Ritchie Bros. Auctioneers Incorporated (NYSE:RBA) Q3 2023 Earnings Call Transcript
Ritchie Bros. Auctioneers Incorporated (NYSE:RBA) Q3 2023 Earnings Call Transcript November 9, 2023
Ritchie Bros. Auctioneers Incorporated beats earnings expectations. Reported EPS is $0.72, expectations were $0.52.
Operator: Good day. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the RB Global Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I'll now turn the call over to Mr. Sameer Rathod, Vice President of Investor Relations and Market Intelligence to open the conference call. Mr. Rathod, you may begin your conference.
Sameer Rathod: Hello, and good afternoon to everyone. Thank you for joining me and 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, plan, intend, opportunity and 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 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 and the 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 a 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. All figures discussed on today's call are U.S. dollars unless otherwise indicated. At this time, I would like to turn the call over to Jim.
Jim?
James Kessler: Thank you, Sameer, and good afternoon to everyone. Our marketplace platform and growth initiatives showcased their strength and effectiveness again in the third quarter as we achieved 17% growth in gross transactional value on a pro forma combined basis. GTV growth across all our verticals reflects our teammates' dedication to being trusted partners to our customers. Our focus on cost and execution drove strong flow-through resulted in robust adjusted EBITDA growth. We continue to make significant strides in integrating IAA. During the third quarter, we brought together our global senior field leadership team for a 2-day session. And 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 8,000-plus members that works hard every day to drive successful outcomes for our customers. And to us, success for our customers comes from consistency. Consistency of over delivering on our commitments, consistency 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 of the sectors we service. We have taken quick decisive steps to improve consistency in our automotive sector.
This journey's 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 SLAs to a holistic customer-based approach departing from the prior segmented by SLA approach, which caused a lack of accountability. We are now implementing new business process to measure our SLAs in real time, and I personally scrutinize our progress against our commitments weekly. If needed, I actively involve myself in addressing any potential concerns. Through this process, we have also delineated critical responsibilities held by our team members, whether various cash should be owned at the branch level or how to have corporate best support success in the field.
We are looking to implement permanent solutions and not temporary fixes where customers have to yoyo in their experience. We are also implementing tech improvements and prudently investing to give 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 on-time vehicle pickup, we will also implement a new incentive structure for our branch manager 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 shift all their assignments away from us by the end of the year.
This customer accounted for approximately 4% of total GTV and approximately 5% of total unit volumes annually. I am disappointed that we were not giving a chance to continue our partnership especially considering our demonstrated ability to exceed SLAs in the recent months. We are 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 Idalia, where I and other leadership team members went to Florida a state where we have more than 1,500 acres available for CAT storage, although the impact of these events was relatively small compared to a large hurricane, our ability to mobilize our resources across multiple geographies and including internal tow capacity in some regions within overlap in time frame allowed us to showcase the breadth and depth of our capabilities.
Overall, we have sustainable competitive advantage when responding to CAT events stemming from our combined company footprint, the flexibility afforded by our NASCAR partnership and our facility to pull teammates from across RB Global to process CAT volumes with remarkable efficiency. Moving to the construction and transportation sector. Within the sector, our enduring robust and trusted partnerships have consistently placed us in the prime position as the preferred disposition partner in the industry. And this quarter, we saw strong contributions from both our strategic account groups and our Regions business. Supply chains in the construction space continued to normalize, Aiden end users to obtain new equipment as they purchase new equipment, it powers the trade-in cycle ultimately lead into the need for disposition services.
On the transportation side, there continues to be stress 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 and RB yards at our disposal allowed us to demonstrate that 90% of yellow assets were within a 100-mile radius of any RB global location, a distinction no other bidder could claim. The combined fiscal 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 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 interest leading global buyer base provides our customers with unparalleled depth and breadth of liquidity. Like any other transaction, we intend to harness the analytical capabilities of Rouse 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. The 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 actioned a 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, including the decision between leasing and owning. In discussions with our value partners, it became evident that land ownership is not a requisite for meeting our service level agreements or securing 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 will strategically and opportunistically purchase property in regions successful to cats or where the market opportunity 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 Sameer to discuss our financial results for the third quarter. Sameer?
Sameer Rathod: Thank you, Jim. Before we jump into details, please note that year-over-year comparisons for GTV and revenue refer to the comparison to the pro forma combined results of Ritchie Bros. and IAA for the prior year period. Total GTV increased 17%, with strengthened volumes across all sectors. Automotive GTV increased 11%, benefiting from the higher unit volume and higher average selling prices. 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. In the third quarter, CCC indicated that the loss ratio increased approximately to 19% compared to 17.5% in the same period last year. Recall that the total loss ratio is the number of vehicles deemed solid as a percent of total accidents.
Used automotive prices continue to trend lower year-over-year, where repair cost inflation remains elevated, creating a fertile environment to deem a car total loss after an accident. GTV in the commercial construction and transportation sector increased 22% and driven by increases in lot 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 lot 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. Service revenue increased by 20% with our service revenue take rate expanding approximately 60 basis points, 20%.
Service revenue increased due to GTV 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, partially offset by lower commission rates. That lower average commission rate was driven by a higher mix of construction and transportation assets 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 rates for the quarter contracted 220 basis points year-over-year to approximately 6.5%.
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 date. 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 Bros. for the year ago period. The strength resulted from solid flow-through from strong GTV and service revenue growth combined with disciplined cost management. Additionally, SG&A exclusive of [indiscernible] payments and other adjusting items was $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 3.2x. Adjusted net debt to trailing 12 months combined adjusted EBITDA was 2.4x, down approximately 2% of return compared to last quarter. We remain focused on deleveraging to approximately 2x 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.
James Kessler: Thank you, Sameer. Looking ahead to the fourth quarter, I wanted to lay out our current thoughts. We expect GTV 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 GTV in our automotive sector last year. Regarding the cost of service, tow and 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 expenses associated with leased 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.
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