Ritchie Bros Auctioneers Inc

TSX:RBA

Earnings Call Analysis

7% Service Revenue Growth and $110M Cost Synergies Achieved

RB Global reported strong operational performance in Q2, with a 7% increase in service revenue and an 11% rise in adjusted EBITDA. The company achieved $110 million in cost synergies, surpassing initial projections. While total GTV declined by 1%, the commercial construction and transportation ATV increased by 9%. In the automotive sector, despite a 4% drop in GTV, average selling prices remained stable. RB Global updated its full-year GTV guidance to 0%–2% and raised adjusted EBITDA guidance to $1.22–$1.27 billion, reflecting strong operational leverage and commitment to cost efficiency.

Introduction

In the second quarter, RB Global has demonstrated strong operational performance amidst a dynamic market landscape. The company has showcased robust growth in service revenue and adjusted EBITDA, thanks to cost efficiencies and effective execution across its business segments.

Operational Performance

CEO James Kessler expressed pride in the team's operational excellence, resulting in 7% service revenue growth and 11% adjusted EBITDA growth. The company achieved approximately $110 million in cost synergies, outpacing initial commitments. This marks a significant milestone, revealing the management's dedication to ongoing expense optimization and profitable growth.

Commercial Construction and Transportation Sector

In the commercial construction and transportation sector, the equipment consignment market has returned to pre-pandemic levels. High interest rates and increased replacement costs have led some fleet owners to delay new equipment investments, impacting immediate demand for RB Global's transaction solutions. However, the company is countering this by expanding its regional sales coverage in North America, actively recruiting talent to strengthen its market presence.

Automotive Sector

The automotive sector is experiencing secular growth driven by higher repair costs and lower used vehicle prices. This trend has led to an increase in the total loss ratio, which CCC Intelligent Solutions estimated at 20.7% compared to 19% in the same period last year. RB Global's transparency program has been pivotal in gaining traction with partners, setting the industry standard for performance clarity.

Financial Performance

CFO Eric Guerin reported a 1% decline in total Gross Transaction Value (GTV), with the automotive GTV decreasing by 4% due to lower unit volumes but stable average selling prices. Despite these challenges, commercial construction and transportation sector GTV increased by 9%, driven by higher lot volumes. Additionally, the service revenue take rate expanded by 140 basis points to 20.9%, contributing to a higher adjusted EBITDA of 8.4% of GTV compared to 7.4% in the prior year.

Guidance and Outlook

The company has updated its full-year GTV guidance range to 0%-2% from 1%-4%, reflecting weaker-than-expected average selling prices in the commercial construction and transportation sector. However, due to strong operating leverage and cost efficiency, RB Global has raised its full-year adjusted EBITDA guidance range to $1.22 billion-$1.27 billion【4:0†source】.

Significant Wins and Strategic Moves

RB Global secured a substantial win by becoming the sole salvage provider in the U.S. for an existing partner, adding an estimated 40,000 salvage vehicles annually. This achievement underscores the company's commitment to transparency, over-delivering on commitments and setting industry-leading performance standards【4:0†source】.

Challenges and Mitigation

The company acknowledged challenges, including a milder winter affecting the automotive sector's GTV and the significant impact of a past customer loss. RB Global is focusing on organic growth from existing customers and leveraging its competitive advantages, such as its cat event handling capability, to mitigate these issues and sustain market share.

Closing Remarks

In summary, RB Global has demonstrated resilience and strategic agility in navigating market fluctuations. With a strong focus on operational efficiency, regional expansion, and strategic wins, the company is well-positioned to achieve its revised financial targets and deliver long-term value to its stakeholders.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the RB Global Second Quarter Call. [Operator Instructions]. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I will now turn the call over to Sameer Rathod Vice President of Investor Relations and Market Intelligence to open the conference call. Mr. Rathod, you may begin.

[Sameer Rathod, executive]

Hello, and good morning. Thank you for joining us today to discuss our second quarter results. With me on the call are Jim Kessler, our Chief Executive Officer; and Eric Guerin, our Chief Financial Officer.

The following discussion will include forward-looking statements, which can be identified by such words as expect, believe, estimate, anticipate, plan, intend, opportunity and other expressions. Comments that are not a statement of fact, including but not limited to projections of future earnings, revenue, growth transaction value, that 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.

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 morning 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 2, SEDAR news release, Form 10-K and Form 10-Q 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. At this time, I'd like to turn the call over to Jim. Jim?

[James Kessler, executive]

Thank you, Sameer, and good morning to everyone. I am proud of our teammates as they continue demonstrating operational excellence and financial discipline to drive consistent, solid execution for our partners. This strong execution translated to 7% service revenue growth and 11% adjusted EBITDA growth.

We have now actioned approximately $110 million in cost synergies and will reach the full run rate well ahead of what we committed during the transaction. While we are pleased that we over delivered on this commitment, we see expense optimization as an ongoing journey and will continually manage the business for profitable growth.

Let's start by discussing trends in our commercial construction and transportation sector. The equipment consignment market has normalized following the surge we experienced post pandemic. As business conditions continue to evolve, large fleet owners are evaluating their equipment disposal needs for the remainder of the year.

The higher interest rate environment and the higher replacement costs are leading some customers within the region's business to postpone investments in new equipment, reducing their immediate need for our suite of transaction solutions for their used equipment. We are focused on driving sustainable growth by expanding our regional sales coverage within North America. In the second quarter, we actively recruited new talent to strengthen the Ritchie Bros. brand to ensure we best serve our customers in the highest potential markets.

Now let's move to the automotive sector. Volume in the Salvage industry continues to see secular growth due to higher repair costs and lower used vehicle prices, leading to an increase in the total loss ratio. In the second quarter, CCC Intelligent Solutions estimated the total loss ratio increased to approximately 20.7% compared to 19% in the same period last year. Our transparency program continues to gain traction with our partners as we set the industry standard for clear and definable performance.

I am proud of the team and pleased that we consistently delivered exceptional performance to all our partners in the second quarter. All key SLA metrics remain strong at a very high level and continue to improve compared to later.

We continuously improve our processes and invest in technology to drive premium price performance for our partners. In the second quarter, we also made significant progress in attracting new international buyers to our marketplace, achieving a record high percentage of vehicles sold to international buyers in our automotive sector.

Our efforts resulted in automotive average selling prices remain unchanged year-over-year, outperforming the industry, which continues to experience declines. This high performance and our commitment to trust and transparency translated to a meaningful win in the third quarter.

One of our existing partners who previously split salvage volumes has selected us as their sole salvage provider in the U.S. We believe this win will add an estimated 40,000 salvage vehicles annually.

Our year-round dedication to cat preparedness ensures a rapid and seamless response when our customers need us the most. This was in full display with the last hurricane. While the hurricanes impact was minor, in terms of unit volumes, our resource mobilization once again showcased the depth and breadth of our capabilities.

In addition to dedicated cat capacity, we have additional yard flexibility afforded by our NASCAR partnership, combined with the network of Ritchie Bros. yards. In addition, our unique ability to tap resources across RB Global to process the surge in volumes we experienced around a cat event is key to our ability to exceed our commitments to our customers. We have a significant and sustainable competitive advantage in handling cat events. I will now pass the call to Eric to review our financial performance and outlook.

[Eric Guerin, executive]

Thank you, Jim. Total GTV declined by 1%. Automotive GTV decreased by 4% due to lower unit volumes on stable average selling prices. The decline in unit volumes was due to the previously announced customer loss and the impact of a milder winter partially offset by organic growth from existing customers. As Jim just noted, on a net basis, we believe we are gaining salvage market share sequentially here in the third quarter.

ATV in the commercial construction and transportation sector increased by 9%, driven by an increase in lot volumes, partially offset by a decline in the average price per lot sold.

The average price per lot sold declined primarily due to asset mix as lot volume growth came from rental and transportation industries, where asset values are intrinsically at lower ASPs. We also continue to see pricing decline year-over-year on a mix adjusted basis. Excluding the impact of the Yellow Corporation bankruptcy, GTV growth in the commercial construction and transportation sector would have been approximately 4%.

Moving to service revenue. Service revenue increased by 7% and driven by our service revenue take rate expanding approximately 140 basis points to 20.9%, partially offset by a decline in GTV. Take rate expansion was driven by growth in our marketplace services and a higher average buyer fee rate.

Moving to EBITDA. The contribution from the take rate expansion and higher inventory returns were partially offset by a decline in GTV. Our focus on operational excellence drove strong operating leverage with operating expenses growing at a slower rate than the service revenue growth, resulting in a higher adjusted EBITDA compared to last year.

We remain dedicated to efficiency, and you can measure our progress by seeing adjusted EBITDA as a percentage of GTV increasing to 8.4% compared to 7.4% in the prior year. Adjusted earnings per share increased by 15%, primarily on strong operational performance and a lower net interest expense compared to last year.

Our strong operational performance and continued debt paydown drove a 0.2 of a turn decline in our adjusted net debt to trailing 12 months adjusted EBITDA to approximately 1.8x compared to the first quarter.

Consistent with our capital allocation strategy, we plan on continuing to pay down Term Loan A for the remainder of the year.

Moving to the outlook. We are updating our full year GTV guidance range to 0% to 2% from 1% to 4%. The reduction of guidance reflects the weaker-than-expected average selling prices we are currently experiencing in the commercial construction and transportation sector.

Despite these macro headwinds, we are increasing our full year adjusted EBITDA guidance range to $1.22 billion to $1.27 billion due to strong operating leverage we drove in the second quarter and our continued commitment to cost efficiency. With that, I'd like to open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Sabahat Khan with RBC Capital Markets.

[Sabahat Khan, analyst]

Great. If I can maybe just ask a question on that customer win you just announced. Can you maybe just talk about maybe what are some of the metrics this customer looked at? Maybe anything on the RFP process? And when you talk about splitting the business, how much of -- you may be able to quantify? And how much was it with you versus the other major player in the industry? Any additional color you can share on that would be great.

[James Kessler, executive]

Yes, it's Jim. Let me just first start by how proud I am of the team over the last year as Ritchie Bros. and IAA has come together, and for the IAA team to be really focused on our partners and over delivering on all the commitments that we have and it's those commitments that won us this business.

And look, we've talked about before the life cycle of a salvage car, and it's all those SLAs that we have to accomplish. And our partner saw what we were doing and that overcommitment and awarded the rest of the business. And we're not going to get into any other details for this partner, but it's based on our over delivering, our transparency and what we've delivered, and they were able to put both of us together head-to-head in a competition, and we got awarded the rest of the cars.

[Sabahat Khan, analyst]

Great. And then maybe just on the margin side, a couple of quarters here of good progression on the margin side. And I think on the slide deck, you called out continued operating leverage. If you can maybe share some details on some of the operational changes you are making on the ground level that are contributing to this? And just directionally, maybe not getting into numbers, but just directionally, what you think about the potential margin upside and runway for more of the margin improvement over the next few years?

[James Kessler, executive]

Yes. It's Jim. Let me start and I'll give it to Eric. As we discussed in past calls, as an executive team and leadership team, we're very focused on how do we expand the top line, then how do we expand margins and how do we control costs as we do this. And that's never not going to be a focus for RB Global.

And those 3 line items are what we're always going to focus on and what we're going to concentrate on. So I'm not going to get into details of exact numbers of what we expect that to be. But I'll pass it to Eric if he has any other color if he wants to add.

[Eric Guerin, executive]

Thanks, Jim. Yes, I agree with Jim's comment. It's just this continuous improvement while always keeping in mind where Jim commented on the SLA performance, right, we are never going to compromise on our performance to our partners, but we just want to be as efficient as we can within the business.

[Operator]

Our next question comes from Steven Hansen from Raymond James.

[Steven Hansen, analyst]

Congrats on the contract win. Maybe just as a follow-up is what is your ability to parlay our service level performance into other contract wins over time? Is this sort of one of -- is obviously an important first step. But the obvious question will be, can you call back additional share over time that has previously been seeded?

[James Kessler, executive]

Steve, it's Jim. Great question. Look, I'm not going to get into detail of something that I don't control. I don't control other carriers in their decision. What we do control is how we perform and over delivered on those commitments. And what I'm going to make sure we do is to make sure everyone in the industry is aware of our outperformance and what we're delivering upon.

And I think when people see what we're able to do, they can judge who their partners should be. I'm very confident based on how we're performing and how consistently we're doing it. And instead of action, this is turning into a habit of week-over-week, month-over-month of how we're performing. And I think when insurance partners see this, they're going to have a choice to make, and I'm confident and what we're doing, and we're able to drive for them that we're going to be in the conversation.

But again, I can't control the outcome. That's someone else's decision. But what we can control is to make sure they have a partner that is performing the best and at the highest level, and I believe we're doing that right now.

[Steven Hansen, analyst]

That's helpful. And just a quick follow-up. Do you think that there's any attribution of the win to -- or how much of the win relates to operational performance on the ground, the key metrics you often talked about versus the actual price performance of the option?

[James Kessler, executive]

Look, I think it's a combination of everything. So I think every insurance partner looks at the net return. So I think you have to take into the equation, tow costs, cycle time, the ability to get a title as quickly as possible, the ASP. And what I'm really impressed by is our continued ability to drive ASP for our partners, especially when you look at the used car market of where that's headed.

So I'm just -- it's the whole equation. It gets down to net returns that I think is important to our partners, and that's what we're focused on. It's not one segment or the other, it's the whole package that you have to be able to deliver. And I believe that's what we're delivering upon right now.

[Operator]

Our next question comes from Krista Friesen from CIBC.

[Krista Friesen, analyst]

Congrats on the quarter. I was just wondering if maybe you can elaborate a little bit more on the commercial business and maybe if there's any specific areas that you're seeing weaknesses and if you think some of this is due to the uncertainty around the election.

[James Kessler, executive]

Yes. Look, I'll start and I'll pass it over to Sameer and Eric to add some color. Look, when we look back at every election, we see a similar cycle where people get apprehensive, either that's buying new equipment, interest rates and what's going to happen in the market. So the election cycle, and I think we mentioned this in the past couple of calls, always has an effect and it's just a delay effect, just a matter of time of what happens.

And for us, as we look at price and everything else, we're not shocked the way price is going right now with where interest rates are and everything else. And for us, there's a lot of indicators that are in our favor. But as indicators, the hard part is to know when they're going to go in that time sequence to exactly know is it fourth quarter, first quarter, second quarter, why it happens.

But there's a lot of things in our favor right now that we just need to continue executing for our partners and listening to them and what they need and make sure we're able to go after it. And Sameer or Eric, I'll pass it over to either one of you, if you want to give any more color about the macro environment.

[Sameer Rathod, executive]

Krista, it's Sameer. Yes, I wouldn't specifically call out any end market causing weakness. I think what we do hear from our customers is perhaps the interest rate environment plus the higher cost of new is causing them to tap the brakes on purchasing new, which means in turn, they're not looking for disposition services. So I'd say probably smaller customers and the sensitivity around interest rates is what we would call out.

[Krista Friesen, analyst]

Okay. Great. And then maybe just on the cost synergy side. Obviously, you're achieving them much faster than anticipated. Is it that you're achieving them faster? Or you found additional cost synergies that maybe you didn't anticipate beforehand?

[James Kessler, executive]

Look, it's Jim. I would probably state it, it might be just a different philosophy of past CEOs to current CEO. As you think about it, I think we have opportunity in our business. And -- when I look at the ability to grow and manage margins and manage expenses, I think we're very lucky that we're able to do all 3 and I think as RB Global and as an executive team, we're committed to managing all 3 of those levers, and we're not going to stop.

We're constantly going to always look for ways to optimize the cost side of the business, but not to jeopardize the growth side of it. We look at these things as a triangle that we need to manage each of the points, and we're going to continue to do so. So I'm very optimistic of the future and what's in front of us. And when I think about all 3 of those points, but each of those points are very important to us that we're going to constantly focus on as a leadership team.

[Operator]

[Operator Instructions]. Our next question comes from Craig Kennison from Baird.

[Craig Kennison, analyst]

I think you mentioned a milder winter, and I'm just wondering if you can shed any light on the overall number of accident claims or accident frequency. It feels like that metric was down, offsetting some of the strength in the total loss rate.

[James Kessler, executive]

Yes. And I'll start and Sameer, I'll pass it to you as we go through this. And look, I think a mild winter affected everyone in the industry, if it's a collision or salvage as you kind of go through it. I just want to remind when you look at our auto number, the carrier loss that we mentioned a year ago is a big reason for what you're seeing in our performance. This is the first quarter of that carrier being pretty much fully out of our comparison.

So we have 3 quarters to go up against that. We did mention the new win, which will offset some of that starting end of the quarter as those cars start to come in. But again, our big thing, yes, there was a mild winter. It does have some effect. But for us, when you're looking at our numbers, the big indicator to keep in mind is that carrier loss that we had a year ago of why we're performing the way we are. And without that, it would be different, and we probably wouldn't be talking about a mild winter or anything like that. And Sameer, anything you want to add from a macro environment?

[Sameer Rathod, executive]

Yes. Craig, we did look at it pretty closely. It's hard to quantify how much is weather. As Jim indicated, the bigger driver was obviously the customer loss.

[Craig Kennison, analyst]

Okay. And as you make progress on the balance sheet, I'm wondering whether buybacks may be something that become part of the capital allocation decision?

[Eric Guerin, executive]

Yes, this is Eric. We currently do not have an authorization in place for a buyback. But as noted in our last quarter, capital allocation. Our focus for the remainder of this year is around our term loan A paydown.

[Operator]

Our next question comes from Maxim Sytchev from NBF.

[Maxim Sytchev, analyst]

Just a quick question around the elasticity of the take rate. Wondering what are your thoughts there? And where I guess the biggest drivers have been is it around the legacy business or IAA is starting to push it as well? Just maybe any color there in terms of how we should be thinking about this over potentially in the medium term?

[James Kessler, executive]

Yes. Look, it's always a tough thing to answer because when you think about take rate and fees and everything that goes into it, there is a competitive environment that we're constantly looking at to make sure we're staying competitive and what we're charging. But when you look at what we've been able to accomplish this year, it's on both sides of the business, it's on the traditional Ritchie Bros. side and commercial train and the auto side, traditionally, what we call IAA. So it's a reflection of both of being able to increase some of the fees on both sides of the business.

Look, I'm very optimistic about what the future holds when I think about take rate and what we can do, especially with all the additional services that we're able to add a transaction. But again, some of this is so hard when you're dealing in a competitive environment to know how competitors are going to react and what you're going to do and we have a process in place that we look at it on a very consistent basis.

And then we have a process in place where we make decisions of what to do with those fees and everything else. But in general, I'm optimistic about what's in front of us and our ability to increase our financial profile in that regard.

[Maxim Sytchev, analyst]

Okay. Excellent. And then so just one follow-up. In terms of IAA and kind of your thought process around driving ASP through international greater reach, I'm just wondering if you have any update on that strategy?

[James Kessler, executive]

Yes. Look, this was our highest quarter where we had international buyers. But -- the way I think about the marketplace is, the way you get international buyers, is the more run and drive type of cars that you have, and again, we went through the definition of a run and drive. It's not something that can actually roll or drive today in some cases.

But the more run and drives you can get and more operationally that the team is focused to get a car to meet that definition of a run and drive. We'll allow more international buyers to participate in your auctions is because they can put some money in the car, get that car, get it overseas and sell it after they make their investment in the car.

So for us, our focus is really the cars that are run and drives, making sure all the international buyers are where we have leveraged the Ritchie Bros. relationships international to make sure the IAA side has the support they need and especially having the presence that Ritchie did as we merged together, it's really important to this.

But again, I think the biggest factor, anytime you're thinking about international, what type of cars do they want? And are we offering those cars in the marketplace and then being able to show them trim level data all the detail why it's a run and drive, why they should invest in their car and how they can make money included.

It's really important. We just had our buyers in for a weekly -- yearly summit a couple of weeks ago in Chicago and got their feedback of what we should be thinking about for the future. But we're very happy where we're at right now on the international buyer side and very happy with our team execute on our run and drive program that we have in place operationally.

[Operator]

Our next question comes from Sabahat Khan from RBC Capital Markets.

[Sabahat Khan, analyst]

Great. Just one quick follow-up. There were some headlines around weather events kind of small ones throughout the U.S. Just wondering if in any of those, you had an opportunity to sort of exhibit updated operations, handling of cat events and any feedback you might have gone from insurance companies. That was one of the kind of the lines of questions we got from investors over the quarter. So curious if you had any commentary there.

[James Kessler, executive]

Yes, it's Jim. I'll start. The cat events were very small. We've had received positive feedback from the partners that we have that were affected in those events. But again, I would say they're just on the small end of it.

But look, I'm encouraged every time, even though it's small, I see how our team has reacted. I see what our partners, the appreciation they have to our reaction and what we're going to do. And the one thing that we're very prepared for this year is no matter what size cat, we're prepared. We're ready to support our partners, and we have the real estate, we have the space. We have the people, we have everything in place.

And the other thing that we have in place is the minute these cat events, the reported and the transparency that we're doing on a quarterly basis. We're going to also do for cats to make sure our partners are very aware of how we're performing and how quickly we're ready to react to their needs. So I know this might sound weird, and it's unfortunate for people that go through a cat event. But if a cat event does happen, I'm very confident in our performance and our ability then to communicate that to our partners as we go through it.

[Operator]

Thank you. We are now closing the question-and-answer session. I'd now like to hand back over to James Kessler for final remark.

[James Kessler, executive]

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And again, I just want to really show my appreciation to the RB Global team. If it's commercial construction, transportation, the automotive side of our business, everyone has done a tremendous job of living up to our commitments to our customer and over deliver on those commitments. And my belief is, as we continue to do that, that's really what is going to set us different than anyone else in this space.

It's really the ability to do it consistently over and over when you make a commitment to deliver against that commitment. And I just want to show my true appreciation to the RB global team for their support and their ability to constantly do this over and over again. Thank you so much. I want to thank everyone for joining us on the call today, and we look forward to talking to you very soon. Thank you so much.

[Operator]

Thank you for attending today's call. You may now disconnect. Have a wonderful day.