RB Global, Inc. (RBA) Q2 2017 Earnings Report, Transcript and Summary

Good morning. My name is Tashaun, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Ritchie Bros. Auctioneers Second Quarter 2017 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Zaheed Mawani, Vice President of Investor Relations. The floor is yours.

Good morning, and thank you for joining us on today's call to discuss our second quarter results. I'm joined this morning by Ravi Saligram, our Chief Executive Officer; and Sharon Driscoll, our Chief Financial Officer. Also with us today for the Q&A portion of the call will be other members of the leadership team. Ravi and Sharon will open the call with prepared remarks regarding the quarter, and the other leaders will join them to answer questions for the Q&A portion of the call. The following discussion will include forward-looking statements as defined by the 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 or affect 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 second quarter results were made available this morning before 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 to 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 today 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 figures. I'll now turn the call over to Ravi Saligram, our Chief Executive Officer. Ravi?

Thank you, Zaheed. Zaheed's been here 10 days. It's been a remarkably steep learning curve, but he handled it admirably. Thank you to everyone for joining us on our earnings call today. On the call, we are going to focus on our prepared remarks by providing you with, first, a recap of our second quarter business and financial performance; and second, an update on how the integration of our recently closed acquisition of IronPlanet is progressing. Sharon will discuss the second quarter business and financial performance and I'll then provide an update on the IronPlanet integration. Let me take a moment to recap the transformational acquisition of IronPlanet. The acquisition closed on May 31 and marked the bringing together of 2 leading companies to create a dynamic and differentiated company that is positioned well for future growth. Our combined company provides our customers with unprecedented choice and will enable them to transact when they want, how they want and where they want, as we bring our capabilities together to offer a single platform for all of our customers' needs. Right at the outset, it is clear that we are creating a compelling integrated operating platform which will create powerful network effects. Let me illustrate with just a few stats. In 2016 total GAP/GTV and GMV, total GAP of the business of Ritchie Bros. plus IronPlanet was $5.3 billion, of which nearly $3 billion was online, making us one of the top online e-commerce players in the B2B world. We sold 485,000 pieces of equipment, over 356 live integrated auctions, 104 video online auctions and IP's Daily Marketplace and EquipmentOne. We had 43 million unique website visitors, 2.9 million registered users and 155,000 buyers across the system. Together, Ritchie Bros. and IronPlanet had 21 private marketplaces, while Mascus offered 1,500 principally for dealers. Ritchie Bros. and IronPlanet generated 228 million page views and 250 million at Mascus. IronPlanet did 100,000 equipment inspections in 2016 and 900,000 during the brand's lifetime. Just these alone are indicative of the opportunities to drive the network in effect. Imagine what we can achieve when we connect and link all our channels and the richness of data and insights we can gather. Before I pass the call over, I'd like to extend the warmest welcome to all our IronPlanet team members that are now joining the Ritchie Bros. family. We're excited to have our teams come together and begin leveraging the best of both teams to serve our customers, grow our business and drive long-term value creation for our shareholders. With that, let me turn it over to Sharon.

Thank you, Ravi. I would also like to extend a warm welcome to all the IronPlanet team members joining the Ritchie Family. We are one team, now working together meet our customer needs, and I could not be more excited about our future as a combined business. With that, let's move on to discuss our Q2 performance. Gross auction proceeds for the second quarter of 2017, which included $77 million of IronPlanet GMV for the month of June, was approximately $1.3 billion, a 1.4% decline from Q2 last year on an auction calendar that was similar to the year-ago quarter. With the oil and gas used equipment dislocation surge now subsided, Q2 continued to see similar macroeconomic conditions that we experienced in Q1, with lower supply driven by high deployment rates and long lead times for new equipment. With equipment being highly utilized and the lack of new equipment to fulfill demand, we are experiencing a period with less turnover. Although the cycle is expected to negatively impact us for the balance of the year, the buildup of rental fleet and the eventual turnover should produce an acceleration of growth in 2018. As for live auction highlights during the quarter, I'll review a few of the notable items. In Canada, despite equipment supply constraints, our teams are still working very hard for new business. Our April Edmonton auction broke site records for number of sellers, and sold more than $134 million worth of equipment and assets. We were very pleased with our performance in Eastern Canada, with the largest ever option in Toronto in our May sale. Similarly in the U.S., our Houston, Texas auction in June also broke the site record for the largest-ever option in that month, selling more than $46 million worth of equipment. Europe and our emerging businesses are also doing well posting double-digit revenue growth. In the first half of 2017, Europe, including IronPlanet and SalvageSale, grew 15% year-on-year. Our EquipmentOne business increased revenue by 26%, Ritchie Bros. Financial Services fee revenue grew by 33% and Mascus revenue increased 35%. Of note in Q2, we also held 87 agricultural auctions, including 32 auctions held under the Kramer Auctions brand. Looking now at our auction metrics. Our sales team did a remarkable job of bringing in consignors, with 11% consignor growth during this period of constrained equipment supply. Our customers are still selling equipment with us. However, they're selling fewer pieces, resulting in an overall reduction in number of lots sold of 2%. Our marketing outreach efforts, combined with market demand for equipment, translated into a 9% increase in bidders and 5% increase in number of buyers in the quarter. Consistent with Q1 and second half of 2016, we saw improvement in used equipment pricing. Construction assets continue to perform well throughout Q2 with later model, low-hour equipment experiencing the most price improvement, reflecting the tightening equipment supply, particularly in North America. Transportation assets has strengthened slightly from their lower levels from late 2016, with lower-mileage truck tractors experiencing the most lift. Agricultural prices in Canada have seen some meaningful price improvements in Q2, while at the same time, agricultural equipment in the U.S. has experienced some pricing weakness. We believe the difference in used agricultural equipment pricing between Canada and the U.S. is due mostly to the different types of machinery used in farming practices between the 2 countries and the stronger U.S. dollar. Some oil and gas equipment did experience price improvement for the first time in many quarters, indicating that oil and gas pricing may have bottomed in the second half of 2016. All in, the weaker overall environment drove lower lot counts, which, despite the strong pricing, did not translate into higher GAP volume. With owners and dealers utilizing and holding on to their equipment in response to the improved macroeconomic conditions, we saw a deterioration in the overall age of equipment coming to market relative to recent years. That's driving lower average price per lot of the equipment at our auctions. We observed increases in the age of equipment across all sectors and in all geographies. We're seeing a significant decline in near-new or 1- to 2-year-old equipment, with the 6-year and older equipment at the highest levels we have seen since 2014. Through Q2, only 25% of our -- of the equipment is in our sweet spot of 3 to 5 years old, which is down 427 basis points from full year 2016. Moving on to financial performance. Revenue for the second quarter was $166 million, a 4.6% increase over last year. SG&A expenses increased $400,000 or an increase of 1%. We will go into more detail on revenue expenses in a moment. Acquisition costs of $23 million include $9 million in fees associated with the IronPlanet merger transaction, $4.8 million of stock option compensation expenses resulting from the accelerated vesting of options assumed as part of the merger, $3.5 million of legal fees related to the regulatory approval process and closing of the transaction, and $1.4 million of severance and retention costs that followed the merger. In the quarter, the company recognized $8.9 million of an impairment loss due to the likely discontinued use of certain technology assets before the end of their previously estimated lives. Operating income of $26.9 million decreased from $53.8 million last year, primarily due to the significant costs associated with the completion of the IronPlanet acquisition. Net income attributable to stockholders of $17.6 million decreased by $22.1 million, resulting from that decrease in operating income and the increased interest expense incurred to finance the acquisition. And this was partially offset by the decrease in tax expense in the quarter. Diluted EPS of $0.16 per share decreased 57% due to the decrease in net income, combined with a $1.3 million increase in the weighted average number of diluted shares, primarily due to the assumption of IronPlanet stock options as well as the modification of certain share units from liability classified in May 2016, and the modification of the CEO sign-on grant performance share units in May 2017. In order to see the underlying performance of the business, it is important to look at our business and operating performance on an adjusted basis. The adjusted results exclude the income -- impacts of nonrecurring acquisition-related costs and the impairment loss. On an adjusted basis, our operating income declined 5% to $51.1 million, with our adjusted EPS of $0.33, which is an 11% decline versus a year ago. Notably, our adjusted EPS still includes the additional interest cost expense incurred to finance the acquisition, which reduced adjusted EPS further by $0.05. Now let's look a little deeper into revenue. Revenue for the second quarter increased by 4.6% over last year. The increase was principally driven by the inclusion of $11 million of IronPlanet revenue together with solid growth in Europe and our emerging businesses and a strong revenue rate performance, partially offset by lower GAP. Excluding IronPlanet, our revenue growth is a decline of 2%. And on a constant-currency basis, our organic revenue growth rate was essentially flat year-on-year despite the significant declines in GAP. The revenue rate for the quarter was 13.2% compared to 12.5% in the same quarter last year. The rate increase was primarily due to the merger and fee revenue from IronPlanet's online marketplaces and favorable contributions from Private Treaty, EquipmentOne, Mascus and Ritchie Bros. Financial Services. We also experienced a 50 basis point improvement in our live auction revenue rate over last year, achieving a live auction revenue rate of just over 12%. Live auctions now represent 82% of revenue rate versus 90% just a year ago. We are pleased to have generated a revenue rate growth in a softer environment, which demonstrates the benefits of our diversification strategy. Turning now to our costs. Our cost of services increased 9% to $21.6 million versus $19.8 million last year. Notably, the quarter included 1 month of IronPlanet costs of $4.5 million, which were not in our Q2 numbers last year. Thus, looking at our cost of sales, excluding the 1 month of IronPlanet, our costs declined approximately 5%. This decrease highlights the cost-reduction action taken to respond to lower lot counts and volume declines at our live auction events. Similarly, with SG&A, our expenses increased approximately 1%, but excluding the addition of IronPlanet, our SG&A declined roughly 7% year-on-year. The primary driver of this decrease was a $4.5 million decrease in share-based payments caused by the mark-to-market fair value impact of an approximate $4 decrease in share price in the Q2 2017 reporting period compared to an almost $7 increase in the share price during the Q2 of 2016. We continue to stay focused on cost control, while executing our plan to achieve our stated synergy targets and continue to look for every opportunity to manage our variable costs as we work through the cyclical softness we are experiencing. Turning to our balance sheet and liquidity metrics. The cash flow characteristics of our model remain strong, with operating free cash flow of $112.7 million on a trailing 12-month basis. And although a year-over-year decline of 14%, this is a positive outcome given short-term softness in the business, combined with the additional acquisition-related cost and interest incurred with our bond issue to complete the merger transaction. CapEx intensity of 5.6% of revenue was well below our max of 8.5% of revenue as we begin to invest to strengthen and link our technology platforms. During this quarter, significant financing activity occurred as we completed and financed the IronPlanet acquisition. The $500 million senior unsecured notes were released from escrow, the $325 million delayed-draw term loan was drawn, and all syndicated credit facilities have now been secured by assets of the corporation. Long-term debt as at June 30, 2017, is at $814 million, with an weighted average annual interest rate of 4.3%. This increase level of debt has taken our adjusted debt to adjusted EBITDA ratio of 2.9x. This increase is slightly improved from our expectations when we announced the transaction. And although, we are over our desired level, we are focused on short-term debt repayment as a top priority for capital allocation to reduce this metric to below 2.5x as quickly as possible. As we move into the back half of our fiscal year and given the recent acquisition, we felt it would be useful to provide some context and visibility on how to think about some financial assumptions to help with our models. To be clear, we're not providing forward-looking guidance and these assumptions provided here are meant to provide supplementary context in light of the acquisition and are only for the back half of 2017. That said, as you can see on the slide, we expect the following assumptions in the second half of the year for the combined company. Starting with our top line. We continue to expect the softer macro conditions to persist for the majority of the back half. Our July GAP numbers we released today underscore this trend as we reported a year-over-year GAP decline of 13.8% over July 2016. We are also going to have a headwind in the back half due to comping 2 significant events in H2 of 2016: our Columbus, Ohio sale in Q3 of last year and a large Private Treaty deal in Q4. To help with your models for revenue, I would refer you to the table in Note 22 of our quarter 2 financial statements. This table shows combined revenue trends for the 2 companies, with the first half of 2017 of $340 million revenue versus $349 million of revenue in 2016, a 3% decline year-on-year. Please note that IP revenues for 2016 are net of CAT equity incentives. This trend of a 3% decline could worsen in second half 2017 once applying the tougher comps expected in Q3 and Q4 as previously discussed. Applying these trends on an RB reported basis for the second half of 2017, this could result in a 10% to 13% increase in H2 revenues year-on-year, with IronPlanet in our 2017 actuals but not in our base. Again, I will reiterate, this is not guidance, but more of a frame of reference for investors to use as a starting point for modeling. We strongly recommend you use your own judgment on market conditions to generate your revenue targets for the remainder of 2017. We expect the revenue rate for the combined company of between 12% to 13%. Depreciation and amortization costs are expected to be between $30 million to $35 million, with the additional amortization from the $188 million of intangible assets acquired with IronPlanet. While the majority of the acquisition-related costs are behind us, we still expect to incur up to $5 million for the balance of the year. Finally, we expect to incur net interest expense in the back half of approximately $20 million based on our current debt levels and anticipate effective average tax rate over Q3 and Q4 to be between 23% to 25%. The Q2 tax rate of 18.5% is unusually low and is a reflection of revising our full year estimates on tax expenses post-transaction to the range just mentioned. Finally, given the unexpected length of the merger approval process, it is prudent to adjust our time-bound Evergreen growth target as it relates to EBITDA margins and return on invested capital. And expect the dates to achieve will be extended by 1 year to 2019 and 2021, respectively. We have included a revised Evergreen model in the appendix to this presentation to reflect these 2 date changes. Before I turn it over to Ravi for the integration update, it is important to highlight that we are positioning this company for long-term growth and profitability. And while the macro cycle we are experiencing at the moment is challenging, we are leaning into opportunities that we have to execute well during this softer period and continue to focus on those things we can control, positioning us to accelerate as we exit the short-term period of macro headwinds. And with that, I'll turn the call over to Ravi.

Thank you, Sharon. We are now just over 60 days into operating as a combined company. So we are very early indeed in our integration process. But I'm very pleased to say that our teams are coming together exceptionally well. Our leadership team has developed a very well-defined integration plan, and we also leveraged some external expertise that has consulted on major acquisition integration. Because of this hard work, we're confident that we have the right plan going forward with the right work streams, key milestones and leadership accountability to ensure flawless execution. While we have a lot of work ahead of us to capitalize on this combination, we couldn't be more excited about how this acquisition has positioned us for growth in this large market filled with untapped opportunity. As we mentioned in the past, the global used equipment market is huge and upwards of $300 billion. Ritchie Bros. is an industry leader and has traditionally played in the $25 billion annual used equipment option market. But the market opportunity is much, much larger, and this combination unlocks the potential for our organization to expand our market coverage upstream into private sales and retail channels. Our holistic value proposition positions us to capture more share of more sizable market segments by meeting more of the customer needs. The market for the disposition of used equipment is very fragmented with many small players. Part of the reason for the heavy fragmentation is because each customer is unique and has different needs to suit their situation, the type of asset being sold or the timing of their business cycle. Until now, there is nobody today that has the ability to meet all the unique needs in a one-stop shop manner. The event-driven auction, which has been Ritchie Bros'. core business for over 50 years, is just one solution, albeit a powerful solution to meet their very needs. Together with IronPlanet and our other selling channels, we're now armed with the portfolio solutions that can be deployed across our customers' spectrum of needs. By delivering choice, we can work with our customers as a trusted adviser to provide them each with a tailored suite of equipment disposition solutions and in the medium and long-term asset management. This is truly a fundamental evolution and transformation in our industry. Based on customer segmentation study we have conducted, there are 3 major customer personas we have identified, one of which includes strong enthusiasts of auctions or what we call full service auction fans. What is interesting to note is that even among these full service auction fans, private sales and trade-ins accounted for a significant portion of equipment disposals. On average, these auction enthusiasts still only give us approximately 25% of their business or share of wallet. We see this as an opportunity for us to work to gain a higher share of wallet. We also see large or a similar opportunity with large fleet owners and strategic accounts. As you can see in the pie chart, on a combined basis, RBA and IronPlanet's strategic account share shows we're touching less than 20% of the volume that is represented in this major market opportunity. In fact, the customer overlap between our brands is very low, combined our strategic accounts business already represents over $900 million in GAP. Just in the U.S. alone, strategic accounts will be a major opportunity for RB in the future. The acquisition accelerates our strategy and positions us to gain share from both our traditional auction customers as well as strategic accounts. Our new platform will provide our traditional auction customers with more choice than ever, as well as customers who may not be transacting through auctions. Through the acquisition of IronPlanet, we have assembled the broadest coverage in the industry to drive our global opportunities and offer a superior customer experience. Ritchie Bros. is now the only full-service, end-to-end asset management and disposition company. Our new ecosystem is a true multi-channel marketplace platform affording both sellers and buyers a better way to buy and sell equipment. While we're in the business of facilitating the disposition of assets, at our core we are a relationship business. Our platform powers relationships based on decisions where we can overlay our solutions and work with our customers holistically to understand what they're trying to achieve with their portfolio and then recommend either a listing solution, brokerage solutions from Private Treaty or Marketplace E, or auction solutions or a combination of all three channels. This approach also has the broadest appeal in our strategic accounts business and with OEMs and dealers with the largest REITs. This is our new core. To drive growth, we're putting the customer first and making it easy to do business with us. As part of our integration efforts, we'll create a multi-channel marketplace ecosystem that will be accessible through single log-on ID functionality in the medium term. The significant of this is that our customers will have one point of entry, and it'll enable frictionless movement of assets across our entire channel marketplace. By assembling this platform, it will enable our sellers to manage their assets across a multi-channel solution and providing our buyers access to the largest selection of used equipment in the world. This is a very rich planning proposition. To tap into our core seller needs, we do focus the majority of our sales efforts on 3 core solutions. First, the unreserved on-site integrated auctions that provide our customers care, custody and control at our sites, at our live auction sites, offering RBA. Second, weekly online auctions for these sellers looking to manage the disposition of their assets on a more frequent basis and being able to sell from their yard or location without having to move equipment. That is the IronPlanet featured weekly auctions. Third, our reserved online marketplace that affords sellers with control over price and timing, and with solutions such as "make offer, buy now, reserve price" selling formats for buyers. Here, we plan to [indiscernible] EquipmentOne, which is doing extremely well with IronPlanet's successful Daily Marketplace and the combined offering to be named Marketplace E. The combination will take place in the Fall of this year. It'll have the best aspects of technology from both offerings. Also, EquipmentOne has specialized in transportation and energy assets, while Daily Marketplace has been focused on construction. Marketplace E is a big idea focused on both sellers and buyers who want control. Right off the bat, we'll have the scale with Marketplace E, with $53 million in GAP on an our annual basis. In the next 5 years or so, we can envision this brand growing close to $1 billion and is a key to move our efforts upstream. With multiple disposition options, we'll deliver choice for our customers, they'll have ultimate control for their used equipment and the right channel to meet their needs, the right solutions at the right time that delivers the right buyers. This acquisition was so compelling on so many fronts. But I believe one of the differentiators that will set us apart from any other competition will be our digital and technology capabilities. We are in an era of analytics, data and connectivity, where customers are adopting technology at a faster rate than we've ever seen. Leveraging technology to create a differentiated and tailored value proposition for both of our customers and our team members will allow us to build deeper relationships with our customers and OEMs. Let me touch a few of the key benefits to our technology platform with the IronPlanet acquisition. First, talent. Talent in the technology team. The IronPlanet team has been building a leading online platform for 17 years. The engineers at IronPlanet have both deep knowledge of our industry and the know-how how to respond quickly and add new capability and leverage technology to capture new business opportunities. The same at Ritchie Bros. Our talent here has been great on the auction side. Between our 2 two technology leadership teams, we have over 150 years of experience in auction and marketplace technology. Second, collaboration. We've seen early success with technology integration. Our teams have come together to provide solutions for our combined sales teams, and we quickly implemented the initial requirements through unified business operations. Third, accelerated digital transformation. Ritchie Bros. has been replacing legacy systems, but has been operating at a slower intuitive pace. The IronPlanet acquisition gives us the ability to leapfrog this effort to leveraging IronPlanet solutions. This pertains to multiple assets of auction operations. For example, we're working on the immediate migration to IP for pricing workflow and tools. Similarly, we're implementing IP's proprietary marketing technology on the Ritchie Bros. website. These and other efforts will allow us to reap early benefits from IronPlanet's technology. In planning integration, we see 3 major waves of work ahead, which we expect to complete by the end of 2019, and I'm referring here to technology integration. The first wave is focused on combining our sales force, enabling seller outreach and enabling effective company business operations. Within the first 60 days, we completed the new territory optimization and assignments for the sales team. This entailed a large on-boarding and systems configuration effort. This allowed our teams to have full coverage of the marketplace and to be prepared to meet with their customers and introduce the multi-channel playbook. They've preliminarily defined future waves that focus on the buyer experience and optimizing operations. These 3 waves of integration will solidify our foundation for future growth and deliver on an unmatched customer experience. Let me now give you an overview of our sales integration. We combined and unified our sales teams to create a unified sales force in order to, first, for our customers have one point of contact and build a relationship. And b, our sales -- second, our salespeople to fully understand the customers' needs and offer the appropriate product solution from our core portfolio. Our salespeople are evolving from transactional sales to solution sales and becoming a trusted adviser to our customers. As part of the sales force unification, we optimized territories based on market potential and using Rig Dig data and EDA data. We fed this data through leading sales consultants patented territory optimization model, while using judgment in the final analysis based on customer relationships. We believe we have the optimal number of sales team members, including territory managers, strategic account managers, regional sales managers, vice presidents and senior vice presidents to drive growth in the long term. We'll add people as needed on a pay-as-you-go basis. Globally RBA, as a combined company, will have 403 sales personnel with 10 TM current vacancies, all of them in the U.S. Our optimization effort yielded 53 -- sorry, 43 positions, which were a reduction in force and resulted in synergies, although IronPlanet did lose some TMs during the DOJ review process, as did from Ritchie Bros'. People due to uncertainty, we feel quite good about the composition of the combined sales force in terms of the ratio of RB to IP sales team members. In the regional field organization, we have significantly more RB legacy sales team members compared to IP, given RB's historic strength with end users. However, in the strategic account groups, we have an equal ratio of RB to IP, reflecting IP's strength in strategic accounts, especially the rental business. Also, we have started the CAT alliance team with most legacy IP team members given their relationships with CAT dealers. We have a great sales team in place globally and we'll work hard to fill the 10 vacancies in the U.S. and stabilize the sales force to reduce ongoing turnover. We established 3 guiding principles for our integration. Our guiding principles are: First, focus on the customer; second, perform while we transform; and third, leverage our talent and technology. The customer has been our anchor in both companies. We both share an obsessive passion for serving our customers, and it is the tie that binds both of us. Everything we do in our key integration work frames will be challenged by me with this simple question: What does it do for our customers? The promise is that if we make it easier, simpler and more effective for our customers, we can truly become their one-stop shop, which will ultimately drive strong revenue growth. We have to perform while we transform. Integration cannot be in a vacuum. While we build for the short-term, we need to continuously improve our near-term performance. We now have great talent with complementary skill sets in the entire company. We are brand marketers, digital marketers. We'll address dealmakers and sales outreach to buyers in the daily marketplace. We have great yard managers on the sites and experienced equipment inspectors from IronPlanet. We have experts in machine learning and business intelligence data scientists. We will work hard to leverage all of our great talent in the company to create meaningful customer insights and analytics, drive innovation and accelerate growth. We'll focus our integration work on the sales force, technology, operations, finance and create a cohesive culture. We've laid our key integration milestones by quarter and H1 2018 to hold ourselves accountable. These milestones and initiatives have been developed to ensure strong foundation for the combined company to drive us in the long -- to drive growth in the long term. Post-close, we are focused on sales hub, which is the front-facing aspect of our salesforce.com used by our RB TMs to not only look at their business, but transact. Soon this will be rolled out for legacy IP TMs as well. We have created very specific dashboards by TM, by RSM, by VP to delineate their pipeline. How much of their pipeline is coming from acquisition customers versus loyalty? What their top 50 opportunity accounts are in their territory, et cetera. We've also incorporated IP history and the IP pricing tool into this dashboard. This is the most advanced sales dashboard either companies ever had and very focused on driving revenue growth and improving sales productivity. Another milestone is the first phase of solution-selling training focused on 3 product solutions as well as educating sales people from both sides on each of those products has already been completed. We've also created a buddy system between RB and IP reps to help each other out. Essentially, sales integration has been completed in the U.S., Canada and Europe and our sales teams are off to the races. Another milestone for illustration is integrating RBFS into IP in the third quarter of 2017. We'll expand the addressable market for RBFS and this is a great way of growing incremental revenues. An example of an important business milestone in the first half of '18 is getting ready to have one mega Orlando auction for the combined company in February 2018 versus individual auctions of RB and IP. A lot of preparation goes into driving this auction. The planning for which needs to be mostly completed in the second half of '17. We hope this milestone chart gives you a favorable view that management has been thoughtful in identifying key priorities and it's highly focused now on execution. We'll provide you quarterly updates on our progress against key milestones. I'm excited by our early wins. A lot has happened in 60 days. And our unified sales teams are focused on selling our 3 product offerings either in tandem or individually based on how to find customer needs. Let me illustrate and give you 3 examples. Globally, legacy RB TMs have already generated about $90 million, that's right $90 million in GAP pipeline to IronPlanet, since the sales teams were unified just in the last 30 to 45 days, approximately 40% of these deals have closed, have been -- and have been listed in IronPlanet's daily marketplace for weekly auctions. About half of this growth volume came from new customers, a quarter from existing loyalty RB customers and another quarter from IP loyalty customers, which says to existing customers cross-selling is working. Another example, a first-time transportation seller consigned a multimillion dollar truck and trailer package for the combined company. The consignor felt good about our multiple channels. Our legacy IP dealer customer who had also done business with RBA in the past, gave us a large multimillion dollar rental package. He felt comfortable about maximizing the value of his portfolio since he could put different assets in each of our 3 product offerings, i.e., that is across RBA, Daily Marketplace and weekly auctions. We're excited that GovPlanet is the only player in heavy equipment that was awarded a GSA contract a few weeks ago. This will enable GovPlanet to contract with any federal agency covered by GSA, for example, the DOD, FEMA, Department of Interior, the Department of Energy. GovPlanet is a great vehicle in the long term and, by the way, a very profitable business. And finally, we're off to a great start with CAT corporate and CAT dealers. Our relationship at RB has never been better with the CAT family, and we're excited to work with RB. We've completed the Ritchie Bros. data pipe to CAT ahead of schedule, and we've started getting buyer consents at our auctions. We've successfully piloted Telematics and plan to start the rollout site by site. While CAT dealers are currently supply-constrained, we're confident that over time we'll start receiving their rental network volume and the used equipment. CAT continues to have the highest volume of any brand that we sell at the combined company. Let me conclude with 5 critical priorities for the second half of '17, which will also spill over into '18. We're laser focused on driving revenues and laying the foundation to accelerate growth in 2018. This will come through a strong effort by our sales teams to cross sell the 3 core offerings to existing customers, to acquire new customers and bring them into the platform. A key focus is to increase strategic account penetration in key verticals. We'll proactively grow our CAT strategic alliance and play a sticky long-term relationship. We're in the process of establishing dealer councils in both North America and Europe and internationally to work on initiatives that create mutual benefit. We're excited about the IP opportunity internationally. We're leveraging IP's platform in Europe with strategic accounts, while utilizing RB's infrastructure relationships. Our initial focus is in Southern Europe, where we are both present. We're also launching IronPlanet into Australia. Australia is our third largest individual country, and we have a very strong brand franchise. IP used to be in this market many years ago. We believe the IP launch will allow us not only to increase our share of wallet with existing customers, but get us a new type of customer. Finally, we're marching forward with great commitment to realize cost synergies. We're confident of delivering run-rate synergies of $10 million by the end of '17 and $20 million by the end of '18. Synergies will come from reduced headcount, headcount eliminating duplicate management roles and operational and sales synergies. We'll provide more robust detail on synergies over the next few calls. Finally, our overarching priority remains to continue integration efforts, especially technology. Before turning to questions, let me say that this marriage was a marriage made in heaven. And I'm not saying that just because I come from India and believe in arranged marriages. Although we are suffering from macro headwinds right now, it will become abundantly clear both in the medium-term and long-term that we have a winning combination to add significant shareholder value. And with that, we'd like to open the call to questions from analysts and institutional investors. [Operator Instructions] Operator, would you please open the line for questions.

[Operator Instructions] Your first question comes from the line of Michael Feniger with Bank of America Merrill Lynch.

You provided a lot of color on the second half of 2017. I was hoping can you discuss the SG&A line. SG&A was up 1%, including IronPlanet. And excluding IronPlanet, it was down 7% with some mark-to-market adjustments in lower advertising. Can you just give us a frame of what the appropriate run rate for SG&A in the second half of this year for core Ritchie Bros. and the combined entity?

Sharon?

Yes, sure. So Michael, so that definitely is a lower number due to the elimination of the share-based comp move. So I would just take that number and add back the 4.5 share-based comp to get to what would be a run rate incremental growth year-on-year.

And your next question comes from the line of Cherilyn Radbourne with TD Securities.

I think you've done a really good job of outlining the strategic benefits of the transaction in your integration plan. So most of my questions are financial in nature. Just wanted to ask about the acquisition-related costs that are identified on the income statement about $23 million in this quarter, of which, I believe, $7 million or $8 million were not added back in computing adjusted EPS. Could you just elaborate on what that $7 million to $8 million represents? And how it relates to the $5 million of acquisition-related costs that you spoke about in the second half of the year?

Sure. So Cherilyn, the acquisition costs that we're unable to adjust out relate to kind of ongoing fees that we have related to external partnerships that assisted us with the transaction as well as legal and professional services from accounting firms, et cetera. And so those we do expect to continue. There's also -- I think, if you look in the financial statements, you'll see there is a portion of it that relates to kind of the ongoing deferred retention payments related to other acquisitions that we've done previously, Mascus, Xcira, et cetera.

So how much of that $7 million to $8 million per quarter would you expect to still be in your numbers in 2018 as an example?

It will continue to decline. So the estimate of $5 million for the back half. Certainly, what you'll see is still some continued professional service numbers in there. Those should eliminate. So we're not looking to guide on this. But I think I would be looking at it about a 50% of that would carry over into 2018.

And then just last one from me is do you have an estimate of IronPlanet's adjusted EBITDA for 2016? I know for a while, you are presenting $19 million for the 12 months ended September 30, 2016?

So I think, you will find that in the 8-K/A that was also released today. So we did the update on the performance. I think it's just -- I think it's still around $19 million or so...

Pretty close to that, yes.

Yes.

And your next question comes from the line of Larry De Maria with William Blair.

And thanks for the color on the IP integration plan. I just wanted to see if you can provide some more color on your thoughts around Cat Auction Services? And how engaged they are? And how open they are to accepting the kind of the offer you talked to them about by giving them data with the first and second the buyer and the runner up? And how are you thinking about that channel in the near-term and then longer-term?

Sure. Thanks, Larry. I'll take a quick shot at it and see if needed we can add some more color. But I think -- so first and foremost, this is with CAT alliance. It is really about -- that we would -- IronPlanet was already doing it. And now they'll get RB as well. So combined, they'll be getting a lot more data of buyers and runner ups. And I referred to building the technology pipe to them that Marianne and her team have already just completed. We're now in the process of getting dealer agreements, because we're -- for the combined company, we now have -- we're going to do individual dealer agreements both in North America and internationally to bring into the fold in order for them to receive the data. And the data is very important to them, because it really helps them with parts and service. And for that, we're going to get a significant majority of anything that they send to the auctions or marketplaces. And just by the fact that we have been able to -- I think, we had a -- on the slide, you saw that we've already got traction on getting several dealers signed up. We're also making calls on many more, both internationally and in North America. I think that this is going to be very positive and CAT corporate -- CAT family on that is very supportive. And other than temporarily, we've seen these headwinds, because they're using up a lot of their fleet on rentals. In fact, some CAT dealers have had to go buy equipment just to put it into their fleets. I think that's a temporary phenomenon. Long-term, it's going to be a terrific alliance.

That's helpful. So in other words, we don't think that we're using IP mostly because of their financial incentive of being equity owners in it. And you can -- do you feel like you can convert all or most of them? And is there a big push from Caterpillar corporate? Or are they providing a stake or incentive as well?

Can you repeat the last comment you made, just Caterpillar providing what, sorry?

Either a stake or an incentive for them to use it.

Okay. Got it, got it, got it. Yes. Thank you. I'll -- Sharon can mention a little bit about the CAT incentives. But overall comment, yes, there were couple of dealers that were probably attracted to it. But for the most part, really this was for them. CAT is becoming very increasingly digital company and interest in the Internet of Things. And so this was a way for them to ally. And what they saw attractive was Ritchie Bros. sells a lot of CAT equipment. And -- so with the combined, they're going to get a lot of rich data. That's really the driving force of this. And it really helps the dealers, because parts and services are very profitable. The second thing is CAT corporate is -- the dealers are independent, but CAT corporate is very committed to this relationship. And so we're having very, very good top-to-top dialogue. And it's a really good enduring partnership. So I'm just very excited. Sharon, do you want to mention on the accounting treatment on the incentives?

Yes. So certainly, Larry, just to put a little frame around the CAT equity incentives that you see in the IronPlanet financial statements in 2016. These are a product of the noncash acquisition of Cat Auction Services that happened when IronPlanet purchased that business. If they had only extended that incentive program to the owners of Cat Auction Services, that amount would have shown up as an earnout allocation in the purchase price, and so would have been completely on the balance sheet. But because the team extended it to beyond the existing owners of Cat Auction Services, therefore the treatment that it did in the financial statements and its value was significantly increased due to what would have been an unanticipated increase in the value of IronPlanet shares after we placed our price through our offer that we did in August of last year.

And your next question comes from the line of Ben Cherniavsky with Raymond James.

As you know, I've been quite interested in the conversion, Ravi, as you put it of a transactional sales force into a solution sales force. And I'm just wondering if you can elaborate on the kind of training and tools that are required to make that transformation. A lot of you guys have been with Ritchie Bros. for many, many years, and they're used to the transactional model. I'm not sure how IronPlanet would have described their sales force. But I imagine it was also quite transactional. So what -- how do you convert a sales force from one kind of philosophy to another? And what you've done in the incentives to align them accordingly?

Great, Ben. I'm going to have 2 people take a shot at it from different perspectives. Let's start with Frank Roth, who is Head of our Sales Effectiveness, and who's built a lot of the tools and worked with HR on the training. And then I'll have Jeff Jeter, President of Sales, give you a sense in the U.S. And then I might end with Brian Glenn just to -- who has been a veteran army person. And he and his team have really embraced us. So we'll take. So Frank, you want to kick it off?

So it's exciting for our trusted advisers as they're starting with the customer needs, because they have all the solution. And in the past, we may have approached it with a singular solution. So what you have to do is say in a simple force, what are the needs of the client, are the assets remote or are they on site? So those are the types of thing that drive the behavior of the rep. And then what we did was we created what we call multi-channel ticker to look -- it incents the reps to make sure they're engaging and presenting all of the offerings to the customer.

Great. Jeff, as you had to drive this through the field?

Yes. Hi, Ben, Jeff Jeter. I think the other thing that is clear that we have to do is to drive this from the tops down, right? So myself, my direct reports, the regional sales managers, we as the combined sales management team have to embrace this. We clearly have to walk the talk on being this trusted adviser selling a solution. I'm quite comfortable with the tools that we have in place, the training that we've had thus far, the upcoming training that we'll continue to have, a tweak to our compensation plan for this multi-channel ticker as Frank referred to. I think, we've got all the pieces in place. So I'm very comfortable about that. And we've got to go drive it. We've got to drive it as a management team. We've got to enforce that down into the sales organization. And I think, as Ravi illustrated a few minutes ago just from really the last 45 to 60 days, the amount of pipeline of opportunities that legacy RB reps have put over into an IronPlanet marketplace. I think, it's phenomenal. About $90 million worth of pipeline, $40 million of that is closed business. And I really think if you look at that sales organization today, they clearly, clearly understand better that the customer has different needs, and you have to bring to market different solutions to meet those needs.

Brian, you've been at this quite some time. And you run one of the -- now most successful sales organizations in Ritchie Bros. Give us your take and how your teams are responding?

Ben, thanks for the question. When you look across Canada, we've got approximately 70 front-facing territory managers customer representatives. A great number of them literally have not -- probably have 5 years under their belt with Ritchie Bros. They're a younger group. They embrace technology. They're tech savvy, so to speak. And over the last 3 years, we as a leadership group have pushed the embracing of EquipmentOne and certainly getting comfortable with online technology in that marketplace to enable us to ensure the transition of the future that's happening literally today was more seamless. And our teams have gone through rounds of training and obviously have embraced it, and they're excited about it. And you mix that with a bit of the gray hair that you referenced there across the country here in Canada and certainly each is a complement. And obviously, that's just going to lead to greater things for our customers and certainly greater days ahead for Ritchie Bros.

Let me just -- thanks, Brian. Let me just add one thing. When we kind of paid -- Ritchie Bros. paid us dues with EquipmentOne. Unfortunate but the [indiscernible] rejection, all that, that I talked about, that's way behind us. The fact that our E1 this year ironic that it is after the impairment has really accelerated, and we're seeing tremendous growth that Sharon mentioned. So -- and it was -- when we were fusing IronPlanet, Daily Marketplace, and E1, we're taking 2 successful offerings. So I think those days of kind of the old Ritchie Bros. paradigm, where there was only one -- they were one trick pony are long gone. And we have the tools. We have the technologies. We have the people. And now it's just -- and the fact in 30 days or so, $90 million from RB legacy TMs, I think it's incredible.

Yes, Ravi, I didn't want to misrepresent my question. I wasn't suggesting that there were still a lot of people who weren't behind the platform, who didn't embrace what you are trying to do. I'm wondering if there are some of them who find it hard to do, because it involves a change in what the tools they've used, the method that they relied on to make deals in the past, the approach they've taken. All of those sorts of things and how you've taken them through that transition saying I want to do this but show me how?

Yes, I didn't say -- actually, it's a great question, Ben, because it really reflects our heritage and what's happened in the evolution of Ritchie Bros. So I actually appreciate your question. And I think, yes, there's going to be some veterans. For instance, this is even before IP using salesforce.com to sales hub, which is very analytical. That is tougher. But I think they're -- we're trying to make it as simple as possible, and we're using younger territory, the TSSs and sales operations from IP to help our people with this.

And your next question comes from the line of Maxim Sytchev with National Bank Financial.

I just had more of a macro question, Ravi, if you don't mind sharing your thought process in relation to -- I mean, obviously, the comps in terms of available equipment has -- had been tough. And I'm just wondering internally what you guys monitoring to sort of see that inflection point when -- again, the equipment supply will normalize and obviously your platform with IP is going to be able to benefit from that?

I think, Maxim, what we're -- clearly, it's not an issue of -- right now, especially in the U.S., the macroeconomy is booming, right? In fact, it's booming so much. That's why we're not -- it's a very kind of interesting paradigm, because normally it will be the other way around. So the bigger issue for us is we're looking at new equipment production. We're trying to stay close to the OEMs to see, are they ramping up? We're looking at different categories of equipment to see where are the shortages? And -- so on one hand that gives us a sense. The other thing is just being in the field in the marketplace and making sure that we're finding every opportunity. The fact that in this quarter, our consignors were up 11%. It's showing that our people are executing. They're trying to find every customer out there. So as soon as it loosens up, we will be the beneficiaries. So Jeff, is there something do you want to add to that?

Yes, Maxim. I'm in the market every week, whether it's end users or dealers or OEMs. And the challenge right now, as I kind of look out and try to think, okay, when does this loosen up and when does this ease up and when do we start seeing kind of turnover. That's where it gets a little murky. And if you go back to late last year and the beginning of this year, things turn pretty quick in the positive sense for people in construction and work. OEM lead times went out. And as I talk to our customers in the market today, business is good. Backlog is good. Utilizations are high. OEM lead times are out. So they'll have a hard time getting new equipment, therefore it's hard to turnover equipment. So it's tough. The good news is there's -- if you look at our combined business, there's net new customers that we -- neither Ritchie Bros. or IronPlanet has traditionally done business with. So we need to mobilize and go drive new business from those customers. There are sectors like transportation and ag and some other sectors that we can go after and gain more share of wallet. So we're certainly not letting this supply issue become a self-fulfilling prophecy, but the fact is construction is robust. We've got to go work hard to find corners to find supply and see what it looks like and how it turns in 2018.

The other thing we look at, Maxim, is really other things are appraisals and which Doug Olive and his group do and find on at-risk deals that has -- we're seeing that significantly lower than last year full disbursals, which is what we're known for at legacy RB. That is sort of is at half last year, because we're pushing at risk. But it's just an environment where with pricing being so high, people actually don't want to do underwritten because they think we will get most of the rewards. So we look at the number of factors, but the most important thing is just being with customers and all the time. And all our people are constantly with them, Sharon and I, and Todd just had dinner with some of our most important customers who were visiting us on Friday. And I talked to them a lot about the supply situation. So its constantly getting feedback and that's what helps us. The key is that our salespeople are constantly hunting. So when it turns, we'll be the beneficiaries.

Right. And just maybe 1 quick follow-up. In terms of the CapEx intensity, right now, obviously, you are below your sort of evergreen 10%. But especially, as you launch in Australia in the back half of this year, should we expect the CapEx versus revenue to start to climb to that 10%? Or is it going to be more gradual in terms of scope?

So Maxim, I'll take that. So post close of the transition, we did change our max target to 8.5% of revenue. So we will get a little closer to that depending on the speed at which we deploy our capital related to the integration. The piece I would point out relative to Australia, that is predominantly an English country, so the actual technology to be able to convert that is less onerous than expanding into other types of markets where you have different compliance or language concerns.

I'd like Marianne to maybe do a quick comment. Marianne Marck is our Head of Technology for the entire company. Marianne, just talk a bit about the affordability of the IronPlanet offering for launch into other places.

Sure. Thanks. Maxime, IronPlanet has previously expanded into Australia, but has pulled back. So they have done a lot of the work already required in order to able to operate in the country. And so with our presence there in the country, it really gives them a great way to -- for all of us to just to be able to bootstrap launching them in bigger way there. So also, IronPlanet, it's really operating all their business in the unified online platform. And so because everybody follows unified process, it does make it easier to expand into other areas because you're going to be operating with that same model and using that same tool set elsewhere.

I have one final comment. The cost usually when you enter a new country, especially online is really the less ability to market and bring in buyers and sellers. And we've had a long history there. And we are very, very strong brand. And with a highly developed sales force, we have a digital marketer there. So I think, that's why this was kind of Karl decided to take the decision to do it early on.

And your next question comes from the line of Scott Fromson with CIBC.

Just a quick question. Most of my questions have been answered. Just wondering on the U.S. infrastructure build, I wondered if you've had any thoughts from customer conversations on timing, on what they're going to be needing in terms of their equipment fleet? So just what they're thinking? And how it's going to impact your business?

Jeff, do you want to give us...

So Scott -- yes. Sure, Ravi. Scott, is your question just what their demand requirements are going to be from a fleet perspective, is that...

Yes, what their demand requirements are going to be from a fleet perspective and timing, particularly given what looks like a fairly delayed implementation of Trump's plan?

Well, again, as I am in the market, demand from end users is fairly strong across the board for general and core construction equipment. And that is one of the reasons why you don't see any turnover supply. That's one of the reasons you see very high utilization at the national rental companies as well as the dealers, because of this very strong demand of core construction really across the board and the end users across the U.S. And I'm traveling weekly to all regions and talking with customers. So right now, we're in a supply constrained business with high demand. And core construction equipment is what is in high demand as it is evidenced, if you look at again the -- read the reports from the OEMs and the national rental companies. It's really across the board in that core construction area. I would continue to see that throughout the balance of this year and the next year.

And Scott, I think the issue really is this is -- there may have been confidence from the economy and maybe the election and so on. But mostly, what you're seeing is local- and state-driven. For instance, in the past, I mentioned the gas tax in Georgia, that's prepared which was all supposed to be for infrastructure. There is various ways that states are driving. So you're seeing a lot of projects. And so this is kind of independent of the $1 trillion plan. So we just have to wait and see about that. But right now, I think there's enough demand in the marketplace. And you're seeing that in the OEM reports. Now the thing is as they ramp up and get their production, because it's in their best interest do it. It'll loosen the supply, which will start coming to us.

And we'll take one last question. Okay. It looks like we've answered all the questions. So thank you very much, and onwards and upwards.

And this concludes today's conference call. You may now disconnect.