gentlemen.

Speaker 2

Hey, how are you?

Speaker 7

Good, good. Jim, just one question for you, if I may. I mean, given the context and the difficulties of completing IEA, what are your thoughts regarding the size of any potential transactions and sort of the need to do that and where it would be the most accretive, whether strategically or financially? Thanks.

Speaker 2

Look, it's a great question. And again, we're very focused as a leadership team on the business that we have, the verticals that we have. And look, all the verticals that we're in right now, we love the margin profile and the financial outlook of each of them, right? So as we think about what we want to do in the future, and Eric talked about this, as we think about the future, we know there are certain places where there are holes on the map, right, that would fit in nice with us as we think about the future, if that's M and A. But right now, we want to make sure we're driving the business that we have.

Speaker 2

We're running it effectively and efficiently, and we're always going to be opportunistic of what fits in for us. But right now, we're so focused on running this business and running a very profitable, effective company, and that's where our focus is right now.

Speaker 7

Okay. That's great. That's it for me. Thank you so much.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from Steve Hansen, Raymond James. Steve, please go ahead.

Speaker 2

Hey, guys. Just sorry, just

Speaker 5

a quick follow-up. The one thing that struck me as interesting on the inventory rate was the sequential improvements. I know it was down year over year, but on a sequential basis, we saw a nice improvement. I mean, you described that business as still being competitive in the broader landscape, but how do you feel about the sustainability of that sort of high single digit rate?

Speaker 2

Yes. Look, I think we're going to just go back to the same guidance that we've been given quarter after quarter. Look, it's a competitive market. Sometimes the deals go in your favor, sometimes they don't, right? And each time a deal is different depending on if it's Canada, the U.

Speaker 2

S, international, who we're competing against, We're in this to grow share. We have the best data to make the best decisions of where to use that data. So the guidance that we kind of said that low to middle historical end, I think is still a place where and we're expecting, but I think there's going to be times when you see what you saw this quarter where it's going to look like that. But look, I think we're in the best position for any of these competitive deals with having the rails and the data and analytic tools that we have to make the best decisions. And we're very confident that it's a place where we can compete and be successful at.

Speaker 5

Okay, very helpful. Appreciate the time guys.

Operator

Thank you. There are no further questions at this time. Please proceed.

Speaker 2

All right. Hey, 1st and foremost, I want to thank the RB Global team for everyone's hard work, dedication, commitment to our customers and over delivering on those commitments. Thank you so much for your hard work. And I just want to thank everyone on this call. Thank you for your confidence in RB and we look forward to talking to you the next time.

Speaker 2

Thank you so much.

Operator

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.

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