RB Global, Inc. (RBA) Q2 2018 Earnings Report, Transcript and Summary

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ritchie Bros. Auctioneers' Second 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 the conference.

Good morning, and thank you for joining us on today's call to discuss our second quarter 2018 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. 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 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 websites, as well as our Investor Relations website at investor.ritchiebros.com. 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 second quarter results were made available yesterday evening after market close. We encourage you to review our earnings release and Form 10-Q, which includes our MD&A and financial statements which are available on our website as well as EDGAR and SEDAR. On this call, we'll 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 on today's call are in U.S. dollars unless otherwise indicated. 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 second quarter earnings call. GTV growth in the second quarter was up 14% on a reported basis and up 3% on a like-for-like basis. Our agency proceeds were up 24% versus prior year on a reported basis and 12% on a like-for-like basis led by strong live and online auction performance, robust price realization across all channels, positive new customer acquisition and buyer fee contribution. Adjusted diluted EPS was up 27%. Overall, these results are encouraging, considering the very high level of equipment utilization and fewer live selling days in second quarter versus last year. Let me review how the second quarter highlights. First, I am pleased to report our U.S. business had an excellent quarter after enduring several tough quarters of equipment supply challenges and working through a complex integration. The U.S. team led the company in like-for-like growth in the quarter, which is an extremely positive sign. U.S. revenues were up, led by strong live auction comps, together with the largest ever online quarter postacquisition. Let me repeat. Largest ever online auction quarter. These are tangible proof points demonstrating that a combined teams are more confidently embracing multichannel as part of the solution dialogue with our customers and actively driving new customer acquisition. Our U.S. Strategic Accounts group, in particular, after a very tough first quarter, came back strongly and had its best performance in the last 8 quarters with 84% of our Strategic Accounts grew, driving new acquisition transactions in the first half. After a year as a combined company, I'm pleased to report that our sales teams continue to show stabilization with our turnover now significantly below 2017 levels, but voluntary turnover at the lowest point since 2014. I'm proud of my team's effort to work through integration as quickly but as thoughtfully as possible, and we are now positioned well with a team that has embraced the multichannel strategy and is squarely focused on operational execution. Now looking at our Canadian business. Our positive GTV and agency proceeds growth was driven by strong live performances, underpinned by continuing momentum from the improving macro sentiment in Western Canada. We saw strong price performance and vocational assets and complete dispersals of large oilfield packages in our April Edmonton auction. These positives were partially offset by decreases due to auction calendar shift, which deferred our Grande Prairie auction into the third quarter combined with some weakness in the East and softness in our ag business. Online adoption in Canada is at a very different stage than the U.S. since it's a complete startup. We are building our online foundation in the Eastern part of Canada and the more remote parts of Canada. In Canada, Marketplace-E seems quite complementary to the live auction, and our agriculture team is willing to use it on a regular basis concerning real estate. The Canadian team contributed a significant level of inventory to the weekly auction in July, which is encouraging. Western Canada loves the live auction channel, and as such, were not looking to reprogram existing live customers over to online, but rather to d rive acquisition of new customers and win more share of wallet from existing customers to complement what we built over the last 60 years. Overall, we're optimistic about Canada as the West strengthens and positive government decisions on core infrastructure projects across the country are poised to drive additional demand with Quebec, Ontario and Nova Scotia infrastructure projects already in flight or slated to start. In International, we experienced good sequential momentum with solid GTV growth led by our Australian and Asia regions and strong revenue growth driven by new acquisition; higher inventory sales; Australia and Europe; services growth and fee revenue, all partially offset by auction calendar changes and soft performance in the Middle East. Our live auction in Japan was another back-to-back success in collaboration with our CAT dealers and strong demand in Chinese markets. Online volumes led by Marketplace-E are showing promising results in Europe. Marketplace-E is growing fast in the International region, given that it's particularly suited to some international markets where historically, there has not been an auction culture. We are pleased today to announce an increase to our dividend, a 6% increase raising our dividend to $0.18, underscoring the board and management's confidence in continuing strong cash generation and a commitment to rewarding shareholders through dividends. Finally, in addition to our $25 million of debt repayment in the first quarter, we made another voluntary prepayment on our debt this quarter in the amount of $25 million on top of the $2 million of scheduled payments. The strength of our cash flow model affords us the ability to grow our dividends and repay debt to minimize interest expense. Looking now at our second quarter auction highlights. Over 60% of our live industrial auctions in all our major geographies showed year-over-year growth versus Q2 last year. Combined with the over 70% of live auctions delivering comp growth in Q1, this overall first half performance is definitely showing positive momentum. It also reinforces our operational strategy in having fewer live auctions per site, but making them bigger, while selling flow-through business in between events through our online channels that featured auction as well as Marketplace-E. Some notable U.S. auctions, include our Chehalis, Washington auction, which was the largest Chehalis auction in 7 years and delivered 92% year-over-year growth. Our Nashville, Tennessee auction delivered 150% growth and was also the largest ever national auction. Rounding out key notables in the U.S. was our Orlando, Florida auction, driving $33 million in GTV and 62% year-over-year growth. Our Canadian team conducted 2 auctions at our flagship Edmonton site for more than $230 million in GTV and 23% growth. The April Edmonton auction allowed us to put on display our full one-stop shop capability as we executed full dispersal packages, including heavy-duty, light-duty and real estate right down to the vehicles. And we displayed many IronPlanet items in our yard. The June Edmonton Auction saw strong pricing which motivated buyers and sellers to act. Lastly, on the Edmonton auction, the majority of the auctioned equipment were sold in Western Canada, which is another positive proof of renewed strength in Western Canada. In the Prairies, the team delivered a record-breaking $31 million in GTV auction in Saskatoon, which was an impressive 68% comp. Internationally, our Moerdijk, Netherlands auction grew $42 million of GTV and 54% growth over the previous year. This was the largest Moerdijk auction since 2010. With that, let me pass it on to Sharon.

Thank you, Ravi. Turning to our consolidated second quarter results. GTV growth of 14% in the quarter was driven by the acquisition with 3 full months of IronPlanet in this quarter compared to only 1 month in Q2 of 2017. In addition, we saw strong performance across both live and online channels, partially offset by the impact of changes to our auction calendar, most notably the shift of Grand Prairie and Moerdijk auctions from June to July. We also saw a modest increase in higher-value items in all channels, particularly in the categories of hydraulic excavators, crawler tractors and articulated dump trucks, contributing to an increase in average price per sold item and GTV growth. Offsetting some of these positive drivers is the increase in overall age of equipment. The percentage of equipment in our sweet spot of 3 to 5 years is down roughly 200 basis points year-over-year as this late-model equipment has been impacted the most by the strong economic conditions in the U.S. and higher utilization rates in the rental sector. The total revenue growth of 22% and agency proceeds growth of 24% was driven by the acquisition, higher inventory revenue supported by strong at-risk commission rates plus the increased fee revenue as a result of the partial fee harmonization implemented in the first quarter. On an adjusted basis, our operating income increased 27% to $64.8 million versus the second quarter of 2017, which excludes approximately $24 million of nonrecurring acquisition-related costs and an asset impairment charge we incurred in Q2 of 2017. The increase in adjusted operating income was driven by growth in agency proceeds and improved cost leverage, offset partially by approximately $5 million of higher year-over-year depreciation and amortization expenses as a result of the amortization of intangibles from the acquisition. Adjusted diluted EPS attributable to shareholders was $0.42 for the quarter compared to diluted adjusted earnings per share of $0.33 in the second quarter of '17. We are pleased with this outcome as it was driven by our ability to deliver agency proceeds growth, contain cost growth and drive a lower effective tax rate while observing approximately $2 million of higher interest expenses versus the same period last year. Turning to our Auctions and Marketplaces segment agency proceeds. A&M agency proceeds grew 25% in the quarter driven by the acquisition, strong price realization, improved at-risk performance and the favorable impact of the partial fee harmonization. All of our major geographies posted like-for-like growth with our core U.S. business leading the way. The U.S. performance is significant. This is our largest region and has felt the brunt of the equipment supply constraints over the past 5 quarters and being able to deliver positive like-for-like growth across both live and online channels is attributable entirely to better execution, which is extremely encouraging, and the type of momentum we look to keep building upon on the back half. On a rate basis, our A&M agency proceeds rate improved 120 basis points to 13.5% versus last year, however, flat on a sequential basis versus Q1 of 2018. The year-over-year rate improvement was driven by the continuing strong pricing environment, improving performance on at-risk contracts, meaningful rate performance in our government business and the favorable impact of the partial fee harmonization implemented in the first quarter. While our Q2 rate is slightly above the top end of our rate estimate of 13.25%, at the moment, benefiting from strong at-risk performance due to current supply-demand imbalance for core construction equipment, and as such, we are not making any changes to our expected range for A&M agency proceeds rate at this time. Turning now to our other services category. Our RBFS revenues were $6.8 million, up 42% versus the prior year with application volume of 28% versus last year and funded volumes up 46% to $129 million. RBFS is one of the areas where we continue to invest in talent and resources, and we are seeing excellent and relatively immediate returns on the additional spend. We will continue to fuel our RBFS business as we see this as one of our key foundational capabilities to support revenue and agency proceeds growth. Mascus also generated continued strong revenue growth in the quarter of 43% to $3.3 million, with our ancillary business also up 21% this quarter. Overall, we are very pleased with the performance and growth of our services businesses. Moving on to expenses. On a reported basis, the combination of cost of services and SG&A expenses increased 30% year-on-year in the second quarter. On a like-for-like basis, excluding ancillary and logistical service expenses, combined costs grew by 8% compared to our agency proceeds like-for-like growth of 12%. Cost of services, as reported, increased 19% to $43 million, primarily due to the acquisition, which includes full 3 months of inspection and appraisal costs in the second quarter of 2018 compared to only 1 month in 2017, as well as incremental costs to support the growth within our service revenues. I wanted to take a moment and provide some additional comments on cost of services postimplementation of the new revenue recognition standard last quarter. Our reported cost of services of $43 million now include ancillary and logistics service expenses of $19.9 million, which had previously been recorded net against revenues under previous accounting practices. When ancillary and logistical services expenses are removed from the cost of services, the net amount is $23.1 million, which represents 11% of agency proceeds versus 13% in the second quarter of 2017. As a reminder, agency proceeds represents revenues as previously reported and lines up with how we have historically managed the business prior to the revenue recognition change being implemented and how we continue to manage our business today. SG&A expenses increased 36% to $101.3 million, primarily due to IronPlanet cost being for the full 3 months this quarter versus only 1 month of Q2 of '17, plus investments to fuel our growth in RBFS and our government business and higher incentive compensation cost. Higher incentive costs were driven by stronger performance in the quarter versus the same period last year in combination with our new multichannel compensation plans launched in 2018. We have also had higher year-over-year share unit expenses in the quarter, primarily due to the cycling over the Q2 2017 decreasing share price that resulted in a lower mark-to-market expense in 2017. On a rate basis, SG&A was 49% of total agency proceeds, which is down sequentially from preceding quarters. As we commented on our Q1 earnings call, we expected our SG&A rate to align closer to our Q4 2017 SG&A rate of 52% as a percentage of agency proceeds, and achieved better than anticipated cost leverage in this quarter. Looking to the back half of the year. We will focus on achieving greater operating leverage and improve profitability, and as such, it would be incumbent upon us to begin looking critically at all of our expenses and identify opportunities to thoughtfully drive cost efficiency to offset the continuing macro backdrop. Ravi will discuss this shortly. Turning to our balance sheet and liquidity metrics. Our trailing 12-month operating free cash flow of $101 million declined from $114 million last year as a result of the timing of year-end auctions affecting the timing of cash outflows to consignors in the fourth quarter of 2018 versus 2017, as well as the increase in inventory deals affecting cash flows and a full year of interest expenses as a result of the acquisition. We also have had higher net capital spending on a trailing 12-month basis as we've invested integration projects, enhanced functionality in our online market share channels and other foundational infrastructure projects. Our agency proceeds CapEx rate of 56% was flat year-over-year and continues to be below our Evergreen Model maximum of 8.5% of agency proceeds. Our CapEx investments in the quarter were principally weighted towards our technology investments, led by our MARS platform initiatives, backend infrastructure integration and investments to support the implementation of the GovPlanet non-rolling stock program. Long-term debt at the end of the quarter was $750 million with a weighted average annual interest rate of 4.9%. At the end of the first half, we have now repaid over $56 million of debt, of which $50 million was voluntary. Our favorable operating results in the quarter, together without debt repayment, has resulted in an adjusted net debt to adjusted EBITDA ratio of 2.5x. We are also pleased to announce that in addition to the voluntary debt repayment this quarter, we also took steps to reduce excess availability on our revolving credit facilities by $185 million. We assessed our overall availability and determined we have excess coverage, and this reduction will result in a full year run rate SG&A savings over $800,000 driven by lower bank charges. We still will have access on our revolver of $490 million, which is adequate to manage our operational needs. Before I turn the call back to Ravi, I'd like to share some thoughts on the first half of '18. I'm sorry. I guess I said – I should say that CapEx was 5.6%, not 56%. So sorry, 5.6%. Before I turn the call back to Ravi, I'd like to share some thoughts from the first half of 2018. Overall, I am pleased with the overall health of our financial position. Our strong cash flow has enabled us to accelerate our debt repayment, support our dividend increase and we are driving improved earnings and operating leverage, while maintaining a solid balance sheet. With that, I'll turn the call over to Ravi.

Thank you, Sharon. Our second quarter has built on the early momentum from the first quarter. Our GovPlanet business continues its positive trajectory. In the first half, the team led a highly effective rollout of the DLA nonrolling stock contract making the program now fully operational. The team established operations to receive inventory at 70 Department of Defense bases and it's an additional 200 facilities across the U.S. We also moved responsibility for state, local and municipal business from our regionally-based territory managers to the specialized government services team. The sector-focused specialized-government sales team is already yielding strong results with 70% year-over-year increase in state and local sellers through the first half of 2018. Our GovPlanet team also established a second weekly auction on Tuesdays for nonrolling stock surplus, in addition to the Wednesday auction of the rolling stock. We continue to be bullish on the government business as we mobilize to capture more share of our highly-fragmented market opportunity and believe that it'll be a strong growth driver for us. Our online performance was certainly a bright spot in the quarter. We are now seeing progress, particularly with the U.S. sales team consigning more frequently and with higher volumes through the weekly online auctions. This was the key focus during the quarter as Jeff Jeter, our U.S. President and I conducted 8 regional roundtable town halls, meeting with all of our 200 territory managers, strategic account managers and sales managers and directors across the country, called The Hearts and Minds Tour, to get laser focused on driving new customer acquisition and embracing online. We socialized very specific metrics to measure individual TMs and SAMs online performance. And solicited TM and SAM feedback on barriers to driving online. One such barrier the team identified was the inability to act quickly or more nimbly on smaller onesies and twosies deals especially suitable as online starters. As a result, we immediately instituted changes to allow more autonomy at the local level, allowing teams to run their business and providing them empowerment and ability to compete and win more deals. This is one of several examples of the positive outcome from these meetings. And as an encore, we'll be hosting sessions in Canada and internationally to drive stronger online engagement, leverage our scale and cross pollinate strong ideas and best practices to facilitate incremental growth. The CAT Alliance and relationships with the dealer network continues to grow positively with dealer agreements are more signed at the end of the second quarter. Our relationship with Caterpillar is the best that we have ever seen. We experienced modest growth from the CAT Alliance as a whole, but CAT dealer volume in aggregate was down due to high dealer rental utilization and severe backlogs on new equipment. We are confident, however, that in the future the CAT Alliance will continue to be a great growth driver for us. We are now a year into our transaction, thought it would be fitting to briefly to review our progress. In a year, where the overhang of the macro and integration has occupied the headlines, we would be remised if we didn't acknowledge the terrific outcomes, several of which are strategically significant in terms of positioning us for growth in the long term. Looking back, we are now through the largest and most complex parts of the integration. And overall, I would say we executed the integration plan very well. Our executive team has come together extremely well. We are aligned and we have complementary skill sets and collectively, we are completely focused on driving execution. Our combined sales teams drove the record-breaking result in Orlando in February, and built on the momentum to drive new business in both first quarter and second quarter. We rationalized 5 live sites and leveraged our online channels, something that was not feasible prior to the acquisition. We immediately began leveraging our online capabilities with our weekly featured auction and Marketplace-E as beachheads to enter several key markets internationally where live auction culture was not widely embraced. We are growing our brand and presence without the cost infrastructure of a greenfield live investment side investment. We intend to continue our international growth led by our online marketplace solutions. Finally, our technology is a core differentiator and we're accelerating the pace of our innovation and enablement capabilities. The efforts over the past year have been truly foundational, and while they don't drive instantly GTV benefits, not having the capabilities and functionality in place will compromise our long-term growth. Our MARS platform will truly unify all our auction management systems under one roof and will power our growth and drive significant deficiencies. We significantly increased the size and variety in our marketplaces globally by launching integrated search, which consolidates listings from all channels in one place so customers can see the power of RB scale. We also increased our investment and pace of innovation around platform solutions. We expect to launch our full platform solutions capability by the end of the year and partner with enterprise sellers around the globe to become their trusted partner and drive upstream growth volume. I have never been more excited than I am now at what technology will do for our company in the years ahead. We are a technology-enabled relationships business that connects global buyers and sellers. the year, however, was not without equipment challenges from the unprecedented supply shortages and navigating the team through a complex integration. These factors impacted our performance, and while disproportionally driven by the equipment shortage, the fact remains we are not satisfied with our results and we aspire for more. First, we have made it clear to our sales teams that equipment supply is not in our control and that it cannot become a crutch or an excuse. We need to continue to drive growth through new customers and increase share of wallet. Second, we are focused on driving improved probability and flow-through as we grow our top line. We're clear-eyed about the work that but confident in driving efficiency and improving our performance and profitability. We are applying a higher level of performance accessibility, and are looking to all parts of our business to improve our returns. We are stringently privatizing initiatives, simplifying our structure and rationalizing discretionary cost and pursuing additional efficiencies. We have built positive momentum over the past 2 quarters, as we discussed throughout the quarter. But I'm also encouraged by the agility our organization has shown to learn and adapt, ensuring we both focus on the right actions and avoid inactions as we focus on relentlessly driving profitable growth. In closing, I'd like to share some perspectives on Q3 and the second half. July is off to a good start as we delivered $279 million in July GTV, which was a 12% increase on a like-for-like basis over the previous year. The strong start was driven by double-digit GTV growth in both our live and online channels, including Marketplace-E. As we have said, postacquisition, we're no longer just a live auction company. Over 15% of our second quarter GTV was generated through our online marketplaces. And we expect this mix to continue increasing as online gains more momentum. We have traditionally posted monthly GTV and auction metrics on our website. However, as a result of the changing face of the company, we believe it is less relevant, postacquisition to publish GTV and auction metrics on a monthly basis. Additionally, the metrics we published are for live industrial auctions only. And as mentioned, this is just part – one part of our overall business. We understand it was important to anniversary the acquisition and get to like-for-like compares, and thus, we didn't want to make any changes to the auction metrics. For the first full year postacquisition. Going forward, we will no longer publish monthly GTV and industrial auction metrics, but we will provide these results and metrics on a quarterly basis. In closing, I must say that we have had a solid first half. Our agency proceeds are up 30% reported versus prior year and 11% on a like-for-like basis. We are driving demands for our industry-leading buyer base. Bids for listed items were up 6%. Our average monthly users of 4.8 million across all channels, including Mascus, was up 10%. Additionally, 57% of our GTV was sold online, and we continue to make progress on mobile in second quarter 2018 as we did 7.9% of our online GTV on mobile compared to 4.3% in the prior year. In Edmonton alone, there were 500 purchases on mobile devices. Through the combination of our online channels, our live sites, our seller relationships, our strong buyer base and our technology, Ritchie Brothers is truly becoming a platform. We are confident that our platform will continue to drive network effects over the next several years. And with that, we'd like to open the call to questions from analysts and institutional investors. As – we please ask that you limit yourself to one question and one follow up. Operator, would you please open the line to questions?

[Operator Instructions] Your first question comes from Cherilyn Radbourne with TD Securities. Your line is open.

Thanks very much and good morning. First question was – I was just hoping you could give us a bit of perspective on what same-store GTV growth in Q2 and in July would have looked like, if not for the movement of Grande Prairie and Moerdijk auctions into July instead of June?

I don't know if we have the exact percentages, Cherilyn, but...

Yes, most of the costs flow with the sales. There might be a few additional sales that came into June to prepare for the sale. But most of the cost basically go with the auction.

But you could probably go back and look at history on our websites on what Moerdijk and Grande Prairie did last year. And that should give you some sense of it since we have those metrics.

Okay. And then in terms of the inventory sales in the quarter, it looked like there were net proceeds of about $12.5 million in Q2. And I was just hoping for some historical perspective on that result and whether that's a repeatable number?

So Cherilyn, those inventory deals are deal-by-deal results. And so they vary significantly depending on the economics of each particular deal. We've had strong quarters and we've had weaker quarters. We do tend to look at that. If you recall, that is only the profit on the actual sale of the asset and it does not include the fees and additional revenue streams that are also related to selling that asset that are included in the services revenues.

And one other thing Cherilyn is really, because inventory deals are part of our underwritten business, and this business is disposition business, inventory deals dependent on full dispersals. They come up opportunistically around the world at different times. Sometimes you have highs, sometimes you have lows. And frankly, that's one reason why we continue to think that agency proceeds is really the way to run the business and model things. We'd encourage our investors to look at agency proceeds because you have constancy and history really judge us in like-for-like performance, because revenues in the standard accounting sense – because now with the accounting standards has inventory deals, those are very volatile. And you can drive yourself not trying to model that because we, for sure, cannot figure out or forecast where the next inventory deal will be. So we would strongly encourage. And those analysts and investors, again, if there's not clarity on the differentials or how to think about it, Zaheed will be more than happy to take people through that.

Okay, thank you. That’s my two questions.

Thank you.

Your next question comes from Derek Spronck with RBC Capital Markets. Your line is open.

Good afternoon. Are you seeing any sort of changes in the structural equipment supply issue – I'm sorry, do you see any change in the equipment supply environment, and do you think there is an element of it being structural due to the fact that the equipment dealers are focused more on the total – capturing the total economics lifecycle of their equipment that they have it within their own businesses?

Sure. Hi, Derek. So a couple of things. Our – we only get anecdotal evidence on those and then we see the public filings. I think most of the OEMs are reporting based on their earnings calls and scripts that we have seen that there is – continues to be new equipment backlogs and supply shortages. So and the fact that I think I had mentioned in my prepared remarks, that this equipment backlog, new equipment backlog of the OEM dealers, I think that has been splitted over the fact that the supply-demand imbalance has not got harmonized yet. And also the fact that now as many OEM dealers are doing more rental business. So I think – but those rentals, especially OEM dealers, like to churn those faster, but I think they are just waiting for new equipment to catch up. Having said all that, to me, at least, as far as Ritchie Bros. is concerned, I'm taking the supply stuff off the table in the sense. We just can't – we don't control it, so what's the point about – that's what I've told our sales teams. Don't give me all of that. Go find new customers that has large enough markets. Go figure it out. Find new customers, and that's why we are focus on execution, and that's why we've been able to start delivering growth because I don't want us to just milk existing relationships. I mean their existing customers are very important to us, but we have got to be hunters, not just farmers. So to me the supply thing, we don't have the crystal ball. Very tough for us to think about it or talk about it. Let's focus on what we can control, which is driving execution, getting new customers.

That makes sense. Just on the front about being a hunter. Sales productivity on a quarter-over-quarter basis declined a little bit. Is that because you are being more aggressive hunting for that equipment and having to incentivize for that? And how do you see the trend in your sales productivity going forward?

So I think the main cause, rather than talking about the quarter-to-quarter variation on it, to me it's more – the important thing is the IronPlanet legacy sales team had a certain level of GTV they sold, which was significantly less than RB just because of the model. And I think we've declared what that was. I think it was like 7% versus 12%. So there's a period time for them to catch up. They're getting – I'm very impressed with our IronPlanet sales team, since they are beginning to take on the live auction and they've all embraced it extremely well and are doing well. And conversely, our legacy RB sales teams beginning to sell online. So there'll be a period of harmonization. And overtime, as each sales team, the legacy sales team to learn to sell each of the product more and more with the learning curve. And then recognize there's also new people coming in who are not legacy IP or RB, and it takes time for them to ramp up, because of the turnover that we have, we have to bring a lot of new people. In this business, it takes a year to 2 years to start ramping up. So all those factors combined. But Jeff and I, in particularly in the U.S. and Karl and Brian, but in the U.S. in particular where there's the biggest issue, we are very confident that sales productivity will continue to improve overtime and will be a major driver for us. We feel very good about how the progression's happening. And this quarter really gave us encouragement because our legacy sales teams, the RB sales team in particular started embracing online more.

Okay, I appreciate the color, Ravi. Thank you.

Your next lesson comes from Ben Cherniavsky with Raymond James. Your line is open.

Good morning guys.

Hi, Ben.

Good morning.

By the way, I think it's probably sensible and I applaud your decision to stop publishing the monthly data, because it's just not comprehensively helpful anymore. So that was a good move.

Thank you, Ben.

My question just on – I guess, going back to the inventory sales. And for sure I understand how difficult that is to predict. But if you strip out the ebbs and flows of the underwritten business, like this does the market opportunities change, how would you define your ability to make money on those deals? In other words – and I'm just going to use the old auction revenue rate metric here because it's just more familiar to me, but to the extent that, that auction revenue rate is going up and has been going up, does not, to some extent, reflect your ability to evaluate deals and make better money on them. When they come into your hands. And if so, why wouldn't you become comfortable in saying that number sustainably higher?

Ben, I'll tackle that. Again, we are very confident in our at-risk positions we take in with the deals. I think what we're seeing right now is the access to that type of deal is not as readily available as we would like, simply as the markets are pretty hot and customers don't feel that there's risk. So therefore, they are preferring to either go down the path of a less of inventory purchased or guaranteed proceeds. They're actually going to a straight-rate basis. So as a result, when we actually – when we look at the quarter, we did perform very strongly on all of our at-risk and inventory deals. And that would have been well above our normal rate positions that we've talked about. But I think we're just being cautious that we see that as part of the supply demand imbalance. And as we start to see that balance come back into the marketplace over time, we just want to make sure that we are not kind of over egging those rates. We also see that competition is also very fierce on those packages and want to basically, just give ourselves enough room to be able to compete, to continue to drive the business forward.

And Ben, I'll add something. I think – and yourself have been a major proponent of those, which is how we pushed our – the team's too much on at-risk rates and are we leaving GTV behind. And in fact in the supply constrained times, we've been very vociferous with our sales teams to not leave deals behind, and that we'll worry about the rates. Now we are just – with our – with the network effects that we have, with our very strong data analytics capability, and the knows that our people have, the larger the deal, the better we usually do. Occasionally, yes, it will be in our history. Have a few deals that will go south, absolutely. But we are just getting better and better. That's a muscle that I think without being overly braggadocious over the last 4 years, there's 1 place where we have actually made some good improvement. It's on the underwritten side. I just think, as Sharon pointed out, where the deals come from, we don't know. Like we just got an amazing deal in Gabon in Africa that we have been looking at for over a year, and suddenly, all the stars align and we were able to make it. And so it's just these larger deals, they are not so predictable. That's our only thing. And in terms of taking the rates up more, yes, it will steadily increase. We just didn't feel with 1 quarter, you just want to kind of move it off. And we want to have the flexibility. I'd rather get more underwritten volume because I still think we are down from historic highs on that.

Okay. I mean that's a lot of color in it and I appreciate that. But I still think that if you are getting better at the underwritten business, which I think is evident and should happen as you scale and do better data analytics, then that number should move up overtime.

I don't know if I'm going to think further, Ben. I'm Sorry.

Okay. I mean, I guess, there is also an element of market swings, like you're going to be – it's higher probability that you make good money in a rising market. And when conditions change, there is a higher probability that it's tough to make the same margin, right?

Yes. And once we start, you don't want to embed it in stone. And the other thing is, sectors are different. Right now construction is very hot, and if you happen to get a big deal in construction, you probably do fairly well. But the same is not true for ag because ag markets, especially in Canada, are quite soft. And ag, it could be completely different and vary. The thing is – especially if the size of that, and transpiration somewhere in the middle. So I think the sectoral thing also matters. But I think we feel pretty comfortable that – because our job is based on everything we know to give our best view, and so that's where it is.

Okay. If you can count that as a – I have a quick follow up. Just on the Evergreen Model. I'm curious why you guys elected to take GTV as the target, and focus on just have some revenue growth. I mean is that indicative of a share of wallet that you're just trying to drive more fees from an existing customer base? Or what would be – why would organic GTV growth not be something that you guys would drive towards?

Yes, I think, Ben, look, GTV is definitely very significant driver part of our business. And we certainly acknowledge it, understand it and are very focused on it. However, GTV as we've changed quite a bit, and our business models and things and our – like, in the government business, the relationship with the revenue versus GTV is quite different. So the services business has no GTV. So when you look at this quarter, for instance, where we had, I think, like-for-like 3% GTV and 12% agency proceeds growth, there is a little change. So I think we completely understand because we are not just about driving rate. We've got to keep focus on volume, but for the Evergreen Model, we just felt that really the starting point is really agency proceeds. And that's what we want to – that's where – that doesn't diminish its importance, but that's a marker we want to put down as opposed to when we were just a pure live auction company.

Right, okay, fair enough. Thanks very much.

Thank you, Ben.

Your next question comes from Scott Schneeberger with Oppenheimer. Your line is open.

Hey, guys. It's Daniel on for Scott. Can we talk a little bit about the visibility for the back half of the year when it comes to GTV growth in international markets? Elaborate a little bit on your expectations there, please?

Daniel, our international markets have done well in the first half. And so far, we feel very good about what that team is doing. And we're not seeing any major shifts in how they will continue to progress and perform. The one area which is very soft for them is the Middle East just given all the political turmoil around that. But we feel very good about how Asia is doing, how Australia is doing, how parts of Europe are performing, and I'll leave it at that.

Second one for me. Can we also – help us think about the SG&A expectations in the back half and margin progression?

Sure. It's Sharon. I'll take that. So we've kind of guided – if you go back to the slide that shows SG&A by quarter, Q3 as you recall is one of our smaller quarters. So we would expect it to trend more similar to how our Q1 SG&A rate went. So that being said, we should see some improvement. We're thinking kind of 55% to 57% of revenue or agency proceeds is what you should be thinking about. And then depending on what your projection would be for agency proceeds, at some point, SG&A starts to act fixed. So we would say that you should not be factoring into your models anything more than $100 million in SG&A for Q3.

Thank you.

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

Hi, folks. Just a quick question. Is there a point where the Ritchie Bros. would look at opportunities to use its technology, and know how to deploy its other verticals rather as a principal or as a partner. I'm kind of thinking of the similar model to the online food retailer, Ocado in the U.K., which is a signed partnership agreements to deploy its IP in new geographies?

Yes, Scott, let me take that. Yes, we're – you're right about the fact that I'm very excited about our technology platform. However, there's a lot of work and growth potential right now in our core business and we need to fulfill that. We still are embryonic in the U.S. on agriculture. We have got to solve for that. We've not cracked the code. And so that is something we've got – to us, it's almost like a new vertical there. So that's something our focus will be on. And we have, opportunistically, the whole classic cars, while it's not strategic, it is an opportunistic thing for us. IronPlanet is already hosting like – so that is something we looked at it. Long term, are there opportunities? Absolutely. But I think in the near and medium term, we don't want to get distracted. We've got to stay focused on our core. Let's – there's opportunity here. We don't want to get distracted. When I say it's all about execution, it's really meaning very laser focused on our priorities. And right now I think there's still room and the only provision is the agriculture that I mentioned.

Thanks, that’s very helpful. Thank you.

Your next question comes from Maxim Sytchev with National Bank Financial. Your line is open.

Hi, good morning. Ravi, I was wondering if you don't mind maybe updating your comfort level around the 40% EBITDA margin that we're talking some way back in terms of being able to attain that level of profitability?

I'll let Sharon take that.

Yes. Hi, Max. I think we are very pleased that Q3, on a standalone basis, we delivered 39% EBITDA margin, which is actually getting back into kind of more of our historic level. So we certainly, as we are looking forward, we certainly see no reason to change our targets. We are driving it on 2 fronts, getting sustainable revenue growth that will basically help to bring that leverage, operating leverage to the bottom as well as very consciously containing costs. We are 1 year into this transaction, so we have much better visibility around our overall cost structures and where opportunities for efficiency are. So we are still very confident that, that's a very much achievable target.

The only thing I'll add there, Maxim is that, and Sharon has already mentioned it but I'm just – reinforce it, that we are not just going to rely on a revenue growth and continue to drive that. But we've already done a pretty good job of delivering on the synergies we promised in year 1. And we'll continue to deliver on our promise for year 2. But we'll also look for additional ones. And just really for me it's very important – and for our team, executive team, it's very important that we get that flow-through back on track because that is the beauty of the RB model and I was very pleased the 39% EBITDA margin. But other part of it is sequentially in first quarter, we – like-for-like grew agency proceeds 10% and cost growth was 7%. In Q2, it was 12% and 8%. So if you look at that ratios, first quarter it was 70%, 66% in the second quarter, and we want to progressively keep getting that down. Ideally at some point, and I can't tell you when, but we want to try to get where cost growth gets to half the rate of revenue growth. So if we get to a nice flow-through, and that we are very committed to, so EBITDA margin of 40%, just a marker. It's arithmetical calculation. The key drivers are making sure that cost growth is significantly lower than revenue growth. That's the message. And we are very committed in sharing this very – we've got the whole organization is focused on it.

And do you mind, maybe, talking about the timeframe around being able to get to that level where the costs grow at half the revenue progression, if that's possible?

I think at this point, rather than just – because it's – we are working our way to it. Our job is to try to sequentially improve and I just like to leave it at that.

Okay, now that’s helpful. Thank you very much. That’s it for me.

This concludes the Q&A session for the conference. And I'd now like to turn back to CEO, Ravi Saligram, for any closing remarks.

Thank you very much. We appreciate all your support onwards and upwards.

Thank you, everyone.