RB Global Q2 2024 Earnings Call Transcript

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August 6, 2024

Key Takeaways

  • 7% service revenue growth and 11% adjusted EBITDA growth in Q2 underscore the company’s operational excellence.
  • Achieved approximately $110 million in cost synergies ahead of schedule and expects to reach full run rate earlier than committed.
  • Lowered full‐year GTV guidance to 0–2% (from 1–4%) due to weaker average selling prices in the commercial construction and transportation sector.
  • Automotive total loss ratio rose to ~20.7%, while average selling prices remained flat, helping secure a new sole salvage provider contract for an estimated 40,000 vehicles annually.
  • Adjusted EPS increased by 15% and net debt to EBITDA improved to ~1.8×, reflecting strong performance and continued debt paydown.
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Earnings Conference Call
RB Global Q2 2024
00:00 / 00:00

There are 9 speakers on the call.

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 RP Global Second Quarter 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

Thank you. I will now turn the call over to Samir Rahad, Vice President of Investor Relations and Market Intelligence to open the conference call. Mr. Rahfad, you may begin.

Speaker 1

Hello and good morning. Thank you for joining us today to discuss our Q2 results. With me on the call are Jim Kessler, our Chief Executive Officer and Eric Aaron, 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.

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 morning as well as our most recent quarterly report and annual report on Form 10 ks, 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, 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.

Speaker 2

Jim? Thank you, Sameer, and good morning to everyone. I am proud of our teammates as they continue to demonstrate an operational excellence partners. This strong execution translated to 7% service revenue growth and 11% adjusted EBITDA growth. We have now actioned approximately $110,000,000 in cost synergies and will reach the full run rate well ahead of what we committed during the transaction.

Speaker 2

While we are pleased that we over delivered on this commitment, we see expense optimization as an ongoing journey and we'll 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.

Speaker 2

We are focused on driving sustainable growth by expanding our regional sales coverage within North America. In the Q2, 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.

Speaker 2

In the Q2, 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 consistently delivered exceptional performance to all our partners in the Q2. All key SLA metrics remain strong at 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.

Speaker 2

In the second quarter, we also made significant progress in attracting Our efforts resulted in automotive average selling prices 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 Q3. 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.

Speaker 2

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.

Speaker 2

In addition, our unique ability to tap resources across RV 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 hand on cat events. I will now pass the call to Eric to review our financial performance and outlook.

Speaker 3

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 Q3.

Speaker 3

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.

Speaker 3

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 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.

Speaker 3

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 pay down drove a 0.2 of a turn decline in our adjusted net debt to trailing 12 months adjusted EBITDA to approximately 1.8 times compared to the Q1. 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.

Speaker 3

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 $1,220,000,000 to $1,270,000,000 due to strong operating leverage we drove in the 2nd quarter and our continued commitment to cost efficiency. With that, let's open the call for questions.

Operator

Your first question comes from the line of Sabahat Khan with RBC Capital Markets. Please go ahead.

Speaker 4

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 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 are you maybe able to quantify and how much was it with you versus the other major player in the industry?

Speaker 4

Any additional color you can share on that would be great. Thank you.

Speaker 2

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 over commitment and awarded the rest of the business.

Speaker 2

We're not going to get into any other details for this partner, but it's based on our over deliver and 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.

Speaker 4

Great. And then maybe just on the margin side, couple of quarters here of good progression on the margin side. And I think in your 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 in 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?

Speaker 4

Thanks.

Speaker 2

Yes. It's Jim. Let me start, then pass 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 cost as we do this. And that's never not going to be a focus for RB Global and those three line items are what we're always going to focus on and what we're going to concentrate on.

Speaker 2

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 he wants to add.

Speaker 3

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.

Speaker 4

Great. Thank you. I'll pass

Speaker 1

the line.

Operator

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

Speaker 5

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

Speaker 2

Hey, 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 and their decision. What we do control is how we perform and over deliver on those commitments.

Speaker 2

And what I'm going to make sure we do is to make sure everyone in the industry is aware of our over performance 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 am very confident based on how we are performing and how consistently we are doing it. And instead of actions, 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.

Speaker 2

And I'm confident in what we're doing and what 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 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

Speaker 5

now. That's helpful. And just as a 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 auction?

Speaker 2

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 cost, 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 card market of where that's heading. 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.

Speaker 2

It's not one segment or the other, it's the whole package that you have to be able to deliver. I believe that's what we're delivering upon right now.

Speaker 5

Appreciate the color. Congrats on the line. Thanks.

Operator

Our next question comes from Christa Treason from CIBC. Your line is now open.

Speaker 6

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?

Speaker 2

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, 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.

Speaker 2

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 and to exactly know is it Q4, Q1, Q2 of 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.

Speaker 1

Hey, Chris, it's Samir. Yes, I wouldn't specifically call out any end markets 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.

Speaker 6

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 additional cost synergies that maybe you didn't anticipate beforehand?

Speaker 2

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

Speaker 1

when I

Speaker 2

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 executive team, we're committed to managing all three of those levers and we're not going to stop. And we're constantly going to always look for ways to optimize the cost size 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.

Speaker 2

But each of those points are very important to us that we're going to constantly focus on as a leadership team.

Speaker 6

Great. Thank you. I'll jump back in the queue.

Operator

Our next question comes from Craig Kennison from Baird. Your line is now open.

Speaker 7

Hey, good morning. Thanks for taking my question. 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.

Speaker 2

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 collision or salvage as you kind of go through it. But I just want to remind the group, 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. And this is the Q1 of that carrier being pretty much fully out of our comparison.

Speaker 2

So we have 3 quarters to go up against that. And we did mention the new win, which will offset some of that start in the Q4 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.

Speaker 2

And without that, it would be different and we probably wouldn't be talking about a mile winner or anything like that. And Sameer, anything you want to add from a macro environment?

Speaker 1

Yes. Hey, 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.

Speaker 7

Okay, thanks. 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.

Speaker 3

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 pay down.

Speaker 7

Great. Thank you.

Speaker 8

Next

Operator

question comes from Maxim Zeit from NBF. Your line is now open.

Speaker 1

Hi, good morning gentlemen.

Speaker 8

Jim Lyric, 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 potentially the medium term? Thanks.

Speaker 2

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 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 and transportation and the auto side, traditionally what we call IAA.

Speaker 2

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 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 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 do we do with those fees and everything else.

Speaker 2

But in general, I'm optimistic about what's in front of us and our ability to increase our financial profile in that regard.

Speaker 8

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

Speaker 2

Yes. Look, this was our highest quarter where we had international buyers. But the way I think about the market places, 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 will allow more international buyers to participate in your auctions just because they can put some money in the car, get that car, get it overseas and sell it after they make their investment in car.

Speaker 2

So for us, our focus is really the cars that are running drives, making sure all the international buyers are aware. We have leveraged the Ritchie Bros. Relationships international to make sure the IEA side has the support they need and especially having the presence that Richie did as we merged together, it's really important to this. But again, I think the biggest factor, anytime you're thinking about 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, 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 yearly summit a couple of weeks ago in Chicago and got their feedback of what we should be thinking about for the future.

Speaker 2

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.

Speaker 8

Okay. Excellent. That's it for me. Thanks so much.

Operator

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

Speaker 4

Great. Thanks. Just one quick follow-up. There were some headlines around weather events, kind of small ones throughout the U. S.

Speaker 4

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 gotten from insurance companies. That was one of the lines of question we got from investors over the quarter. So curious if you had any commentary there. Thank you.

Speaker 2

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.

Speaker 2

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 reporting and the 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.

Speaker 4

Great. Thanks so much for the color.

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 remarks.

Speaker 2

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, 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.

Speaker 2

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.

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