RB Global - Q2 2024

Transcript

Operator (participant)

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. All lines have been placed on mute to prevent any background noise. After 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, press the Pound key. Thank you. 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 (VP of Investor Relations and Market Intelligence)

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, 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.

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 two, see our news release, Form 10-K 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.

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

Jim Kessler (CEO)

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 re-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 increase 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 last year. We continuously improve our processes and invest in technology to drive premium price performance for our partners. In this 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 remaining 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, us as their sole salvage provider in the U.S. We believe this win will add an estimated 40,000 salvaged vehicles annually. Our year-round dedication to CATs 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 hurricane's 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 experience 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 (CFO)

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%, 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 at 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% 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 two-tenths of a turn decline in our adjusted net debt to trailing twelve 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%-2% from 1%-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-$1.27 billion, due to strong operating leverage we drove in the second quarter and our continued commitment to cost efficiency. With that, let's open the call for questions.

Operator (participant)

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Sabahat Khan with RBC Capital Markets. Please go ahead.

Sabahat Khan (Managing Director in Global Research)

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

Jim Kessler (CEO)

Yeah, 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. It's those commitments that won us this business. Look, we've talked about before the life cycle of a salvage car, and it's all those SLAs that we have to accomplish. Our partner saw what we were doing and that overcommitment and awarded us the rest of the business. We're not gonna 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 (Managing Director in Global Research)

Great. And then maybe just on the margin side, you know, couple of quarters here of good progression on the margin side, and I think in 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, you know, just directionally, or not—maybe not in getting into numbers, but just directionally, what you think about the potential, you know, margin upside and runway for more of, more of the margin improvement over the next few years? Thanks.

Jim Kessler (CEO)

Yeah, it's Jim. Let me start, then I'll pass it to Eric. As we discussed in past calls, as an executive team and leadership team, we're very focused on, you know, how do we expand the top line, then how do we expand margins, and how do we control cost as we do this? And that's never not gonna be a focus for RB Global, and those three line items are what we're always gonna focus on and what we're gonna concentrate on. So I'm not gonna 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 he wants to add.

Eric Guerin (CFO)

Thanks, Jim. Yeah, 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 gonna compromise on our performance to our partners, but we just want to be as efficient as we can within the business.

Sabahat Khan (Managing Director in Global Research)

Great. Thank you. I'll pass the line.

Operator (participant)

Our next question comes from Steven Hansen from Raymond James. Your line is now open.

Steven Hansen (Managing Director and Equity Analyst)

Yeah, good morning, guys. Thanks for the time. Congrats on the contract win. Maybe just as a follow-up is, you know, what is your ability to parlay the product service level performance into other contract wins over time? Is this sort of one of... This is obviously an important first step, but the obvious question will be, can you claw back additional share over time that had previously been ceded?

Jim Kessler (CEO)

Hey, hey, Steve, it's Jim. Great question. Look, I'm not gonna get into detail of something that I don't control. I don't control other carriers and their decision. What we do control is how we perform and over-delivering on those commitments. And what I'm gonna make sure we do is to make sure everyone in the industry is aware of our overperformance and what we're delivering upon. And I think when people see what we're able to do, they can judge who their partner should be. I'm very confident based on how we're performing and how consistently we're doing it. And instead of actions, this is turning into a habit of week-over-week, month-over-month, of how we're performing.

I think when insurance partners see this, they're gonna have a choice to make, and I'm confident in what we're doing and what we're able to drive for them, that we're gonna 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 (Managing Director and Equity 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, you know, the key metrics you often talked about, versus the actual price performance of the auction?

Jim Kessler (CEO)

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 you know 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 heading. So 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.

Steven Hansen (Managing Director and Equity Analyst)

Appreciate the color. Congrats on the win. Thanks.

Operator (participant)

Our next question comes from Krista Friesen from CIBC. Your line is now open.

Krista Friesen (Executive Director in Equity Research)

Hi, thanks for taking my question, and 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?

Jim Kessler (CEO)

Yeah, 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 gonna 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.

For us, there's a lot of indicators that are in our favor, but those indicators, the hard part is to know when they're gonna go in the time sequence to exactly know, is it fourth quarter, first quarter, second quarter of when 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. 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 (VP of Investor Relations and Market Intelligence)

... Hey, Krista, it's Sameer. Yeah, I wouldn't specifically call out any end markets causing weakness. I think, you know, 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, you know, 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 (Executive Director in Equity Research)

Okay, great. Thanks. 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've found, you've found additional cost synergies, that maybe you didn't anticipate beforehand?

Jim Kessler (CEO)

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. 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 three. I think as RB Global and as an executive team, we're committed to managing all three 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, when I think about all three 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.

Krista Friesen (Executive Director in Equity Research)

Great, thank you. I'll jump back in the queue.

Operator (participant)

Before we continue, again, if you'd like to ask a question, please press star and then one on your telephone keypad. That's star one on your telephone keypad. Our next question comes from Craig Kennison from Baird. Your line is now open.

Craig Kennison (Senior Analyst)

Hey, good morning. Thanks for taking my question. I think you mentioned a milder winter, and I'm just wondering if you could 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.

Jim Kessler (CEO)

Yeah, and I'll start, and Sameer, I'll pass it to you as we go through this. And look, I think a mild winter, it affected everyone in the industry, if it's collision or salvage, as you kind of go through it. But I just want to remind the group, you know, 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 three quarters to go up against that. And we did mention the new win, which will offset some of that, starting in the fourth 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 (VP of Investor Relations and Market Intelligence)

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

Craig Kennison (Senior Analyst)

Okay, thanks. 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 (CFO)

Yeah, this is Eric. We currently do not have a 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.

Craig Kennison (Senior Analyst)

Great. Thank you.

Operator (participant)

... Question comes from Maxim Sytchev from NBF. Your line is now open.

Maxim Sytchev (Managing Director in Research)

Hi, good morning, gentlemen. Jim or Eric, 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 IA starting to contribute as well? Just maybe any color there in terms of how we should be thinking about this over, you know, potential in the medium term. Thanks.

Jim Kessler (CEO)

Yeah, 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 in 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, in commercial, in transportation, 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 to a transaction.

But again, some of this, it's so hard when you're dealing in a competitive environment to know how competitors are going to react and, and what you're gonna 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 do we do with those fees and everything else. But in general, I'm optimistic about, you know, what's in front of us and our ability to, you know, increase our financial profile in that regard.

Maxim Sytchev (Managing Director in Research)

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

Jim Kessler (CEO)

Yeah, no, 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, you know, 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, will allow more international buyers to participate in your auctions. Just 'cause they can put some money in the car, get that car, get it overseas, and, and sell it after they, you know, 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 aware. 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, you know, internationals, 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 of why it's a Run and Drive, why they should invest in that car, and how they can make money off of it, it's really important. We just had our buyers in for a weekly...

A 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 executing our Run and Drive program that we have in place operationally.

Maxim Sytchev (Managing Director in Research)

Okay, excellent. That's it for me. Thanks so much.

Operator (participant)

Our next question comes from Sabahat Khan from RBC Capital Markets. Your line is now open.

Sabahat Khan (Managing Director in Global Research)

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

Jim Kessler (CEO)

Yeah, 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 appreciate, the appreciation they have to our reaction and what we're gonna 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 reporting and the transparency that we're doing on a quarterly basis, we're gonna 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.

Sabahat Khan (Managing Director in Global Research)

Great. Thanks so much for the call.

Operator (participant)

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

Jim Kessler (CEO)

Thank you so much. 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-delivering on those commitments. And my belief is, as we continue to do that, that's really what is gonna 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 (participant)

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