RB Global, Inc. (RBA) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ritchie Bros. Auctioneers First Quarter 2017 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session. [Operator Instructions] Thank you. Jamie Kokoska, you may begin your conference.

Thank you, Christine. Good morning, everyone, and thanks for joining us in our Fiscal First Quarter 2017 Results Conference Call. Discussing Ritchie Bros. performance today are Ravi Saligram, Chief Executive Officer; and Sharon Driscoll, Chief Financial Officer. Joining them for the Q&A session following the formal remarks will be Jim Barr, Group President; Randy Wall, former President of Canada; and Anna Sgro, Senior Vice President of Sales, Canada East and Northeast U.S. The following discussion will include forward-looking statements as defined by SEC and Canadian rules and regulations. Comments that are not a statement of fact, including projections of future earnings, revenue, gross auction proceeds and other items, are considered forward-looking and involved risks and uncertainties. The risks and uncertainties that could cause our actual financial and operating results to differ significantly from our forward-looking statements are detailed in our SEC and Canadian securities filings, available on the SEC and SEDAR websites as well as our Investor Relations website at investor.ritchiebrothers.com. Our definition of gross auction proceeds may differ from those used by other participants in our industry. It is not a measure of financial performance, liquidity or revenue and is not presented in our statement of operations. Our first quarter results were made available yesterday after market close. We encourage you to review our earnings release and Form 10-Q report, which includes our MD&A and financial statements, which are available on our website as well as EDGAR and SEDAR. On this call, we will discuss certain non-GAAP financial measures. For the identification of non-GAAP financial measures, the most directly comparable GAAP financial measure and a reconciliation between the two, see our earnings release and Form 10-Q. Presentation slides accompany our commentary today. These slides can be viewed through the live or recorded webcast or downloaded from our website. All figures discussed on today’s call are in U.S. dollars, unless otherwise indicated. While we may use million or billion dollar figures for brevity in today’s discussion, all percent changes have been calculated using full and rounded figure. I’ll now turn the call over to Ravi Saligram, Chief Executive Officer.

Thank you, Jamie, and thanks to everyone for joining us on our earnings call today, which we are doing from Toronto, Canada. The first quarter of 2017 lacked a very robust first quarter last year, which had benefited from strong auction volumes related to the oil and gas dislocation in Alberta and the addition of the Grande Prairie auction for two large dispersals. The surge in volume from Western Canada has now subsided, and complete dispersals have been less frequent, which were the primary drivers of low auction volumes in the first quarter this year. As we communicated on our last earnings call, the auction calendar in the first quarter this year was more in line with auction calendar of the first quarter of 2014, given there are no onetime large auctions added to the schedule to cater to complete dispersals. Gross auction proceeds for the first quarter of 2017 were $900 million, a 12% decline from the first quarter last year. The addition of the Grande Prairie auction last year supplemented that quarter’s GAP results. Removing the impact of that auction last year, which is not a regularly scheduled event, GAP declined 7.6% from the first quarter of 2016. Likewise, we benefited from a $54 million onetime auction in Casper, Wyoming in the first quarter of 2015, which propped up that quarter’s results. Compared to the first quarter of 2014, which is the most recent quarter, with a similar auction calendar, first quarter 2017 GAP increased 5%. Turning now to revenue. Our U.S. and Europe business generated solid performance in the quarter with revenue from U.S. operations up 4% relative to the strong comparable quarter last year. Revenue contributions from this region comprised 62% of total revenue in the quarter, up from 57% in the first quarter of 2016. We had outstanding auction results in Orlando and in Texas as well as excellent growth in EquipmentOne. However, our full potential for growth in the U.S. was impeded by an acute shortage of used equipment supply. The good news is that there seems to be a lot of construction activity and construction jobs right now in many parts of the United States. Unfortunately, that does not seem to be enough new equipment to keep pace with this demand. Dealers and end users are being affected by prolonged lead times and deliveries of new equipment in particular categories. At the same time, rent utilization seems to be at very high levels. Consequently, both end-users and dealers, and dealers in particular are holding onto their equipment fleets. Europe also had a strong quarter with revenue growth of 10% propelled by strength in the UK, Spain and Benelux. We’re beginning to see signs of positive momentum from our European operations and are cautiously optimistic that the environment there will continue to improve. As I mentioned earlier, Canadian business contented with some challenges in the quarter, primarily related to subsiding volume in Western Canada. That said, we continue to be pleased with our business performance in Eastern Canada. It simply was not enough, however, to offset declines in the west. Ultimately, these factors led to a 21% decline in revenue from our Canadian operations relative to the year-ago quarter. While revenue from other regions declined 36%, it’s important to note that this category is a relatively small proportion of our overall revenue base. So there is not a large impact on the quarter on an absolute dollar basis. Our other category includes regions such as Asia, the Middle East and Australia. Middle East was the most affected with very high supply, but lack of demand. Sharon will discuss our financial details – results in more detail later on the call, but I will provide a high-level summary now. As stated on recent earnings call, we’re going to discuss our first quarter performance using reported U.S. GAAP results, that is GAAP, adjusted results, which remove nonrecurring items only and comparable results, which remove nonrecurring and acquisition-related costs as well as interest payment bonds currently held in escrow. We believe comparable results better demonstrate the operational health of our business, absent the noise from corporate development and nonoperating activities. These items had a collective negative after-tax impact of $13.9 million on our first quarter results. Revenue for the first quarter was $124.5 million, a 6% decrease from the $131.9 million in Q1 last year. Selling, general and administrative expenses increased 5% from the year-ago quarter and reported operating income declined 40% due mostly to $8.6 million of acquisition-related expenses and a lower operating margin as a result of lower revenue. The operating margin for the quarter was 19%. Our reported diluted EPS for the first quarter was $0.10, a decline of 63% from the $0.27 earned in the first quarter of 2016. Now on a comparable basis, removing the impact of the acquisition-related costs, interest paid for bonds held in escrow and the onetime tax charge this quarter, operating income was $32.2 million. Operating income margin was 25.9%, and diluted EPS per share was $0.22. As we’ve discussed, our comparable performance this quarter was challenged compared to the same quarter last year as a result of lower auction volumes. On Slide 8, we’ve showed you the difference between U.S. GAAP adjusted performance, which only excludes the onetime tax charge and comparable results for the quarter. Moving to operational metrics now. Our online capabilities continue to be a key differentiator for Ritchie Bros. With 45% of buyers purchasing assets through either online bidding or EquipmentOne channel. This is up from 43% in the first quarter last year and 41% in Q1 2015. So the importance of these digital technologies continues to grow. Likewise, 45% of GAP, this time GAP, was sold to online buyers in the quarter. This percentage is actually down slightly from the last three quarters. But directionally, trends with how our customers choose to bid during the first quarter. As the chart on Slide 9 indicates, bidding in person, on site, tends to be higher in the first quarter each year, due mostly to the crowd size and bidding activity at our February Orlando auction. Here, we usually see more on-site bidding and buying than we typically do at other auctions. This is most likely due to the large event nature of the Orlando auction and the many customers who decide to travel there to participate in person and network with their peers. We expect online bidding and transactions to continue to grow in future quarters and years. As a result of this, we are continuing to invest in technology initiatives that make participating in our auctions more convenient for our customers. This includes expanding the capabilities to the Ritchie Bros. mobile app, while still a relatively new tool for our customers to use. Mobile bidding has gained some traction with more than 21,000 active monthly users by the end of March. Similarly, the percent of transactions occurring through mobile bidding app continues to grow, with 5% of online bids coming from app users in March and 3% of online purchases going to app users. As one just early demonstration of the success of our mobile app, on April 26, more than $1 million worth of assets were purchased through the app in just one day. That’s a phenomenal achievement and an indication of our customers are finding that this new tool is a helpful and convenient way of participating in our live auctions. Our way-finding map was also launched as an extension of the app during the first quarter of this year to great customer reviews. As you may recall, this offering provides on-site auction participants with an easy way to locate specific assets in the expensive yards that are for larger auction sites, for example Orlando. It’s a great example of how we are using technology to innovate and enhance the experience for customers who prefer to participate in our auctions in person. We’ve been actively building out our service offering to cater to more needs and preferences of our customer base through our diversification strategy. While many of these business lines are still relatively new to our platform, they’re generating meaningful results. Given the relative size of their contribution compared to our core auction business, however, their growth was not enough to offset the revenue declines we experienced in our Canadian auction operations. EquipmentOne delivered strong growth during the quarter with GDP up 63% and revenue up 37% from the first quarter last year. That’s a tremendous achievement that the EquipmentOne team should be very proud of. As you’ll recall, Mascus was acquired power phased with the first quarter last year. So comparable performance from the same period last year isn’t really relevant. During the first quarter this year, Mascus generated $2.2 million in revenue and is on a good growth trajectory. As you’ve seen in our financial filings, both EquipmentOne and Mascus comprise our other reporting segment. Collectively, these businesses produce $6.7 million of revenue in the first quarter or 46% increase relative to the same quarter last year and generated $63,000 earnings before interest and tax. Ritchie Bros. Financial Services hit an important milestone recently, achieving more than $1 billion in funded volumes since inception this month with a CAGR of nearly 68%. Similarly, they processed 6.2 billion of applications since the business was launched in July 2011 and funded nearly 17,000 transactions. I congratulate the entire RBFS team. During the first quarter of 2017, trade applications grew 13% from the year-ago quarter and funded loans grew 9%. They’re also capturing more of their addressable market, but the penetration rate increasing from 10.9% in first quarter of 2016 to 13.9% in the first quarter of this year. As for live auction highlights during the quarter, I’ll just point out a few. Our February Orlando auction broke site records with both the number of bidders and sellers and sold more than $188 million worth of equipment assets. Similarly, our March Fort Worth, Texas auction achieved new site records for both the number of lots sold and number of equipment sellers. This $75 million auction was also the largest Texas auction our company has ever held, demonstrating that momentum in the U.S. continues to build. Of note, we also held 20 agricultural auctions during the quarter, which is the most we’ve ever held in the first quarter. This growth was driven largely by our acquisition of Kramer Auctions in November, which added seven auction sales for our auction calendar in the quarter. In terms of used equipment pricing trends, we’re pleasantly surprised by pricing improvement in the beginning of the quarter and that pricing has held through, and some categories improved even more today. Construction assets performed well with three to six-year old excavators generating an average of 4% higher pricing from fourth quarter at our U.S. auctions, but as much as 15% higher at Canadian auctions. Newer model excavators experienced even better price appreciation, which we believe is represented to often supply tightening for newer equipment. Reloaders also experienced a meaningful lift with about a 10% increase in value on average from what we experienced last quarter. The performance of transportation assets also improved during the quarter with about a 10% improvement in value compared to what we saw in the fourth quarter at our U.S. auctions. In Canada, that price appreciation in transportation was a little less robust but still positive. The performance of agricultural equipment has been a bit divergent between the U.S. and Canada during the quarter. In the U.S., ag tractors saw up to 20% pricing declines. While in Canada, pricing actually improved about 5% to 10% from fourth quarter levels. We believe this is due to a couple of factors, including the kinds of equipment needed for the kinds of crops that are harvested in these geographies as well as the depreciating Canadian dollar against the U.S. dollar, which makes new ag year relatively more expensive for Canadian farmers. Oil and gas specific assets actually experienced some rebounding during the quarter indicating that values for certain oil and gas related equipment may have bottomed in the second half of 2016. While it may be a bit early to call it a trend, we do see some large price increases in frac tanks relative to what we saw in the fourth quarter. And oil and gas specific transportation assets also saw some improvement. Similar to gas and revenue, our operational metrics were impacted by volume declines in auction calendar differences in the first quarter. As we mentioned in our last earnings call, the auction calendar this year was more closely resemble that of first quarter 2014 rather than those of the last two years. So I said earlier, there was a large $46 million onetime sale in Grand Prairie that was added to the auction calendar in the first quarter last year and a large $54 million onetime off-site auction added to the calendar in first quarter 2015, which is Wyoming. The number of consignors, who sold assets during this quarter in 2017, was relatively flat from first quarter last year. We actually think this is quite an achievement given that there were fewer auctions in the period. This means, we are retaining and growing our customer base. They are just utilizing more of their fleet at this moment. Consignors would’ve been approximately up 3% if we removed the impact of Grand Prairie from last year. Lots sold during the quarter declined 9% from Q1 last year or about 7% if you removed the impact of Grande Prairie. Registered bidders declined 8.8% in the quarter or about 3% adjusting for Grand Prairie and buyers declined 8.2% or 5% with our Grand Prairie. In terms of the customer serving – driving lot increases or declines, consignments from customers in light construction space generated the largest increase in lots for us during the quarter, followed by customers in the finance and insurance sectors. The largest lot declines came from sectors in the heavy construction transportation sector relative to consignments made in the same quarter last year. Turning to our underwritten business. Our underwritten business performed well during the quarter with a 417 basis point improvement on rate, driven largely by the underwritten performance at our Edmonton, Fort Worth, Houston, Brisbane and Toronto auctions during the quarter. Private Treaty inventory transactions also supported the rates trend. Our volume of underwritten did decline fairly meaningfully during the quarter to 14%. This compares to 23% in the first quarter of last year. There was no change in strategy or approach to underwritten business this quarter. The underwritten volume reduction was primarily a U.S. issue. In the U.S., fewer customers requested underwritten contracts due to constrained supply. Given the strength in pricing and high demand, many customers in the U.S. opted for the straight commission contracts instead. And with that, I’ll pass the call on to Sharon to review our financial performance in greater detail.

Thank you, Ravi, and good morning, everyone. Our revenue decline in the quarter was entirely volume-driven, as we achieved a more robust and first quarter record revenue rate. Volume declines drove revenue down approximately 11%, while rate improvements counteracted it by 6%, leading to a total constant currency revenue decline of 5%. Foreign exchange impacts translating revenue into U.S. dollars from operations outside of the U.S. led to an additional 1% decline for a reported 6% decline in total revenue during the first quarter. The revenue rate for the quarter was 13.84%, a company record for the first quarter. The rate was bolstered by improved auction and EquipmentOne fee revenue, Private Treaty transactions and improved performance by RBFS, Mascus and Xcira. New business lines, so those outside of our core auction and EquipmentOne channels, contributed 1.2% of the overall 13.84% during the quarter and 80 basis points of rate improvement relative to Q1 last year. Including our pre-existing business lines, the rate improved 90 basis points, again, our diversification strategy is taking hold. As Ravi discussed, we believe reviewing comparable performance is more telling of the underlying health of our business absent noise from acquisition activity and onetime items. To help you understand the puts and takes of our comparable performance, we have provided a reconciliation table on Slide 19 of today’s presentation. Adjusted performance excludes only the $2.3 million tax charge, related to an increase in uncertain tax positions due to an unfavorable outcome of the tax dispute in one of our European operating jurisdictions. When removing only this charge, adjusted net income for the quarter was $12.7 million or $0.12 diluted EPS attributable to stockholders. Comparable figures exclude the $2.3 million tax charge and also $8.6 million of pretax acquisition-related cost and $6.7 million of pretax interest expenses related to the bonds currently held in escrow to fund the acquisition of IronPlanet. On an after-tax basis for these items, comparable net income was $24.3 million or $0.22 diluted EPS attributable to stockholders. Through a disciplined approach to cost control, the operations and field teams were able to proactively respond to lower forecasted GAP volumes and reduce cost of services by 16% versus prior year, while revenues only declined 6% for the same period. Selling, general and admin expenses did grow by 5% in the quarter, primarily driven by noncomparable costs, related to Mascus, Kramer and Petrowsky acquisitions, increased investments in EquipmentOne and Ritchie Bros. Financial Services to support strong revenue growth and continued investments in talent, marketing and technology to support our operations. SG&A costs were positively impacted by $2.1 million in mark-to-market pickup on our stock-based compensation and approximately $1 million in year-on-year bonus accruals, due to the softer earnings performance in this quarter versus Q1 of 2016. Combined OpEx for the business grew only 1%, despite having a broader range of businesses, brands and channels now operating on our platform. Our operational teams showed an excellent ability to control variable operational costs as auction volumes declined. As you are aware, we have undertaken many corporate development initiatives over the last several quarters, including our impending acquisition of IronPlanet. The cost of due diligence, retention costs, legal and advisory costs, expenses related to regulatory review and acquisition funding costs have affected our results since quarter four of 2016. The chart on Slide 22 of our presentation today reflects how these acquisition-related expenses have affected our overall adjusted results and how they would otherwise have performed absent these acquisition costs. In the first quarter of 2017, specifically, $8.6 million of costs were incurred primarily for legal and advisory activities for impending acquisition of IronPlanet regulatory work related to the ongoing review of the acquisition by the U.S. Department of Justice and integration planning costs, as well as $6.7 million of interest on bonds that will fund the acquisition that are currently held in escrow until the transaction closes. Comparable net income attributable to stockholders declined 20% after adjusting for these factors. Turning to our balance sheet and liquidity metrics now. Operating free cash flow was $116 million, and although a decline of 43%, still represents in excess of 109% of our adjusted net earnings on a 12-month trailing basis. Working capital improved 44% from the 12-month trailing March 31 last year with working capital margin improving 610 basis points to 22.6%. CapEx intensity, or capital expenditures as a percentage of revenue, increased to 5.4% from 2.7% in the year-ago quarter. As we have messaged in the past, CapEx was abnormally low throughout 2016, as we reviewed our IT CapEx needs. Viewing our cash flow on a comparable basis, removing the impact of acquisition costs, bond interest and the tax matter, the $170 million on a trailing 12-month basis indicates that our strong cash flow characteristics of our model are still intact. Although reported return on invested capital was 13.6%, viewing it on a comparable basis, the rate of 16.2% excluding the bonds still held in escrow was still a respectable return. Our adjusted debt to adjusted EBITDA ratio was 0.6 time, down from 0.7 times in the same period last year. This figure obviously excludes the bonds currently held in escrow. We will see an increase in our leverage ratio upon the completion of the IronPlanet acquisition. And although it will be above our desired 2.5 times target, we will be well within our financial covenant ranges. In preparation for the acquisition of IronPlanet and the debt we will have following its completion, our capital allocation priorities have changed relative to a year ago. As we said on the last two earnings calls, dividends will remain our number one priority, but paying down debt will become our second. This is a change from the past two years when we’ve undertaken share repurchases and cancellations to offset dilution from management options. You will recall that during the last quarter of last year, we spent $36.7 million on share repurchases. That cash outlay did not occur in the first quarter of this year in anticipation of the impending IronPlanet acquisition. As a final comment, I wanted to acknowledge that the combination of the natural lumpy nature of our business model and this unique period of time, as we prepare for the closure of the IronPlanet transaction, causes significant difficulty with the modeling and forecasting of our quarterly results. We appreciate those of you that have taken the time to look through the noise in the quarter. And with that review of our financial performance, I’ll now pass the call back to Ravi for some closing remarks.

Thank you, Sharon. We continue to be very excited about our impending acquisition of IronPlanet. Our integration teams are ready to get started, and we’re well prepared for when the acquisition closes. All of our functional teams have established day 1 to day 100 integration plans to ensure we are approaching our combined business as effectively as possible. We anticipate territory alignment activities to occur soon after close to ensure our customers have no confusion as to who their established sales contact is, for the manual solutions we will soon offer. We have assessed our brand portfolio and value propositions and made key decisions on all brands for early stages of the integration. And we have a clear road map on integrating RBA and IronPlanet product offerings in the very early stages of the combined company, including such things as employee training, customer communication and support tools. Two specifics related to our integration: we will be combining our sales forces at the regional territory manager level and at the strategic accounts level, so that the customer – our customers get to interact with only one combined company, Ritchie Bros. salesperson. We will continue to have separate sales forces for our specialized businesses, such as Mascus, Crews, GovPlanet and CAT auctions. Our regional TMs will focus primarily on providing customers three product offerings. First, RBA’s unreserved live auction, which is on control and custody and a successful business model; IronPlanet’s weekly featured unreserved auction with the floor, which – where customers don’t have to move equipment; and EquipmentOne daily marketplace. This offering is a fusing of EquipmentOne and IronPlanet’s daily marketplace, which will allow seller’s price control and the ability to have reserved prices. This combined offering will still be under IronPlanet brand umbrella. These offerings will allow our TMs to become true trusted advisers and provide our customers solutions based on their specific disposition needs. We’re continuing to work closely with the Department of Justice and have provided them extensive documentation and a thorough understanding of our respective business models. We strongly believe in the merits of our case and believe the combination will be highly beneficial to our customers. We continue to target closing at the end of the second quarter. As we begin our second quarter, we are seeing many of the same trends we saw in the first. Pricing continues to be quite robust, and we’re optimistic that trend will continue as long as optimism persists in the construction sector. Further, if President Trump is able to pass his infrastructure bill, it should only enhance optimism and confidence. Unfortunately, we expect equipment supply, used equipment supply, to continue to remain constrained during the second quarter in the U.S. Also, we believe the challenges we have faced in Western Canada recently will continue for a few more quarters, but we’re cautiously optimistic that Europe may see a return to growth again. As you model your expectations for our second quarter, it is important to note two key items. First, there was a dramatic and unforeseen pricing drop at the end of June last year, which had a significant impact on the performance of our underwritten business and bottom line. Second, the challenges that we faced in Western Canada so far this year have not subsided yet. While we are exceptionally pleased with the very strong auction our Edmonton team recently held, we generated CAD 184 million of gross auction proceeds for us last week. It is down from the absolute record of the $240 million monster auction they achieved in April of last year. So – our difficult piece in April was shown in our April GAP results, which we’ll be announcing later tonight. Gross auction proceeds for the month of April were $354 million, a 10.4% decline, due primarily to the Edmonton auction results. Foreign exchange has once again become a bit of a headwind for us. Removing the effects of translating Canadian denominate GAP into U.S. dollars for reporting using the same exchange rates as this time last year, GAP would have been $367 million or 7.1% decline. The good news is that April GAP continued to grow in the U.S. So in conclusion, we recognized that first quarter is off to a soft start and external headwinds will likely continue in the second quarter. However, investors should take heart that the fundamentals of our business model remain intact. Cash flow is strong. Working capital is low to negative. We are increasingly asset-light in terms of CapEx from a brick and mortar standpoint. Execution is getting better. Our teams are laser focused on new customer acquisition, both in sectors we are established in and sectors we wish to grow. And we are improving in cost control. Importantly, our diversification strategy is working well and beginning to take hold, with the EquipmentOne, Mascus and RBFS gaining momentum. We are confident our multichannel approach will deliver more value to our customers, both established and new. IronPlanet is an important next step in our multichannel strategy and will allow us to better penetrate the $360 billion global market and penetrate, in particular, the dealer-broker and private sales business and continue on evolution from what used to be an auction company to a true multichannel premier asset management and disposition player. Before we open up today’s call for questions, I want to take a moment to thank some departing members of our team. First, as announced on last quarter’s earnings call, Randy Wall has now officially retired. We tried our best to keep him longer, but the best I could do was to convince him to stay on in a part-time advisory capacity, to help us leverage his infinite knowledge of everything RBA. So while we are saying officially goodbye to Randy as President of Canada, he’s agreed to help us on a project basis when needed. For this and his many, many, many years of tireless efforts to build up Ritchie Bros. into what it is today, we all thank you, Randy. And Randy’s dedication is shown that even though he just retired, he’s on vacation, he is calling in for this call. That is dedication at RBA. We plan to name a senior overall leader for Canada, who will be selected internally from within Ritchie Bros. and will be announced in conjunction with the closing of the IronPlanet transaction. As many of you know in the – as many of you in the capital markets have come to learn earlier this week, our Investor Relations Head, Jamie Kokoska, has decided to pursue an opportunity in a sector more in line with her personal interests. While we are sad to see her leave us, on a personal level, we are very happy that she’s been given the opportunity to grow her career with a leading fashion retailer. I want to thank Jamie for her excellent contributions during the last four years and bringing a high level of professionalism, transparency and investor engagement to the company. We’re actively recruiting a new Investor Relations professional and hope to have this person in place before the next earnings call. We are also planning to appoint someone in the interim, and we’ll let you know in the next two weeks. In the meanwhile, please reach out to Sharon, directly, if you have any urgent questions. And with that, we’d like to open the call to questions from analysts and institutional investors. As for past calls, we asked that you limit yourself, please to two questions before requeuing as we have a lot of interest on today’s call. Operator, would you please open the line to questions?

Thank you. [Operator Instructions] Your first question comes from the line of Neil Frohnapple from Longbow Research. Your line is open.

Good morning, thank you. And Jamie, you’ll be missed, and good luck. Ravi, I understand that the other region is relatively small as a percentage of total revenue, but it did weigh on total company revenue by, call it, 3 percentage points, given the magnitude of the decline in the quarter. And I believe you say that Middle East with the high supply and lack of demand, but could you provide any more granularity on this issue? Whether it’s currency-related and how long this could potentially persist?

Well, I think in the Middle East, just given the various situations there, Neil, we’re trying in a lot of innovative things. Karl Werner, who oversees that region, in fact, tried a very innovative thing of a three in one auction with live auction in Dubai, combined with EquipmentOne and Private Treaty. We’re also utilizing this time to rev up Private Treaty in the Middle East and – but as we’ve said before, those are lumpy. We don’t know when they’ll take hold but we certainly are building a pipeline in there. I think it’s just an issue of, for the first time in the Middle East, it’s things are in all those markets. Whether it’s Saudi and neighboring countries, demand has come down. And clearly, with oil prices being where they are, it’s just been an issue. We do think, though, longer term that there is room for optimism, that things will come back. So this quarter was particularly affected. Now the other parts there are Australia, which has been pretty buoyant. And we still – that’s a very big area of focus for us. In the first quarter there, we did have one at-risk deal that did not do well, which affected results negatively. Typically, the Australian team is one of the very best at at-risk underwritten business in the company, so they tried something new in the ag space that did not quite work out. And that’s what I want our teams to do, is try things to grow the business. So that was, to me, it’s one of those onetime things but I’m very buoyant about Australia. Asia, we look at primarily as an export market and that continues to do okay in that in terms of what we are trying to do there. So really, Middle East was the one that did have an impact. And in the Middle East, by the way, we do sell things on a dollar basis, which further compounds things because, just like Mexico, we sell in U.S. dollars. And so while there’s no exchange things, but in terms of buyers, that does put some pressure.

Okay, that’s helpful. And then, Ravi, just wanted to ask about your experience as acting U.S. and LatAm president. Now that you’re even closer to the field, has your thinking about these regions changed at all strategically on how to capture the growth in these markets? Or anything else that might jump out to you as untapped opportunities?

So let’s separate the U.S. from LatAm first. And this is my second foray as acting President of the U.S. and I’m really pleased to be closer to the U.S. team. First and foremost, I think we have got an outstanding team now in the U.S. They’re really sharp on execution. And so in that regard, my leaders are really strong leaders and so that gives me particularly some reassurance. I think I continue to believe that the U.S. is – should be our number one geographic priority. My optimism for that market remains unabated. I really think it’s very good. And now with what’s happening with a focus on infrastructure. So if you look at – there are many states. What’s happening right now with construction jobs in the U.S. is not related necessarily to any Trump infrastructure bill. So a lot of states have been creative, whether they’re passed like Georgia passing a gas tax and devoting all of that to infrastructure. In certain states, as they’ve had increased revenues, as they legalize marijuana and that is creating increased revenues for those states, those are going to infrastructure. And so I think there are several states right now that are taking this to hand. And if on a federal basis, Trump managed to get, there is good bipartisan support for this, so it’s a matter of when, I think that – and whatever you read, you know that the U.S. infrastructure needs a lot. Somewhere – I just read a statistic that just maintaining bridges and roads on an annual basis is about $63 billion. So the more jobs our contractors have, the better off we’ll be. So I think that’s a positive. Right now, we’re just sort of in a situation where new equipment production or new equipment, there’s been some delays, I guess, in particular sectors, so people are holding onto the equipment because they have the jobs, which is a positive. Over time, that’s going to translate once new equipment starts flowing freely to loosening up of that used equipment supply, which is only positive for us. The good news is we’ve got the teams in place. Now, I do – one of the negatives on – from our standpoint when you do have a very buoyant economy, it does affect sales force turnover. And because there are a lot of dealers who are willing to because they know that the cream of the crop in sales comes from the U.S., from RBA’s team, so there’s a little bit of inclination on that, so that’s something we’re watching out for and working on. But long and short – and we’re doing a lot of focusing on new segments in the U.S., how do we get growth? And the fact that April GAP that I just mentioned grew in the U.S. and we had a solid first quarter, despite all these equipment challenges, tells me that we’ve got a good – this is really the right way to go. And I think it will only get better once we have IronPlanet because it’ll give us access to new segments like GovPlanet that we don’t participate in or cruise with oil and gas. So that’s sort of the U.S. story. LatAm is a different thing, and there, you got to break it out. Today, we’re primarily in Mexico. And Mexico is having a lot of issues both in the economy, with the exchange rate, so that I don’t care and that’s why we sort of put on hold on underwritten business there and focusing on straight commission. Now there are opportunities in Latin America and we’re using our European teams to actually help us there because a lot of our Spanish teams have connections because our Italian teams, there’s a lot of those companies out in Latin America like in Brazil, Chile, Peru, et cetera. And we’re leveraging that versus – and this is a great way of improving sales productivity. So long-term question mark on Latin America but definitely U.S., an important priority.

Okay. Thanks for the detail, I’ll pass it on.

The next question comes from the line of Sara O’Brien from RBC. Your line is open. Sara O’Brien: Hi, good morning.

Hi, Sara. Sara O’Brien: I wondered if you could talk about the synergies at IronPlanet, if there’s been any change an expectation, just given the talk about U.S. tax change and how that might impact and maybe any others that you can see?

Hi, Sara. Yes, so we’re – as part of the integration planning, we are continuing to kind of look at integration opportunities. I said that our learnings to date, we really haven’t changed our thoughts on the synergy potential for that business as of yet. So I think the current thoughts still remain. Certainly, the U.S. tax changes, if they were to go through, could add some more value albeit, certainly, we had already baked in some opportunity due to the kind of Canadian opportunity that we have as a Canadian-based business through normal tax-type initiatives. Sara O’Brien: Okay. And then maybe just, I guess, more of a forward-looking question. But with 45% of GAP transactions online now, is there a time where you feel that the physical auction sites will become far less relevant and maybe the investment in the physical locations will be, I guess, outdated? I’m just wondering like in terms of how you look at the physical versus online and maybe how the shift might move in terms of investment towards IT going forward?

So Sara, I’ll try and take a shot at that. So I think we recognized the shifts and we’ve seen, I think, over 13% CAGR growth in online GAP over the last five, six years. So – but two things. One is that the on-site – ours is an integrated model and the on-sites are the propellers of this. There is still a lot to be said. There are a lot of customers who like kicking the tires, who want to be in the community. And one of the things you have to recognize like mobile app, they may actually be on-site but just bidding on their smartphones because they want to have anonymity. And there are a lot of customers who come and then go to their offices and bid online, again, for anonymity. So it is really – that’s why we want to be multichannel. And now having said that, do we need all the sites we have in the network? That’s something we’re going to be taking a real careful look at. And clearly, getting IronPlanet into the mix helps us be even more aggressive on it. But even without it, we would be looking at it. So we are looking at our network to say, which are sort of your flagship mega sites. I mean, clearly, Edmonton, Orlando, Dallas, Houston, et cetera, are really important magnet sites for us. Over time, we would look at, do we need all those sites? And with RIP, we also get the benefit of the CAT alliance, which allows us if we need to do some particular auctions on their sites, especially internationally. So I think you have to look at it in the mix. Our whole thing is give the customers the choice. Let’s be multichannel. They have different needs. And that’s one of the reasons the pure play online is also an important one, which is why we’re buying IronPlanet. But we’ll see how it evolves. You look at retail, the stores have not all completely disappeared. And except you just – so we want to be proactive and just look at how do these things affect it and get a very efficient network, both online and on site. Sara O’Brien: Okay. I’ll leave it that. Thank you.

Your next question comes from the line of Joe Box from KeyBanc Capital Markets. Your line is open.

Hi, guys. Can you hear me, okay.

Yes.

Great, thanks. So one thing I was hoping to talk about was the appropriate incremental margin. As the mix maybe shifts a little bit more to price, I mean, I guess, the one thing that I’m looking at here, if my math is right on adjusted EBITDA, it looks like there was about 100% decremental margin. I know there’s some moving pieces as we go forward. But I guess, just generally, how should we be thinking about that incremental margin as we kind of migrate some of these investments in a low-volume environment?

Sharon, do you want to...

Yes. So I think that’s a good question, Joe. Certainly, we do hope to get leverage off a growing revenue base. And so certainly, what we demonstrated in this quarter is that we were able to react on the variable-type costs that we were able to control. And we adjusted them appropriately due to the changing kind of volume outlook. However, a majority of our costs do remain relatively fixed. And so with declining revenue, you end up with that decrement that you’re talking about. So even though we closely controlled the cost that we could, we were unable to mitigate the impact of the declining revenue in the quarter. What I – we have been investing in talent and technology and marketing. We will continue to do so. However, we will be making those investments on a prudent and responsible basis going forward. But again, the operating model does work best in an increasing revenue environment where you start to see the flow-through off the relatively fixed cost base. But I do think the team did a remarkable job in the quarter on managing the costs that are able to be controlled that relate to volume.

So Joe, I would just echo what Sharon said and add something. Ritchie Bros., the model is and our strategy is all about revenue growth. And let us not have one quarter sort of influence our thinking about the business model. We really think the model is intact. We have – this is a lumpy business. You will see – you could always have a few quarters where things are up and down. But really, when you look at our last two years, 2015 and 2016, we showed that pretty much we delivered on the Evergreen Model with the one exception being GAP. So I think our whole focus is how do we keep driving that revenue growth. Now there will be, in this business, sometimes macro effects and this was just one of those unusual times where we got hit with both Canada and the equipment supply. We had not anticipated the equipment supply issue in the U.S. and the U.S. is strong. So typically, our whole model is about, if one engine starts having difficulties, namely Canada, that U.S. would have pick it up, it was just not enough. Secondly, we’re continuing to diversify. And I think over time, as those businesses get scaled, that will help as well. Now the one thing is that we are looking into is that the flow-through, clearly, of our businesses in things like RBA, EquipmentOne and RBFS, our high flow-through models, whereas subscription businesses and service businesses like Mascus, et cetera, et cetera, have lower flow-through. So – but they give you a little bit more predictability. So we have to think about that and say how do we improve flow-through on those businesses longer term, but it does give you some predictability to your revenue stream. So – but the bottom line is we are very committed long term to continue to drive growth and drive the flow-through that gives you very good margin performance.

Great, thank you both for that. And then just as a quick follow-up, and I apologize if you addressed this earlier. But in terms of the Private Treaty business, obviously, this is a nice arrow in the quiver. Can you just maybe talk about the sustainability of this?

So I’ll address that, Joe. So certainly, this is still a relatively new business for us and we are continuing to grow the pipeline of connections and relationships to be able to make this a good long-term stream of revenue opportunity for us going forward. I think it is a bit lumpy and a lot of the deals do take a relatively long time to be able to complete the transaction and bring the buyer and seller together. The particular deals that did take place in the quarter do relate to kind of the existing deal that was in place in quarter four of 2016. And so – but we do still have some pipeline that is currently being built up for those types of transactions. So we do see it as sustainable, but again, lumpy element to that.

So I’d like Randy to make maybe a comment on that because Randy is one of our key champions and fathers of the Private Treaty business and the Q4 deals that were brilliant were really under his leadership. So Randy?

Thanks, Ravi. I do think that Private Treaty has a potentially significant long-term runway. As Sharon mentioned, it’s very lumpy, even more lumpy than our regular auction business. And they really depend upon relationships and penetrating some of these markets that we haven’t been in as deeply before such as the mining and really energy on the more specialized product. So I think it’s definitely a tool that has opened net new doors for us and it’s exciting. It helps us play in different parts of the world for very large multinational organizations. But it’s really, really difficult to put your finger on and provide predictions in terms of kind of flow business at this stage but I’m quite optimistic about it.

So one final comment on that, which is this is – I view it as a channel and a way for us to address that whole – in the $360 billion global market, we know that there’s a lot of people who want to do private sales. And so we now have a sub-brand, Ritchie Bros. Private Treaty, to address their unique needs because this is for unique assets, high-value assets for portfolios. And there are a number of reasons why those sellers might choose to sell it privately. They’re very targeted. We’re not letting our TMs and get distracted by this. This is really done at the senior levels of the organization. And so – and it’s really – we have looked at it in the mining space, in other sectors. We now have a team that is really good at this stuff in different parts of the world. And till now, it’s been more in Middle East, little bit in Europe, in Australia and in Canada. We are also now looking at this in the U.S. So sustainable? Yes. Very lumpy? Yes. And I wouldn’t also take away that this is – because last quarter, clearly, we got a big part from it. But not all Private Treaty deals are huge margins. They resemble our regular business but it’s a great new channel for us to keep building.

I appreciate it. Thanks everyone.

Your next question comes from the line of Larry De Maria from William Blair.

Hi, thanks, good morning. Two questions. First, the U.S. is doing is well. Obviously, you’re benefiting from normal construction and also hope on the infrastructure front, but that may seem to be fading. You’re always getting pushed out. I’m just curious if you’ve seen anything in the market or your discussion with customers to suggest their sentiment may change or the initial infrastructure euphoria we thought may fade? And secondly, can you just give us a normal SG&A run rate to think about moving forward when we remove some of the noise?

So Sharon can answer question two and I’ll answer question one on the U.S. Larry, I’m not – I have talked to a lot of customers. I was at ConExpo recently where I met with many, many customers, and the mood and optimism at ConExpo was just huge. And the same at our Orlando auctions where I talked to people. I just think right now, the – I think – so we had to – the Trump message is creating optimism in the sense it’s more psychological that people are having confidence in the economy. And – but really, right now, the jobs we are seeing are state-led and where that’s already happening. So I have not yet come across where there is hopes fading. And I’ll let Anna, who handles the Northeast and Northeast needs a lot of infrastructure improvement, Anna, what do you hear from customers in the U.S?

So I echo what you’re saying, Ravi. We absolutely have a lot optimism. We’ve had some great momentum in the Northeast, particularly been with off-site sales, large transactions and customers that are now starting to free up some of the assets and looking to purchase new. So we see that carrying out and we’re quite excited about it.

Talk about Canada East in the same regard even though the question was about the U.S. because Canada East is quite different from how it behaves from Western Canada.

So Canada East had shown, obviously, through economic downturn years ago, a little bit more conservative and it always has been, particularly in Ontario with the large customer national sort of customer base. But what we’ve seen is Ontario particularly is just busting with new infrastructure spend, bus lines, underground, subway, highway expansions. So we have a huge amount of momentum, actually, in fact, one of our largest sales coming in, in the next couple of days. Historically, in Ontario, Québec is now showing great signs of some infrastructure finally flowing through. So there’s good momentum there, and we’ll have a really nice large sale, which we’re excited about. And of course, in the Atlantic provinces, we have had an enormous amount of full dispersals, and we have built up a large off-site sale in Newfoundland again, which is our second time this year, as well as building momentum in our Truro sale. So we are seeing great optimism across the East.

And Larry, with respect to the SG&A run rate, that’s a good question. I think probably the best way to look at it is almost on a dollar basis. Certainly, when I look at – we now have our executive team kind of in place, so we’re not cycling over that kind of new headcount in Q2. So that will all become relatively comparable as Becky, our CMO; Marianne, our CIO; and Frank, our Sales Leader – Sales Effectiveness Leader, are now fully in place in comparable Q2 going forward. We still will have the increased costs related to the acquired businesses of Kramer and Petrowsky for the remainder of the year, but they’re really still based – baked into our Q1 dollars. And so that’s probably the better way to look at it. We are still very much committed to our Evergreen model of growing OpEx and SG&A costs in line and less than our revenue growth, so we will keep true to that. But again, the investments that we’re making to support this transition and integration with IronPlanet will still have some lumpy nature. And even though we have, on the face of the statements, tried as best we can to pull all those acquisition costs out, there certainly is some additional pressure on our internal teams that still is embedded inside the SG&A account as they continue to do work to do the integration planning for our business.

Okay. So just to sum up, it goes down by a few million in absolute dollars but the two smaller acquisitions you made at $700,000, I believe, stays in there?

Yes. So you’re talking about the comparable. So adding in Mascus, Petrowsky and – yes, yes.

Xcira.

Xcira.

Okay. Thank you very, very much.

Your next question comes from Stephen Volkmann with Jefferies. Your line is open.

Good morning. Actually, good afternoon from here. I’m curious about the next six months or so, and Ravi, you sort of said that you thought the current conditions sort of a weaker Canada, kind of okay U.S. and growth in Europe will probably be the way things went for the next couple of – well, at least the next quarter. Does that change the mix on your revenue rate? Is Europe significantly different than Canada? How do we think about that?

I think the first part, absolutely good playback of what I said. Look, I think on the revenue rate, and I think the last slide still had it where this is one that we continue to stay focused on. And so we have said 11% to 12% for our regular auctions and then 12%-plus. Clearly, we’re beginning to do better than that. And we’ll continue to – I’m not happy that our underwritten volume in Q1 was as low as it was. And I continue to strongly encourage our teams around the world, or least specific parts of the world, North America and certain parts of Europe, Australia, to drive underwritten business. That always has and it’s very hard to predict. But we want to get more volume. It’s just a case of, in first quarter, the U.S., just customers because they felt, when you have an upward pricing market, they clearly feel, hey, on the underwritten side, we might then be the disproportionate beneficiary. So – but overall, I think without adding to any more on the guidance piece, we feel the – and Europe, at least in Southern Europe, they have done a pretty good job on the underwritten side. We are careful about underwritten in the UK and some of the northern side. But even their rates in Northern Europe have been improving. So overall, I think rate is, at least at this point, I continue to see that we’re going to hang on to good performance.

Okay, great. That’s helpful. And then maybe separately, I noticed that your – and I think you talked about how your average consignor numbers are up and so you have sort of wider touch points, I guess, you’re talking about. But the other implication of that is that the lot size is declining and that seems to be a trend that’s been kind of going on for a little while. I wonder if you think there’s anything to that or how do you react to that?

Well, I think that’s been a – the small lots have been an issue for us for the last several years. I’ll have Randy do a quick comment on that. But – and we try to exercise with our sales team’s discipline on it. Now when you have an unreserved model, sometimes, small lots are the way people come in, new consignors come into the business. I think this quarter, it was really more an issue of constrained equipment supply in the U.S. and the fact that all the issues, the search came down in Western Canada. Because I think last year in Western Canada, we had a lot of stuff coming out of oil and gas that could be repurposed into construction, which were the heavier piece of equipment. So the small lots are – continued to be an issue, which we have to manage because they do drive up labor costs in the odds. And – but we also have a different buyers fee schedule on those. So Randy, do you have anything – any other insight you want to add there?

Sure, Ravi. Small lots, the good side of the small lots is that, in many cases, they come as part of the package of a complete dispersal event. And that’s, of course, strength of Ritchie Bros. to provide that service from a palliative change all the way up to hundreds of thousands of dollars heavy piece of equipment. And the other thing that does happen in times post downturns where there’s less new product pumped into the marketplace which you have end up with is effectively an aging fleet of the equipment in the background. And then when those aged assets come to market, their average dollar value was slightly down, depending upon the age profile. So we saw that happen post-2008 and it’s early to tell now but that could be a factor at play here in the future.

Good, great. And then just one quick follow-up. I think, Ravi, you mentioned that you had seven Kramer auctions in the first quarter. Is that – did that add a meaningful amount to the year-over-year GAP numbers?

Randy, can you answer that, please?

Sure. The Kramer events were bison livestock events and they were very, very tiny. They’d be completely immaterial. And the bulk of the agricultural business really is in the second quarter, which starts in their April spring event. So very, very minor dollar value.

And just that it doesn’t give the wrong impression. We’re not now getting into the bison or cattle business. It just so happened this was a small piece of the Kramer business that we acquired and we – they’re very proud of that, justifiably so. So we – that will just continue. But it shows no intent to get into that as a new sector.

I guess I’ll have to change the title from my note and thanks. Thank you, guys.

One last question I think Jamie.

Our last question comes from Michael Doumet with Scotia Bank. Your line is open.

Yes, hi, good afternoon guys. So just two quick questions. Pretty decent growth in the U.S., both on GAP and revenue, and that’s despite the tight used equipment supply conditions. I mean, could you help us break out where some of that strength came from and whether it’s market driven and/or if you’re seeing benefits from company-specific initiatives? And then second, really, the question, Ravi, if we can get your thoughts on how and/or when equipment or used equipment supply conditions could loosen up.

Yes, so I’ll tackle the first one. And in terms of the U.S., broadly speaking, one, really the big drivers are not just the RBA live auction business but EquipmentOne as well, which is primarily in the U.S. And now it’s very important to start thinking of these models from a geographic basis on a consolidated basis. And so at EquipmentOne, we are delighted to see the traction that we’re finally beginning to get on that business. And Jim and the team have really worked very well. Sam Wyant, our Head of Strategic Accounts, is also handling that. The strength really came from certain year we had was Florida. It was – we had a number of players who have auctions in Florida and a number of competitors and had very disappointing results versus prior year. But I think our team really hit the ball out of the park. It was not chance. It was very, very – it was extremely well executed with Jake Lawson and his team driving that with – the Orlando auction grew both in GAP and in revenue versus prior year. So that was definitely a big flip. And now Orlando gets not only – it’s not just the sales team in Florida but we send equipment from different places. So it was truly great to see Texas. And Texas was really less about oil and gas. It was really – they’re really taking hold of the construction activity and stuff so that team’s really coming together under Dolan’s leadership there. So very, very – I think we’ve had that and Anna has really cranked up Northeast and I’ll let her comment on any specific initiatives. But overall, I think it has been we are getting better and better at using our sales tools. Frank’s sales effectiveness has put in place tools for our salespeople on salesforce.com. We’re looking – there’s a big laser focus on our new customer acquisition, which hopefully offsets some of the down drag during the equipment supply issues. So now the western part of the U.S. has been soft for us with equipment supply issues probably more prominent there than other places and some strategic account sectors. Rental, for instance, has been soft just because their utilizations are very high. Dealer business has been soft because, again, people are holding on. But our strength with end users, we’re really focused on them. And Anna, do you want to add anything, whether it’s for the Northeast or for the U.S. as a whole?

Sure, Ravi. I think that we’ve really approached the – in the U.S. and I’ll speak to the Northeast, but very organized, structured professional approach as the trusted adviser optimizing on our selling tools, to your point. So the team is very focused on the strategy, the tactics, and certainly, the execution. So everybody is working really hard in a very organized fashion and definitely using all of our multichannel selling solutions, so E1, our Private Treaty aspect. So I think that fell through in the East as well, in the Northeast and Canada East.

One other quick comment there is our North Central business has been doing well as well. And we’re also beginning to get some traction on agriculture even though we said the rates were – pricing was down but we’ve now used best practices and brought in some on the farm auctions. So that side is beginning to get some strength as well. But I think it’s a more scientific approach towards pipelines. I do biweekly calls with all the regional heads to go through their pipeline, look at how much GAP was sold. So we’re just tracking and bringing more discipline and driving more productivity. So that’s sort of first part of your question. Your second part was the supply issues. Tough to tell, because that’s sort of not in our control. We really don’t have that much insight into the OEMs and when – and it’s in specific sectors. Some of it’s also not related to new equipment production because there’s a strong pricing environment. Right now, we’re seeing that dealers are holding onto equipment. And actually trying to put it on, we’re seeing significant increases on listings on some of the online specialized competitors, to say Mascus in Europe, that their listings are up with dealers. Whether they will transact or not, we don’t know, but they are sort of hoping that they can capture the increases in pricing. So I think this is – I don’t know when it’ll loosen up but our whole view is our teams have to just focus on trying to find new customers and drive that. So Anna, did you have...

Yes, I just want to comment our transportation strategy over the last two years and champing across and understanding the hubs across U.S. and Canada, which we’ve really grown our transportation day two as largest. We’ve seen our day one, and traditionally, that’s not been there for us, as well as we had a very long winter. So I’d comment that we’ll start to see a lift in June and July and things releasing themselves as well.

Okay. With that, I think we’ll call it a wrap. Thank you very much for being on the call, onwards and upwards. Thank you.

This concludes today’s conference call. You may now disconnect.