RB Global, Inc. (RBA) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ritchie Bros. Auctioneers Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session [Operator Instructions] Thank you. I will now turn the call over to Mr. Zaheed Mawani of Investor Relations to open the conference call. Mr. Mawani, you may begin your conference.

Thank you, Julie. Good morning, and thank you for joining us on today to discuss our fourth quarter and full year 2017 results. I am 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 and other members of the management joining them 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, or other items are considered forward-looking and involve 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 Web sites, as well as our Investor Relations Web site. Our definition of gross transaction value may differ from those used by other participants in our industry. It’s not a measure of financial performance, liquidity or revenue, and is not presented in our statement of operations. Our fourth quarter and full year results were made available yesterday evening after market closed. We encourage you to review our earnings release and Form 10-K, which includes our MD&A and financial statements which are available on our Web site 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-K. Presentation slides accompany our commentary today. These slides can be viewed through the live or recorded webcast or downloaded from our Web site. 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 in using full unrounded figures. I’ll now turn the call over to Ravi Saligram, our Chief Executive Officer. Ravi?

Thank you, Zaheed. Good morning, everyone. And thank you for joining our fourth quarter earnings call. In recognition of closing our 2017, I’ll share my thoughts from the year. And then pass it on to Sharon to discuss the fourth quarter financial and operating results in more detail. I am encouraged by our fourth quarter results, which reflect the strengthening execution of our combined team. I am especially pleased we grew revenue both on a reported and like-for-like basis despite continuing softness in equipment supply. Of course, we have work to do as we aspire for more but the heavy lift can integrating is largely behind us, and we are now focused on execution, serving our customers and working hard every day to stay ahead of our competitors. 16 months after the announcement of IP acquisition and eight months after closing, I remain as excited if not more of this transformative acquisition. We have reshaped our future and are becoming a true multichannel asset management and disposition company. With a unique deal offering a variety of channel and format choices to both buyers and sellers and have significantly increased our global reach. Every day our teams are discovering new ways of working together to leverage best practices, strengthen innovations. And last week’s Orlando option demonstrated the power of that combination. The network effect is beginning to take hold. Operationally, 2017 was both a progressive yet very challenging year. No one fully predicted the surge in local and state level infrastructure projects post the presidential election in the U.S. We saw dramatic increase in construction work, pipeline projects and record high equipment utilization rates, especially in the U.S. At the same time, OEMs were not able to ramp production on new equipment to respond to the markets’ needs resulting in unprecedented supply shortage with heavy equipment. In the face of these significant macro headwinds, we reported full year GTV of $4.5 billion. Our revenue of $611 million was up 8% from 2016 with the additional IronPlanet on a reported basis and down 2% on a combined like-for-like, company like-for-like basis. In fourth quarter on a pro forma basis, we were up 3.6% like-for-like. Our full year financial results are a reflection of the unprecedented shortage of equipment supply, softness in Alberta's oil patch and uncertainty caused by significant delay in regulatory approvals that led to higher than normal salesforce turnover, especially in the U.S. We did, however, made substantial progress last year on many fronts. Let me mention a few. We delivered $112 million in operating cash flow before returning $73 million to shareholders through dividends. Our international business returned solid growth, delivering 13% revenue growth and expanding to represent 19% of our total auction and market places revenue. [Audio Gap] foster through our CAT Alliance with over 75 moral agreements signed with CAT dealers, including 50 North American contracts and 25 internationally. We have made tremendous progress and strong in Telematics and providing data to CAT. Our volume through CAT dealers also slightly improved in the fourth quarter. We’ve made significant advancement on technology and digital product management and marketing. Marketplace E is our fastest growing brand across all geographies. We executed to deliver and exceeded our stated synergy targets for 2017, and we have successfully completed our stated integration milestones. For these accomplishments and the countless others during the year, I would like to thank our team express my great gratitude for their tremendous efforts and tireless dedication this year. With that, let me pass it onto to Sharon.

Thank you, Ravi and good morning everyone. Turning to our consolidated fourth quarter results. Our GTV increased 24% to $1.3 billion, our highest quarterly GTV ever recorded. The increase in GTV was primarily driven by acquisition along with notable strong live auction comps in Dallas/Fort Worth, our Chehalis site and solid performance in Spain. Additionally, our GTV sold through online channels, including our weekly featured auction and marketplace E, increased over 400% during Q4. Our consolidated revenues increased 22% on a reported basis versus the prior year. This increase was primarily due to the acquisition, revenue growth in Europe and solid revenue performance from other value-added services, including RBFS and Mascus. On a pro forma basis, our fourth quarter combined company revenues increased 3.6% versus last year. Consolidated revenue rate declined 30 basis points to 13.81% versus the same period last year. However, this decrease in rate was due to cycling over the strong performance of the Canadian private treaty inventory dispersals in the fourth quarter 2016, which impacted both revenue dollars and revenue rate. Excluding the impact of those dispersals that were lapped in 2016, we generated positive revenue rate growth in the fourth quarter of 2017. Our reported operating income declined modestly to $40 million versus $40.6 million in the fourth quarter of 2016. This decline is primarily due to our higher base of costs of services, SG&A and depreciation and amortization, all driven by the acquisition, partially offset by increases in our revenue. Our operating income also included the impact of certain one-time severance and restructuring costs recorded in the fourth quarter. Excluding these cost on an adjusted basis, our operating income increased $1.6 million. Net income for the quarter increased $8.9 million or 32% in the fourth quarter versus last year. The improvement included the positive impact of $10.1 million attributable to the revaluation of our net tax liability position, resulting from the recently passed U.S. tax reform, reducing the estimated federal U.S. tax rate from 35% to 21%. Net income for the quarter was negatively impacted by higher interest costs incurred during the quarter due to the increase in long-term debt required to complete the acquisition of IronPlanet. All-in, we delivered diluted EPS attributable to shareholders of $0.34 for the quarter compared to diluted earnings per share of $0.26 in the fourth quarter 2016. On an adjusted EPS basis, excluding the severance and restructuring costs and the favorable impact of the one-time tax revaluation, we delivered adjusted EPS of $0.26 for the quarter compared to $0.30 for the fourth quarter of '16, which excluded the debt extinguishment costs incurred last year. For the full year 2017, our consolidated GTV increased 3% to $4.5 billion, also our highest annual GTV. The increase in GTV was primarily driven by volume from the acquisition, but was offset by a number of factors. First and foremost, the unprecedent short supply of used equipment resulting from the strong infrastructure demand environment, principally in the U.S. This supply demand imbalance resulted in strong price realization for consignors, which reduced their desire for underwritten contracts in 2017 with overall average volume in 2017 dropping year-over-year from 25% to 16% of GTV. Secondly, we cycled a number of significant events in '16, amounting to over $100 million in GTV headwinds. Namely we left the significant Western Canada Oil and Gas sectors dispersals, including our largest ever auction in Grand Prairie in Q1 2016 and the Columbus U.S. option in 3Q in 2016. Our consolidated revenues increased $44.1 million or 8% on a reported basis versus the prior year. This increase was primarily due to the acquisition and increases in revenue from other value-added services, including RBFS and Mascus. However, on a pro forma basis, our combined company revenues declined 2% versus last year, driven by the factors impacting our GTV as I have discussed earlier. Our consolidated revenue rate was a real bright spot for us this year with our rate improving 59 basis points to 13.66% versus the same period last year. This increase in rate benefited from the strong pricing environment together with the accretive business components such as our ironclad assurance program, our government business and growth in our other value-added services. Our operating income decreased $28.2 million compared to $135.7 million in 2016 on a reported basis and decreased $30.2 million on an adjusted basis. This decrease in operating income is primarily due to higher operating expenses and amortization in ’17 as a result of the acquisition as well as higher acquisition cost in 2017. Net income for the year of $75.3 million was $16.8 million lower than ’16 as a result of lower operating income, higher interest cost, offset by the lower effective tax rate, including the U.S. tax reform net tax liability valuation benefit. We delivered diluted EPS attributable to shareholders for the year of $0.69 compared to diluted earnings per share of $0.85 in 2016 and adjusted EPS of $0.81 for the year compared to $1.15 for the prior year. Before I move on, I’d like to close out our dialogue regarding the financial assumptions and supplementary context we provided on our second quarter call. I do not intend to go into detail regarding all of those assumptions today, but on this call. But overall, I’m pleased to say our actual performance for each of the components were within the respective region we communicated with the exception of our tax rate. Our full year effective tax rate came in at 2.7%, significantly lower than our estimates. This was driven primarily by the one-time valuation impact of U.S. tax reform on our net tax liability position in this quarter, but also by better than expected realization of our previously identified tax synergies, resulting from the IP acquisition and refined estimates for tax deductibility of stock option compensation expenses and acquisition related cost during the second half of 2017. Getting into our segment performance, fourth quarter options and marketplace GTV was up 24% versus the prior year on a reported basis, driven by the acquisition volume. Our 12 months trailing GTV surpassed our previous peak experienced in Q3 of 2016 during the hike of the oil and gas dislocation. Turning to segment revenue. Overall, options and marketplaces revenue increased 20% on a reported basis to $163.7 million in the fourth quarter versus last year. This increase was primarily due to the acquisition and improved U.S. sales team execution, which drove U.S. revenue growth to 51% in the quarter. We continue to see strong international performance with revenue growth of 24%, driven by robust live option volumes in Europe and Australia. Total revenue performance was partially offset by an 18% revenue decline in Canada due to the significant Canadian private treaty deal transacted in the fourth quarter of 2016. Lapping this large private treaty transaction also reduced our options and marketplaces segment revenue by 49 basis points to 12.64% in the fourth quarter of ’17 from 13.13% last year. Turning now to other services category. Our RBFS business, which has now financed over $1 billion in equipment since inception, is now being offered to customers in our weekly IronPlanet options. And continues to be a solid revenue growth driver. Fourth quarter revenues were $4.6 million, up 19% versus the prior year with funded volumes up 29%. Our Mascus revenues also generated solid revenue growth in the quarter of 40% to $3 million, driven primarily by listings growth and an increase in subscription. Turning to consolidated operating expenses. On a reported basis, total operating cost increased 31% with cost of services up 54% to $25 million with reported SG&A of 25% to $92 million in the quarter. These increases are driven by the addition of IronPlanet operating expenses. On a like-for-like basis, however, our operating expenses were essentially flat in the quarter, driven by operating leverage from our improved revenue performance, along with synergy realization in the quarter and disciplined cost management. With Q4, now our second full quarter with combined company cost structure, we are starting to demonstrate the operating margin leverage that comes with revenue growth. Looking at our expenses on a sequential. Our cost of services Q4 over Q3 came in roughly flat on a rate basis, which is a function of those costs in more variable and moving with auction volumes as expenses such as inspection services that are higher when auction volumes are growing. However, our SG&A expense rate sequentially declined significantly in the fourth quarter to 52% of revenue versus 61% of revenue in the third quarter of 2017. This sequential rate improvement was driven by our improved top-line performance and demonstrates our ability to deliver improved fixed cost leverage and flow through characteristics of our model. As an additional proof point of flow through leverage, Q4 2017 adjusted EBITDA margins rose to 33%, up from 23% in Q3, driving full year 2017 adjusted EBITDA margins to 31.4%. Turning to our balance and liquidity metrics. Our operating free cash flow of $111.9 million declined year-over-year by 24% due to lower earnings, including the impact from the supply challenges, additional acquisition-related costs and increased interest expenses incurred related to the acquisition. Despite these factors, we generated operating free cash flow of 128% of adjusted net income and we are extremely pleased with our ability to generate strong free cash flow from the business, which is a testament to the strength of our operating model and our disciplined cash management during the year. CapEx of 5.6% of revenue for the year was well below our Evergreen Model maximum of 8.5% of revenue. But did increased from prior year as we invested in technology to integrate the companies and leverage the IronPlanet digital capabilities into our live auctions as demonstrated during our recent Orlando sale. Long term debt as at December 31, 2017 is at $813 million with a weighted average annual interest rate of 4.8%. This increased level of debt has taken our adjusted net debt to adjusted EBITDA ratio to 2.9 times. Although, we are over our desired level, we continue to be focused on debt repayment as a priority for capital allocation to reduce this metric to below 2.5 times adjusted net debt to adjusted EBITDA as quickly as possible. Our financial focus for 2018 will be on delivering synergies, realizing benefits from the U.S. tax reform, optimizing our capital allocation and managing the impact of the new revenue recognition accounting standard. Turning to synergies. As Ravi mentioned, we are pleased to be on track and are staying focused to deliver $20 million of run rate synergies at the end of fiscal 2018. As at the end of 2017, we have exceeded our 2017 synergy expectations, completing initiatives that are generating $14 million of run rate synergies. In terms of the U.S. tax reform, the impact of the lower federal tax rate from 35% to 21% has already resulted in a positive impact to earnings in ‘17 with the revaluation of our net tax liability position. Although, this does lower the NOL value of the tax assets acquired with the IronPlanet acquisition, this impact has been included in the $10 million revaluation benefit booked in Q4 of '17. We will still generate a cash tax benefit as these losses are utilized overtime. In light of the significant U.S. changes, we will be reviewing our current tax structures and strategies, such as transfer pricing agreements and internal financing arrangements. But believe that these reforms will be positive to our long-term earnings as we continue to grow our U.S. based operations and add to our already identified tax synergies, resulting from the acquisition. For modeling purposes, we would suggest a current tax rate for 2018 to be between 20% to 23% based on current U.S. Canada and International tax regulations, but may expect some quarterly volatility as regulations become clearer over the next two quarters. In terms of our capital allocation, we expect to continue prioritizing dividends and are focused on debt reduction as we look to get our ratio of net adjusted debt to adjusted EBITDA to 2.5 times or lower over the short-term. Also, as we mentioned last quarter, we will be adopting the new revenue recognition accounting pronouncement, also known as topic 606 beginning in the first quarter of 2018. We encourage you to review the remarks from our last earnings call and the additional disclosures we have provided in our third quarter 10-Q, as well as our 10-K to assist your understanding of the impact. I do want to reiterate and be very clear, adoption of topic 606 does not change how we fundamentally operate or manage this business, nor does it have any impact on our operating profit, earnings, cash flow or our balance sheet. It is strictly a change in revenue presentation from net to growth as we discussed in detail on our third quarter call. We expect to keep you appraised on this issue as we progress through the quarter. Before I pass to Ravi, I would like to thank all of our team members across the company for their dedication and perseverance in 2017. It was a challenging year for one that has positioned us exceptionally well for the future. Ravi?

Thank you, Sharon. As we've shared over the past three quarters, we’ve laid our key integration milestones targeted for completion in the fourth quarter and for the first half of 2018. Overall, we continue to stay on track if not slightly ahead of our integration plan, as we’ve successfully completed the bulk of activities planned for the fourth quarter, as well as several of our milestones here marked for the first half of 2018. Let me briefly touch on a few of the critical initiatives in the first half of '18. We’re very excited to have won the non-rolling stock dealer contract in the U.S. This would be a large contract that we have started mobilizing across many DLA sites. It's a complex logistical project and our IronPlanet team has already gained momentum. We expect to be operational towards the end of first half. We're also well along on our journey to connect our channels to create an excellent customer experience. We now have IronPlanet listings on rboption.com and rblistings.ip.com. Customers search specifically for equipment and the wide variety of equipment on our Web site will continue to accelerate Web site traffic growth. Let me comment on the bio-feed, which we now refer to as transaction fees. At RBA, we have not changed this fee in the last five years despite significant investments in the customer experience. Importantly, given the IP acquisition, we felt it was important to harmonize our transaction fees across our core product and channel offerings to make customers, especially buyers agnostic of the channel. We're partially harmonizing the RBA fee structure to be closer in line with IT. This was implemented in mid-January and will positively impact revenues. A proof point of our combined company coming together and being laser focused on execution was our Orlando auction last week. Last year, we were competitors but this year the combined strength of Ritchie Bros and IronPlanet was a testament to the accretive power of the combination. It was a historic peak as our teams delivered a record-breaking $278 million in GTV, amounting to 24% like-for-like growth over last year for the combined company. We consider this to be barometer of both end use of demand as well as superb execution of our sales marketing and operations teams. Despite continued tightness of supply, our teams leverage existing customer relationships and penetrated new accounts with slightly more sellers than last year. But importantly, average loss per seller increased high double-digits that share of wallet. Registrants were up 30% with online registration of 45%. Importantly, many registrants came online through IP referrals. Average GTV per lot sold was also up high double-digits, a reflection of good mix and strong pricing. We also implemented several innovations, brining IPs technology to the live auctions. Specifically we created a virtual sales auction in value we sold hundreds of lots remotely by offering the IronClad Assurance and not moving the equipment to Orlando, but it was so live by an auctioneer using high quality pictures. For the first time, we sold our TAL lots remotely from our yard in Atlanta rather than using our valueable real estate in Orlando. Finally, not only did we do well in construction, which is a majority of the GTV, we saw strong performance on both location trucks and over the road trucks. It is good to see pricing rebounding on transportation. Ultimately, the success of Orlando was due to; first, excellent of execution of our team; second, Orlando is a mega auction and a magnet that is global in scope. Our teams send consignments to Orlando from different parts of the world. And consigners know you get great pricing in Orlando. Before moving on, I’d like to add the Surgeon General's warning that we need to be careful not to extrapolate Orlando’s results through the quarter or the year. Based on numerous conversations with customers, dealers and OEMs, the supply constraint are as tight as in 2017 and will persist through at least the first half of 2018. Supply is still short on excavators, re-loaders, dozers, aerial and is not perspective to any one OEM. Nevertheless, Orlando was great and as someone said no matter which way you slice it. We’re investing in technology as a differentiator and a key enabler of our business, and are advancing our capabilities by applying machine learning and advanced data analytics. Specifically, we have enhanced our search capabilities. Buyers now find it easier to locate inventory across all our Web site while sellers leverage both our rich data repository, as well as our platform solution tools to give them the insights tools and solutions to manage their assets in an informed efficient manner. We are focused on helping buyers find what they're looking for easily and quickly while providing access and visibility to the largest equipment inventory across all our brands and solutions. Our enhanced search capabilities now allow us to extend our reach to more customers in a channel agnostic manner. We also successfully combined the technologies and customer features of EquipmentOne and IP daily marketplace, both of which were growing throughout the year to launch Marketplace E in November. Marketplace E is our fastest growth channel and provides control to sellers and buyers through reserve price make offer and buy it now format. Platform Solutions is a true partnership play that OEMs and their dealers, rental companies and large strategic account customers. We allow customers to leverage our signs, scope and reach but allow them to have their own store fronts on our Umbrella IP Web site. Think of it, it’s a Web site within a Web site and allows them to control disposition channels, pricing et cetera. It allows us to become very sticky by connecting to customers ERP systems. As trusted advisors, we provide tools, data and insights to help our customers make real time asset disposition decisions and allow them to select appropriate channels based on their needs for specific asset classes. Our efforts in this area are embryonic, but gaining steady momentum. Both IP and RB had a few current each and we’re now working on scaling this offering. Finally, we’re looking to replace our legacy live option operation system that IP purpose and highly integrated and highly -- integrated simple to use technology. We will have one unified live and online options operations management technology platform by 2019. Of course, we’ll continue to use Xcira as our simulcast technology. The unified platform project is called Mars and will result in a better customer experience, reduce complexity while garnering us efficiencies. As a final word on innovation and technology, we’re now providing customers the ability to search, register and better our Ritchie Bros options are around the world on mobile devices. In the fourth quarter, approximately 7% of our online transactions were made using the mobile app. Mobile capability provide another opportunity to make our customer experiences easy and flexible so they can conduct business with Ritchie Bros, seven days a weeks, 24 hours a day. Now let’s shift to providing you our outlook for H1 of 2018. As you know, we do not provide guidance since it’s extremely difficult to forecast this business. However, we’re offering the following insights for your consideration as you model first quarter 2018. Supply continues to be very tight while demand continues to rise, expect shortages to last at least through the first half of 2018, rental and dealer utilization continues to be extremely high. In terms of our option comps, we’ll also not have 2018 Las Vegas option in the first quarter. You’ll recall we had ConExpo last year. The first quarter Dallas/Fort Worth sale is expected to come significantly lower, given major dispersals in the previous year, as well as the non-recurrence of private treaty deals in Canada and two large fleet deals in Edmonton in the first quarter from an auction calendar perspective, therefore, fewer options as a result of close sites in the first quarter. Now, let me talk about the tailwinds. Pricing strength continues to take hold. Transportation demand is picking up along with pricing, and this sector is seeing pure supply challenges. We also see the nudging up of oil prices has slightly positive and with mining also getting stronger. Our sales force is stabilizing and then learning curve on multichannel is improving. Finally, many of the January and February options today have had decent comps. Turning now to our Evergreen model update. We created our Evergreen model in 2015 and showed it to you in our investor conference to reflect our expectation of how we believe our business will grow on an average annual basis over five to seven year cycle, and recognize this is not meant to be annual guidance. On an average basis in the first two years notably 2015 and ’16 which we achieve all our targets with the exception of GTV. In 2017, we were challenged in delivering most of the metrics except for the three since it was both a transition year and where we were severely impacted by the supply shortage. We unveiled a new Evergreen Model when we announced the acquisition and subsequently shifted timing of achievement of ROIC and EBITDA margin targets by one year. Today, we are reiterating this model going forward in 2018 with 2017 reported numbers as the base. Note, given the forthcoming adoption of the new recognition standard, we need to restate certain targets on as a proxy for our old definition of revenues. We’ll have a fulsome discussion on the Evergreen Model some time later this year. Let me summarize our long-term objectives and strategies. Our three key strategic objectives are; first, to gain share of auction segment; second, penetrate the upstream segment. And upstream we refer to as the non-auction segment, the volume that comes through private sales, brokers, dealers, rental companies, et cetera, all the way to retail where rental companies, for instance, are selling to their own customers. And this whole non-auction segment, because the auction segment is about $25 billion, the non-auction segment is very large, over $300 billion globally. The third objective is to deliver magical customer experiences. So to deliver these objectives, we have five key strategic priorities. The first is to increase auction segment share by selling RBA Live and IP featured weekly auction in tandem, based on customer needs; sometimes event versus flow, sometimes both depending on the fleet. Second is to drive upstream penetration through Marketplace E, Platform Solutions, Private Treaty and Mascus. Third is to connect the channels to improve search, integrate listings, and provide single tying on for customers to enhance the experience. Fourth is to make technology a competitive advantage and touch all aspects of our business. And finally, pursue structural efficiencies by controlling costs, dispose off unused land, continue to rationalize inefficient sites if necessary, and step up to find the next level of synergies. In conclusion, we recognize we have a very challenging macro environment relating to supply constraints that are outside of our control. However, we are undaunted in the face of this challenge and we will concentrate on our efforts on what we can control. In essence, we’re coming out of our integration best together mode and are laser focused on driving growth through outstanding execution. Our new mantra for the combined company is simple; we are one, move, build and grow. Speaking of growth, we have over 10 growth drivers our teams will focus on. First, growing our share of wallet with loyal customers through selling multi-channel, thereby improving sale productivity. Our TMs and strategic accounts managers will aggressively pursue new account acquisition. We’ll pursue growth in construction, transportation and agriculture, while going after oil and gas and mining opportunistically. We will grow GovPlanet in the US and UK and this is a tremendous business. We believe international is now truly on the map of RBA and is a growth engine. We’re marrying IP’s formats with RBAs scale in Europe and Australia. We’re Ritchie Bros financial service on IP. Energy may become a sectorial opportunity if oil prices keep increasing and we have the very reputable crews in this business. Marketplace E and Platform Solutions will be our key reaches for upstream. And finally, the harmonized fee structure will generate incremental revenues and increase our revenue rate by up to 25 basis points. Consequently, we moved up the lower end of our A&M segment revenue rate the options to marketplace to segment revenue rate from 12% to 12.25%. Thus, the new range for A&M segment revenues is 12.25% to 13%. Hopefully, that about demonstrates that we are not sitting still and we’ll find new ways to grow. And with that, we'd like to open the call for questions from analysts and institutional investors. As with past calls, we ask that you please limit yourself to one question and one follow-up. Operator, Jody, would you please open the line to questions.

[Operator Instructions] Your first question comes from the line of Michael Doumet of Scotiabank. Your line is open.

So on Q4 GTV, the results were quite strong. The Orlando results also looked quite impressive. Ravi, last quarter you broke out the weakness, roughly speaking, into what you thought was macro versus company-specific drivers. Now I believe GTV grew on a combined basis despite supply constraint. Anyway you can give us a sense of whether macro conditions are at least starting to improve or if it's mostly pricing and improved salesforce productivity that drove the relatively strong GTV numbers?

Michael, I'd say -- let me answer that. And look clearly, I think we have come a long way on sales force execution and we'll continue to get better. But I really strongly believe that some of the challenges we had in growing things that I referred to are behind us. We have a highly motivated sales force and we're beginning to hum. I would say the supply challenges, and I'm sorry I sound like a broken record. But it's to me no longer anecdotal, its fact. And point to hundreds of customers, not only personally but also through our whole teams, supply constraints are really quite a lot; they're still there; still feeling it in 2018. So then the question is, gee, then how did you see the rise in Q4? Recognize Q4 always there is a little bump up just seasonality, and people do try to get rid of their inventories. I think the difference is we were laser focused on going after it. The same in Orlando, we were laser focused on going after it, and very much making sure that from a auction segment, even though we have hundreds of competitors, we were quite focused on making sure that we did not lose share, and in fact if anything, gain share.

Your next question comes from the line of Craig Kenneson of Baird. Your line is open.

Looking at your territory managers, you saw a nice sequential uptick in the number of territory mangers. I guess, it's a loaded question. But could you discuss the composition of your territory manager team and maybe what percentage are still in their first year for example and how productivity improves as territory manager matures?

Look, there is no question we had sales force turnover, both voluntary and involuntary, because as we did the territory optimization at the beginning of the integration of the combined companies. So we do have new territory managers. Turnover has always been an issue in this business like it is for most sales driven companies. Our turnover clearly was exacerbated in 2017. We have brought it down significantly so in third quarter versus fourth. We brought down the range of turnover not only in the U.S. but globally. And so I think we lost like 32 in Q3 but only six in Q4, so that shows you that we’re doing that. I don’t have right now the breakdown by how many and their longevity. Suffice to say that we’re working very hard on training the people and getting them up to the learning curve. Now, the one -- I think we’ve got two things. When new people come in one positive is they don’t have biases to which channel and its easier for us to get them where you don’t have how the behavior changes now the reference bring lot of the relationships. I think we’re getting a very good blend of the two. I am satisfied with our progress that we’re making on that whole front.

And as a follow up, could you just address any compensation plan changes you’ve enacted as you've integrated the two companies? Thanks.

Jeff, do you want to answer that for the U.S.?

Craig, the compensation plan changes for 2018 are very aligned to view the things that Ravi talked about, namely new acquisition driving multichannel. We've got a component this year that is different for our reps to hit a quarterly production number and then for our strategic accounts team to drive the upstream volume that Ravi talked about. So I feel very good about the components of the comp plan that are very aligned to our strategic objectives whether its gaining share of wallet, going after new business or driving upstream and multichannel selling.

Your next question comes from the line of Ben Cherniavsky of Raymond James. Your line is open.

I’d like to just talk a little bit about the macro and supply conditions, and how -- well let me go back and just recall during previous cycles, Ritchie always actually performed very well in markets where prices were rising, customers were re-fleeting, OEMs were scrambling to keep up. And we know it has been a misconception I think that Ritchie, used to say Ritchie did well in good times and better in bad times. And I think the fact the numbers show if you look at the mid-2000 coming out of the ‘01 recession or even coming out of 2010, the GAAP activity or GTV accelerated with the other bellwethers in the industry. So why would this be -- why would it be different at this point? Why would you not be seeing the higher pricing and the turnover, and the trends to re-fleet, et cetera, the shortages translating into more activity in your yards?

So great question and since you have been a great historian of the company, fair point on our whole concept of how we do, good times and bad times. This is not your normal cycle. And so as I mentioned in my stated remarks, after the elections in November in 2016, we started seeing that in our options where pricings started going out. And throughout 2017, we’ve started seeing pricing go up, and in ’18 it’s continuing, including Orlando where anecdotally we had some customer who have been on 80 things and did not get a single -- we really feel bad about that, but because the pricing was so strong. So right now pricing is at a very, very strong level. So having established that now the problem is this, the usual situation has been and this is not restricted to a single OEM. Most of those, I’d say the majority of the OEMs have talked to all of the majors, for years since the recession, have been cutting down on capacities. And a lot of top suppliers and many of those supply to many of the OEMs, either went out of business or reduced their production. This thing which was really related to the U.S. election and it’s not that there were any loss pass, but there was a business sentiment that just for especially on a local basis and a state basis to really release a lot of projects also contractors start to feeling comfortable bidding on things, it just created a huge frenzy demand that we’ve never seen before. So it’s not like a nominal equipment cycles that you see. And the issue was it caught everyone of the OEMs unless and they were not able to ramp up fast enough and even if they could, they didn’t have lot of those help from the part suppliers. Second where many of the OEMs China, which has been the doldrums for a few year, suddenly took off in the beginning of ’17 and so people who have production in China, and they used to export parts of machines, they have to take care of their own domestic business. So you had a situation where dealers have had huge backlogs. So things have been where they’ve asked for certain machines that maybe four months, six months et cetera. And dealers in the U.S., which is a U.S. phenomenon, have been getting actively into rentals. So they’ve had to take as a rental fleet. So all of this is created where no one wants to release their equipment, because they are not sure they’re going to get the new equipment. And I know that the OEMs are working hard to solve the problem. And some of them are hoping that towards the second half things will ease. So when you don’t have supply, that’s one of the reasons you see it in our at risk business. So half our people jokingly say they can’t give our money away, because pricing is so strong, customers think that hey Ritchie Brothers will do extremely well. In fact, if you look at the volume drop, it’s correlated highly with the GTV shortfalls that we’ve experienced. So very long answer but when you don’t have equipment, there’s very little we can do. Our execution right now is superb. Now having said that, this is a huge used equipment market and we’re going to go beat the bushes as we did in Orlando and find the equipment.

Yes I mean, because at the end of the day, your story has always been more about a secular growth opportunity and even more recently with IronPlanet, it’s about share of wallet and deploying more people to your channels. So irrespective of what the cycle does, you should be able to grow through that, recognizing that inflection points you’re going to get hit by macro but sooner or later it’s up to you guys to just deliver the growth, right?

Well, that's what we're focused on.

If I could just have one follow-up on, you mentioned in your 2018 commentary some of the yard closures should be taken into consideration. And you know that I think that was -- I applaud you guys for closing some of those yards. But was in part of the strategy also not really to lose any business and to make sure that the sales in those markets go to other yards nearby or to other channels like the marketplace?

No, absolutely, and that’s -- but we’re giving you both the tailwinds and headwinds and the factual stuff to keep into account for modeling purposes, every intent -- because we still feel very strongly that those were the right decisions. And so our intent is to either, so for instance, Raleigh, which we closed. Our view is to try and get it to Nashville or Atlanta. And over St. Louis, it is to try and get it to Kansas City or Chicago. So one is the live piece. The second is to get it on to the weekly option. So our sales team -- because we didn’t change any of the sales teams in these places, so that’s exactly what we’re trying to do. But we just noted it so that all of the stuff is clear and transparent.

Your next question comes from the line of Cherilyn Radbourne of TD Securities. Your line is open.

I wanted to ask a question around the Evergreen Model. And specifically, you continue to guide to an EBITDA margin of 40% in 2019, notwithstanding the fact that you seem to be expressing a fairly cautious view around 2018 from a top-line perspective. What gives you the confidence that you're going to have the top-line growth to create the operating leverage to generate that kind of a margin in 2019?

Cherilyn, let me start it and then Sharon can maybe add stuff. So I think we're -- notwithstanding the supply challenges and I don't want to beat a dead horse. And I think Ben's question we articulated what that was all about. Our job now is to figure out how to grow. And I enumerated in my prepared remarks all of the growth drivers that we have. So what we're really going after is new customers and which that's one of the reasons Orlando did well. We also getting share of wallet, which we did well in Orlando as well and other places. So right now we're -- on the core, it is trying to improve share of wallet because there's not a lot of customer overlap between the two companies and sell each other's offerings. Second, we have a lot of other businesses. GovPlanet, that's a huge contract. And as we mobilize and get revenue growth, we'll have the full year of that in ’19, for instance. And this supply thing is not going to go on forever. We think that -- we're saying at least through first half of ’18. So at some point, the OEMs are going to catch up but also, we're going to find new places. Third this whole area of upstream, Platform Solutions, Marketplace E, so I said we showed tremendous growth on the individual components of Marketplace E, which namely E1 and Daily Marketplace. And so we've got a number of things. And now the thing is we're just very focused, because we've become one team. It's not so much about integration anymore. There are still technology projects, et cetera, that will carry on. And it's all about the whole team. There's only one thing on our minds, drive revenue growth.

And then maybe a follow-up with more of an administrative question. But Sharon could you just clarify your guidance on the tax rate and just decompose that into an effective tax rate and then the cash tax rate?

So what I'm quoting is really what I see is the cash tax rate or what would show up on the current line of the financial statements without consideration for anything coming through deferred tax type changes. And again, the benefit that we are basically projecting into 2018 comes on the heels of U.S. tax reform with what we have as a significant now U.S. based business, but also driven by certainly some of the tax strategies that we have in place so our transfer price agreements and internal financing arrangements.

Your next question comes from the line of Scott Fromson of CIBC. Your line is open.

I just think a quick question on -- what y our customers say about the new combined Ritchie Bros. Is the feedback from customer service consistent along the spectrum from large to small?

So Scott let me take a quick shot at it, and then I'll have Jeff and Brian, maybe quickly comment because they are closer to ground but we also put some quotes in Orlando I think in the press release. So far the reception of the customers have been very positive. They were quite in all lot of how we've taken the innovations in Orlando using both and there is a new spirit with Ritchie Bros in terms of the fact that we were able to take the IronClad Assurance and incorporate that into a live auction. So I think customers are very excited. Our consignees are thrilled about the pricing we've got for them, and not only this auction but we've had options at Phoenix and other places, and they have been a variety. So I think all in all at least the feedback I am getting, we had a huge customer deal in Orlando, I talked to lot of our customers, they are all very positive about the direction of the company. Jeff and Brian, anything you want to add?

One of the things I thought was very unique going into building the Orlando event. We talk a lot about their customers that we weren’t overlap but there obviously were customers that we did have overlap. Where quite frankly both IronPlanet and Ritchie brothers had relationship. So last year the last few years when we went into our IronPlanet legacy went into building in our Orlando event and Ritchie went into building theirs, we were competing obviously for volume to go into Orlando auction, competing and customers where we both had relationships. And I think for a lot of our customers this year, it was so refreshing that the tension wasn’t there and we weren’t -- we were there trying to find as the combined company the right solutions for that customer and we weren't in there competing for equipment. And I really felt a big change in just the relief of that and quite frankly forging even stronger relationships with our customers. So it’s been very, very positive.

So with the new combined platform, is there increased pricing power or is that covered by the harmonized feed structure.

So I don’t like to use those terms at all, because ultimately pricing is a reflection of supply and demand. I think what we’re all about is providing the best value to our customers, be they buyers, be they sellers. And our job is to provide the variety, create customer experiences and there is hundreds of competitors, this is a market that will really punish you if you try to get greedy and that is not at all our view. Our job is to provide the best value for our customers.

Your next question comes from the line of Michael Feniger of Bank of America. Your line is open.

You’re guiding to 40% EBITDA margin by 2019. If I look in the past or use your past 40% EBITDA margins before, I think you guys did above 40% margins from 2003 through 2009. And at the time of your ARR was around 10%. Your revenues now clearly above those levels, your ARR is closer to 13.5%, 14%. So is Ritchie about its business model just like fundamentally different now in terms of how to grow earnings. Is it possibly more to get that $1 of future revenue?

So I think certainly we have some new revenue streams that come with a different cost profile. Those are in our other segments, so basically RBFS, Mascus, et cetera. But we also do have other lines of business that if I take IronClad Assurance, it comes with inspection fee revenue but it also comes with operational cost to be able to drive that. So there have been some minor changes. The profile still of this business is that with additional revenue will come improved flow-through over those costs. And so those costs will not necessarily increase at the same rate of revenue, so that part still remains true. The commitment to getting back to the 40% EBITDA margin was what we announced at the point of acquisition and that was as we are acquiring a company that was operating at a significantly lower operating profit margin index compared to our base business.

I mean, now you guys have two quarters under your belt with IronPlanet. So just how you get a sense of that drop through. I mean if revenues increased 10%, what do you think, Sharon, the right incremental margin arrange we should expect to drop through?

So I’ll point you back to that sequential slide that we showed. You’ll have quarter volatility depending on the revenue levels. And clearly our Q2 and Q4 quarters are highest volume quarters where you would end up with at a more like performance so what we witnessed inside of Q4. And just in addition, we are continuing to execute on our synergy efforts and we will continue to drive volume and keep our expenses well managed.

I think on the core business, just to add, our flow through characteristics have not fundamentally changed. Now, it’s where in moments of time we’ve just brought in IronPlanet. The reason we were confident of the party by ’19 was really to say it has similar characteristics. But they didn’t have the critical mass but we did and we took on a lot of their SG&A and we are now through synergies getting to the right base. And we’re working hard on controlling cost. So it’s just a matter of getting to the revenue basis and you’re now seeing the improvement, so step-by-step. And I don’t think there is many businesses that offer 40% commitment on EBITDA margins. so it’s a good flow through business.

And then just lastly on the mix of equipments you put up on at auctions. I believe OEMs stopped producing in 2015, the oil downturn and the industrial downturn in the US. Just curious if you could comment out the mix of equipment showing up at auctions, maybe the age of the equipment of what you could expect for 2018? Thank you.

Mike, I think in 2017, we really did see a degradation in terms of age with the supply shortages, we’re getting more older equipment. And so because people were giving us -- it was tough to find things that were newer less average because they were all being utilized in the field. And so we hope as the supply eases that we’ll be able to get back. I think in Orlando, we actually had a pretty nice mix and we were very pleased, which is one of the reasons that GTV lot actually increased one with strong pricing but the other was mix. So our aim is to continue to have a good balance mix and partially it is based on what the market can offer and we’ll keep working at it.

And due to the time constraints, our final question comes from the line of Maxim Sytchev of National Bank Financials. Your line is open.

Sharon, the first question is for you, if I may. When we look at SG&A at roughly $93 million, I mean clearly some of that is going to be sticky Q-on-Q. But how should we think about it playing into Q1? I mean, how much of that $92 million will be around versus if we should be thinking about percentage terms as you hit the first part of the year?

So Q1, you would expect to be a little bit lower, just because you do have some incremental based cost still embedded in the SG&A line to support the larger volume that we experienced inside of Q4. And then the only other piece to remove would be the incremental severance and restructuring type costs that showed up on the acquisition line. But those would really be the only additional pieces of information I could provide.

Are you talking about the percentage or the absolute number?

I think, absolute number would go down a little bit just because of those variable-based components that are still embedded inside of SG&A.

And then Ravi just a quick question and again, don’t want to belabor the whole supply issue dynamic but when you talk about second half as the trigger point of seeing some improvement. Is this your internal modeling that tells you or provide those signs, or are there any green shoots from the OEMs that may be you could share with us. I guess any color on those two fronts please?

Max, I wish I had a crystal ball. I don’t know if there’s anyone today who can give a definitive answer on it, because it’s not -- if it were one OEM, it’s one thing. I think it’s affected all the OEMs. It is not based on internal modeling, it’s really based on a composite of all our harmonizations. I’ve personally talked to a lot of dealers, lot of our end user customers and to the OEMs to get a firsthand view. But then our people are constantly in the field talking to them. So what I can say is, it’s not going to improve in the first half, so let’s just hope -- what I’ve heard from some OEMs is at least in certain categories, they do feel that things will start getting back on track in the second half. I think to me the way I am viewing it is, it is what it is. And rather than just worrying about that, because it’s not in our control, we’re now focusing on -- because it is a large market. We’re just going to go hunt. Our salespeople are very clear directed, just cannot be farmers, they’ve got to be hunters they’ve got to find new business. They’ve got to improve the share of wallet. That’s what this is all about. We’ve got to look at all the -- we've got other drivers, whether it’s GovPlanet. So go after those and find the strategic accounts. There is a whole target list of new customers. Every salesperson has a target list of new customers to go after and that’s what we are hoping, because this supply thing who knows. So our job is to get growth and that’s what we’re laser focused on delivering.

Okay. Thank you very much everybody, onwards and upwards.

Thank you. Thanks, everyone. That concludes our call for today.

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