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spk01: My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the RB Global third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number 2. Thank you. I'll now turn the call over to Mr. Samir Rathod, Vice President of Investor Relations and Market Intelligence, to open the conference call. Mr. Rathod, you may begin your conference.
spk03: Hello and good afternoon to everyone. Thank you for joining me and our Chief Executive Officer, Jim Kessler, on today's call. The following discussion will include forward-looking statements. which can be identified by words such as expect, believe, estimate, anticipate, planned, intend, opportunity, and similar expressions. Comments that are not a statement of fact, including but not limited to projections of future earnings, revenue, gross transaction value, debt, and other items, business and market trends, and expectations regarding integration of IAA, including anticipated cost energies, are considered forward-looking and involve risk and uncertainties. The risk and uncertainties that could cause actual results to differ significantly from such forward-looking statements are detailed in our news release issued this afternoon, as well as our most recent quarterly report and annual report on Form 10-K, which are available on the Investor Relations website as well as EBR and CEDAR. On this call, we will also discuss certain non-GAAP financial measures, including forward-looking non-GAAP financial measures. For the identification of non-GAAP financial measures, the most directly comparable GAAP financial measures, and the applicable reconciliation of the two, see our news release, Form 10-K, Form 10-Q, and investor presentation posted on our website. We are unable to present quantitative reconciliation of forward-looking non-GAAP financial measures as management cannot predict all necessary components of such measures. Investors are cautioned not to place undue reliance on forward-looking non-GAAP financial measures. All figures discussed on today's call are U.S. dollars unless otherwise indicated. At this time, I would like to turn the call over to Jim. Jim?
spk06: Thank you, Samir, and good afternoon to everyone. Our marketplace platform and growth initiatives showcase their strength and effectiveness, again, in the third quarter as we achieved 17% growth in gross transactional value on a pro forma combined basis. GTV growth across all our verticals reflects our teammates' dedication to being trusted partners to our customers. Our focus on cost and execution drove strong flow through, resulting in robust adjusted EBITDA growth. We continue to make significant strides in integrating IEA. During the third quarter, we brought together our global senior field leadership team for a two-day session. And this meeting served as a platform to emphasize our foundational values of being one team, all in, all about the customer, and easy to do business with. I was excited and energized to see how the teams came together, learned from each other, and how eager everyone was to drive our shared vision of success as one cohesive team. It is this one cohesive team of 8,000 plus members that works hard every day to drive successful outcomes for our customers. And to us, success for our customers comes from consistency. Consistency of over delivering on our commitments, consistency of being proactive with our customers, and consistency of driving the best outcomes for the transactions they entrust us with. This consistency continues to build trust with our customers and ultimately positions us to unlock more market share in all the sectors we service. We have taken quick, decisive steps to improve consistency in our automotive sector. This journey's first step was in the second quarter, where we streamlined the senior leadership team. The new structure made it easier for our customers to partner with us as we transitioned management of service-level agreements, or SLAs, to a holistic customer-based approach, departing from the prior segmented by SLA approach, which caused a lack of accountability. We are now implementing new business process to measure our SLAs in real time, and I personally scrutinize our progress against our commitments weekly. If needed, I actively involve myself in addressing any potential concerns. Through this process, we have also delineated critical responsibilities held by our team members, whether various tasks should be owned at the branch level or how to have corporate best support success in the field. We are looking to implement permanent solutions and not temporary fixes where customers have to yo-yo in their experience. We are also implementing tech improvements and prudently investing to give our teammates the tools they need to drive consistency for our customers. I am delighted to say that we have already seen an uptick in our SLA performance, with one example being improved on-time vehicle pickup. We will also implement a new incentive structure for our branch managers at the start of next year so they are better aligned with the performance they are responsible for driving. We are happy with our SLA performance recently and have made substantial strides since closing. Despite these recent improvements in SLA performance, one customer has notified us that they intend to shift all their assignments away from us by the end of the year. This customer accounted for approximately 4% of total GTV and approximately 5% of total unit volumes annually. I am disappointed that we were not given a chance to continue our partnership, especially considering our demonstrated ability to exceed SLAs in the recent months. were going to continue to over deliver on our commitments to all of our partners like we had in the past quarter and continue to do so in the current quarter beyond this our proactive approach has not gone unnoticed by many of our partners especially regarding cats this year we have had cat events ranging from wildfires in hawaii to hailstorms in texas to floods in new york and of course There was Hurricane Adalia, where I and other leadership team members went to Florida, a state where we have more than 1,500 acres available for cat storage. Although the impact of these events was relatively small compared to the large hurricane, our ability to mobilize our resources across multiple geographies, including internal tow capacity in some regions within overlapping timeframe, allowed us to showcase the breadth and depth of our capabilities. overall we have sustainable competitive advantage when responding to cat events stemming from our combined company footprint the flexibility afforded by our nascar partnership and our ability to pull teammates from across rb global to process cap volumes with remarkable efficiency moving to the construction and transportation sector within the sector are enduring robust and trusted partnerships have consistently placed us in the prime position as the preferred disposition partner in the industry. And this quarter, we saw strong contributions from both our strategic account groups and our region's business. Supply chains in the construction space continue to normalize, aiding end users to obtain new equipment. As they purchase new equipment, it powers the trade-in cycle, ultimately leading to the need for disposition services. On the transportation side, there continues to be stress in the industry, accelerating the need for liquidity solutions for our customers. A recent illustration of this was the Yellow Corporation bankruptcy, which involved a highly competitive bidding process. This unique advantage of having IEA and RB yards at our disposal allowed us to demonstrate that 90% of Yellow assets were within a 100-mile radius of any RB global location. a distinction no other bidder could claim. The combined fiscal footprint not only redefines industry standards, but also reinforces our commitment to serve in our large enterprise customers precisely where they desire and in the manner that best suits their unique needs. To be clear, even with this transaction, we have more than enough capacity at our yards to effectively service all our customers. We are dedicated to optimizing price realization, and our industry-leading global buyer base provides our customers with unparalleled depth and breadth of liquidity. Like any other transaction, we intend to harness the analytical capabilities of Rails and leverage in our pricing teams to identify the most effective format, location, and channel to drive the best outcomes. We currently anticipate it will take three to four quarters to work through the bulk of the yellow consignment. The combination of yards, our marketplace liquidity, and our size allowed us to win the trust of this customer and showcases our ability to do transactions of any size. We never take our customers' trust for granted, and we are committed to continually enhancing their experience. Moving to integration, we realized 12 million actual call synergies in the quarter and have actioned a total of 51 million in annual run rate call synergy since the close of the transaction. Based on our progress, we expect to deliver at least $100 million to $120 million of annual run rate synergies by the end of 2025. As part of our integration efforts, we evaluated our land strategy, including the decision between leasing and owning. In discussions with our value partners, it became evident that land ownership is not a prerequisite for meeting our service level agreements or securing market share. We maintain a surplus of land capacity across our asset classes, allowing us to accommodate our operational requirements easily. However, our capital allocation strategy is guided by financial prudence. We will strategically and opportunistically purchase property in regions successful to CATS or where the market opportunity makes strong financial performance sense for us to make this investment. Given these considerations, we are increasing our 2023 net capital expenditure outlook to approximately 310 million. Let me now hand the call to Sameer to discuss our financial results for the third quarter. Sameer?
spk03: Thank you, Jim. Before we jump into details, please note that year-over-year comparisons for GTV and revenue refer to the comparison to the pro forma combined results of Ritchie Brothers and IAA for the prior year period. Total GTV increased 17%, with strengthened lot volumes across all sectors. Automotive GTV increased 11%, benefiting from the higher unit volume and higher average selling prices. The existing customer portfolio drove the growth in unit volumes as the salvage industry continues to benefit from a rebound in the total loss ratio. In the third quarter, CCC indicated that the loss ratio increased approximately to 19%, compared to 17.5% in the same period last year. Recall that the total loss ratio is the number of vehicles deemed salvage as a percent of total accidents. Used automotive prices continue to trend lower year over year, where repair costs inflation remains elevated, creating a fertile environment to deem a car a total loss after an accident. DTV in the commercial construction and transportation sector increased 22%, driven by increases in lot volumes, partially offset by decline in average price per lot sold. Part of the average price per lot sold decline was due to mix of lot volume growth came from rental and transportation customers, where asset values are intrinsically lower compared to traditional yellow iron construction assets. Additionally, we continue to observe declines in price year over year on an apples to apples basis. Next slide. Moving to service revenue, Service revenue increased by 20%, with our service revenue take rate expanding approximately 60 basis points, 20%. Service revenue increased due to GTV growth and a higher average service revenue take rate. The increase in average take rate was driven by higher average buyer fee rate and growth in our marketplace services revenue, partially offset by lower commission rates. That lower average commission rate was given by a higher mix of construction and transportation assets sourced from our strategic accounts and lower realized rates on guaranteed commission contracts. We expect the lower average commission rate trend to continue in coming quarters. Moving to inventory, inventory declined 7% with lower revenue contributions from the automotive and commercial construction and transportation sectors. The inventory rate for the quarter contracted 220 basis points year-over-year to approximately 6.5%. The decrease in inventory rate can be primarily attributed to the performance of a few large deals in our construction and transportation sector, where pricing declined faster than initially anticipated between the purchase date and the sales date. As previously noted, we expect the environment for at-risk deals to remain competitive in our commercial construction and transportation sector. Turning to earnings. Adjusted EBITDA increased 32% compared to the combined adjusted EBITDA of IAA and Richard Brothers for the year-ago period. This strength resulted from solid flow-through from strong GPV and service revenue growth combined with disciplined cost management. Additionally, SG&A exclusive of share-based payments and other adjusting items was $179 million, which came in below the low end of the range we communicated last quarter. Adjusted earnings per share increased 36% on strong operational performance, partially offset by higher share count, higher interest expense, and the impact of the Series A senior preferred shares. Looking ahead to the fourth quarter, we expect the adjusted effective tax rate to be between 23% and 26%, corresponding to a gap tax rate of 23% to 25%. Next slide. At the end of the third quarter, our adjusted net debt to trailing 12 months adjusted EBITDA was 3.2 times. Adjusted net debt to trailing 12 months combined adjusted EBITDA was 2.4 times, down approximately two-tenths of a turn compared to last quarter. We remain focused on deleveraging to approximately two times by the end of the first quarter of 2025. In the fourth quarter, we expect interest expense to be between $65 to $69 million. I will now return the call to Jim to discuss the outlook for the fourth quarter in closing remarks.
spk06: Thank you, Samir. Looking ahead to the fourth quarter, I wanted to lay out our current thoughts. We expect GTV growth to be between high single digits and low teens year over year on a combined basis. Note that this anticipates an approximately 200 basis point headwind due to cycle and over cap related GTV in our automotive sector last year. Regarding the cost of service, tow and fuel costs continue to trend higher due to the rebound in diesel prices. Additionally, we continue to experience inflation in our labor costs and an acceleration in rent expenses associated with leased property. Turning to SG&A, we expect SG&A to be between $180 million and $190 million exclusive of share-based payments and any other adjusted items. Thank you again for your interest in RB Global. I hope you can hear how excited we are as one team, all in. And I want to thank our team for their focus on execution and dedication to our customers. With that, operator, you can now open the call for questions.
spk01: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Michael Dumais, Scotiabank. Michael, please go ahead.
spk07: Hey, good evening, guys. Hi, how are you, Michael? Very good. So, I mean, I think everyone is going to circle around this with different questions, but, you know, I understand customers, particularly if I can make decisions based on different variables. So the question is, you know, how can you come away feeling like the loss is customer specific rather than potentially a leading indicator?
spk06: Hey, Michael, it's Jim. Thank you for your question. And look, for me, Our main focus, you know, when we came into IAA and looked at their performance was really thinking about how do you turn it around? And, you know, in my mind, I never thought about this as a V-shaped type of all of a sudden when a company was going through, you know, declining, you know, market share over the last number of years that it was just magically going to come up. And I've always thought about this as a U-shaped. type of curve of what we're going to have to deal with. So to be able to make this U-shaped happen, what I feel really great about is the progress that we've already made on the SLAs and the commitments to our customer, which are well ahead of where I thought we would be at this point. Unfortunately, the timing of when those changes started to happen and the decision that a carrier had to make just didn't line up. But what makes me feel really good is the progress we've already made and we continue to make going into the current quarter is what I get very optimistic about as we think about slowing down market share growth, flatten it, and then ultimately growing it.
spk07: Okay, perfect. And just to maybe expand on that a little bit, the 4% of GTV headwinds, Can you walk us down from there to maybe gross profit and EBITDA? Just trying to think about, you know, the operating leverage with IAAs.
spk03: Yeah. Hey, Michael. I think you have enough historical information to get to that number. We're not necessarily guiding to a gross profit or adjusted EBITDA range associated with a loss. As you can imagine, we've improved the efficiency of both organizations through the transaction. Jim, do you want to talk about the cost savings?
spk06: Yeah, no, look, I think as you can see, reaffirming where we're at with the cost synergies, really comfortable with the range that we gave as we think about, but to Samir's point, we wanted to make sure you had the GTV guidance, and I think there's probably enough information to kind of get down to the levels that you're talking about.
spk07: Okay, those are my two. I'll leave it there, guys.
spk06: Thank you.
spk01: Thank you. Your next question comes from Craig Kennison, Baird. Craig, please go ahead.
spk02: Yeah, hey, thanks for taking my questions as well. Circling back to this insurance topic, can you just confirm that it is a different insurance carrier than the one that's impacted results in recent quarters? I think we can confirm that, yes. And then, Jim, I guess I'd just ask, were you surprised by this decision? And if so, like, should investors be concerned that IAA and that team didn't see this change coming?
spk06: Look, as I mentioned before in the previous question, in my mind, I always thought this was going to be a U-shape that when we did our due diligence in IAA, we knew about market share losses and we knew where their performance was and and what we were going to have to do to slow that market share loss down, then flatten it out and bring it back up. So again, not surprised. Would I have loved this decision not to have happened and had more time with the performance that we're seeing right now and have nine months of the current performance instead of three? I would. But look, time is everything. But again, We never thought this was going to be a V shape. We always thought this was going to be more of a U. And so from that fact, I'm not surprised.
spk02: Thanks. And then just on the, you had announced some new incentives for your territory and branch managers starting next year. Could you give us a sense for what those KPIs might be and the kind of impact you think it may have on your businesses?
spk06: Look, I think it's just keeping the company in sync with our SLAs that we make for our partners and the commitments that we made in those contracts. Think about the previous more company level, regional level, but these are very specific around the commitments that each branch has to deliver compared to the SLAs that we've agreed to. Okay, thank you.
spk01: Thank you. Your next question comes from Steve Hansen, Raymond James. Steve, please go ahead.
spk09: Thank you for the time. Can you perhaps speak to the cadence of the expected yellow dispositions? I know you suggested a couple quarters, but do you expect them to be evenly dispersed, or how do you think about that pattern?
spk03: Yeah. Hey, Steven. That's a good question. I think some of this will be market dependent on how to best optimize price. You know, we've already actively mobilized resources against this. But at a high level, I think what we've said is, you know, it'll take us three to four quarters to get through the bulk of the disposition.
spk09: Okay. That's helpful. And then if I'm just going to circle back and beat the horse a little bit here on the carrier. that's made the decision. Can you maybe just speak to the rest of the portfolio and any expected renewals that are coming up over any particular timeframe and whether there's milestones that we should be mindful of as we move through the next two to three quarters? Are there any other renewals that are going to surprise us?
spk06: Look, I wouldn't get... Definitely nothing that will surprise us, but like everything you can imagine, every insurance carrier has a different cadence of when their contract comes up and whatever is going on in their environment, but I can at least tell you there's no active RFQs that we're dealing with right now.
spk09: Okay, that's helpful. That's my cue. I appreciate that.
spk01: Thank you. Your next question comes from Sabahat Khan, RBC Capital Markets. Sabahat, please go ahead.
spk10: Great. Thanks and good afternoon. I guess just on the yellow, based on Kind of your view of the channels that you might utilize to disperse that equipment. How should we think about the take rate on that disposition relative to maybe the company average? Because we've seen some numbers on the number of units, the value that Yellow held it at. But just curious what you think about take rate based on the mix of channels.
spk03: Hey, Saba. It's Samir. You know, as you can imagine, this is a complicated, multifaceted deal. And it will depend on the percent of assets that are actually transacted via strategic bulk sales. That said, as you would imagine, the deal of this size, the total take rate is lower than our current average, much like how we've spoken about strategic accounts more broadly speaking. Very accretive to profit dollars. We're happy with this transaction and how it's structured.
spk10: Okay, great. And then I guess maybe just on the kind of same topic on the customer, I guess as you look out to 24, are you able to maybe give us some perspective as we tweak our models on, you know, net where you think the year might look like with the exit of this customer? And then just kind of second part is, do you have a cadence of how this customer sort of leaves your numbers? Is it all at once at the beginning of the year or does it happen slowly throughout the year?
spk03: Hey, Saba. So we're not going to talk about 2024 just quite yet, but the way the contract is structured is you know, they have the right to, they've indicated that they'll curtail assignments by end of this year. So typically there's a cycle time associated with the inventory we currently have on our books. So most of the impact would happen in the first quarter and you won't get, you know, kind of a clean run rate until the second quarter of 2024. Okay, sounds good.
spk01: Thank you. Your next question comes from Maxim Sichev, National Bank Financial. Maxim, please go ahead.
spk08: Hi, good evening, gentlemen. Hi, how are you? Hello. Good, good. I was wondering if you don't mind maybe commenting around sort of a lower magnitude of hurricane activity and how that impacted the auto business in the quarter. I presume it was margin accretive, but any way that you can maybe quantify that would be helpful. Thanks.
spk06: So, Maxim, you mean what it was from last year, since there was really nothing this year?
spk08: Exactly, yeah. So that we can sort of gauge kind of the cadence on a going-forward basis.
spk03: Yeah, I'm not sure if we've quantified what the CAD impact in terms of GTV was in the third quarter of last year. Let me take that away, and I'll get back to you on that.
spk08: But maybe just directionally. So like more activity, kind of negative for margin, less for margin. Is that how we should be thinking about this?
spk06: No. For last year, the CAD event was accretive to EBITDA. So with the level of volume, it wasn't negative for IAA. So I would think about it as it was accretive in last year's numbers when no CAD events this year. but kind of think about less than a hundred million of GTV type of level, but definitely a creative from an EBITDA standpoint. Okay.
spk08: Thank you. And then maybe just going back to sort of the opt CapEx expectations. I mean, the first question, I guess, what is that really going to generate for you guys in terms of, you know, returns and should we expect, this kind of bump to 300 to start moderating and by when and how much, yeah, like any call you can give there would be helpful, thanks.
spk03: Yeah, no, as we described in the script, Max, either we're making these investments for strategic reasons or opportunistically we're able to purchase land, in some cases, below market value since our leases are up. We're not going to quantify the exact impact. It would show up in our cost of service next year. And then no real outlook for 2024 CapEx. But stay tuned and we'll give you more color on that next quarter.
spk08: So just to clarify, so cost of service will go down on a prospective basis?
spk03: Yeah, I mean, when you buy property, you're reducing your rent expense. But at the level we're doing you know, we're not giving any specific numbers around the exact dollar savings or the margin impact, but where you would see it is in the cost of service.
spk08: Okay. Okay. That's helpful. Thanks, fellas.
spk01: Thank you. Your next question comes from Michael Feniger, Bank of America. Michael, please go ahead.
spk04: Hey, everyone. Thanks for taking my question. Just one. Jim, you kind of discussed earlier you know, around, you know, the V shape versus the U shape. And your goal is to kind of slow down the market share, flatten out and grow it. And just kind of piggybacking off the last question, I know you guys raised your CapEx and just going forward, you know, given this customer loss is, is your assessment that you need to invest more to kind of achieve that U shape? I understand you're not giving specifics on 2024, but just, you know, with your assessment and, and taking over, is it that we need to, you know, is this going to be a higher CapEx, maybe even more investment in the business to kind of get that U-shaped? Just curious, like, how you're kind of thinking about that, not looking for specific numbers, but if there is a little bit more intensity that's needed for us to get that U-shaped.
spk06: Yeah, no, so, and Samir will jump in, but just out of the highest of level, you For our partners on the auto side, what we need to achieve is operational consistency against our commitments that we've made to them. And look, there's very little CapEx that has to be invested to do that. This is all around execution, consistency, clarity, and accountability at the field level. So I'm not expecting to be able to retain and grow capital. to invest capital to be able to do that. I think as we think about real estate and a financial decision to make around lease first own, that's going to be a financial decision that we make that's best for the company. But the two are disconnected from having to go out and get business from our auto partners.
spk03: And Samir, do you have anything that you want to... Yeah, no, I think you hit it, Jim. You know, Michael, at a high level... you know, purchasing land, having land is not a prerequisite for meeting our SLAs. The capital intensity to improve consistency, you know, relatively minor, you know, the purchases we are making is a financial decision, you know, just resources, own economics, that sort of thing.
spk04: Fair enough. And just lastly, just curious, Jim Smear, like in the last You know, towards the end of October, maybe even what you're seeing in early days in November, just is there, has there been any step function changes when we think of used equipment values either on the auto side or either on the construction and transportation as we kind of start to look to finish off the year? If there was anything you noticed through the quarter and towards the end and to now? Thank you.
spk03: Yeah, Michael, great question. So if you think about, you know, the month of October, used equipment pricing year-over-year for construction in the U.S. was down, call it 6%, and transportation was down 19%. You know, we're still above 2019 levels by a healthy amount, but I wouldn't say there was a step function change in the month of October.
spk02: Perfect. Thank you.
spk01: Thank you. Your next question comes from Steve Hansen, Raymond James. Steve, please go ahead.
spk09: Oh, yeah. Thanks for the call, guys. I'm not sure if it was covered. I might have missed it earlier in the remarks. But can you perhaps speak to some of your efforts thus far on the whole car market and the aftermath of the agreement that you made last quarter or June?
spk06: Yeah, so Steve, just as we talked about probably a couple months ago, very early on in our stages, we are done our strategy planning for it and our early stages of execution against that. So from a scene and a number standpoint, nothing in the past quarter. So something more in 2024 than anything that's going to help 2023. Okay, thank you.
spk01: Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star 1 on your touchtone phone. Your next question comes from Larry Demaria, William Blair. Larry, please go ahead.
spk05: Thanks. Good afternoon, everybody. Hey, Larry. Hey, Samir. Jim, two questions. First, any color or timing on the filling out of some of the C-level positions that are open? And secondly, you talked about the SLAs, which are a nice change, obviously. Just for clarity and for a little bit more information, are they being rolled out staggered by customer? Are they fully rolled out? And, you know, you mentioned better pickup times. What are some of the other things that will get better over time and, you know, potentially towards more business coming in?
spk06: No, no, you got it. So I'll start with the second question first from an SLA standpoint. So think about same-day towing, being able when you get an assignment to pick up the car. We're feeling really good about our progress from a tow standpoint. And the next big one is around titling and making sure the time after you get the car, you know, we're as quickly as possible then as you can imagine gross returns. But look, with each passing day, our position is improving and it's strengthening. And what we really need to get is that longer track record of consistency under our management of the company. And once we see that building trust with our customers. And then just to answer the other question, just repeat it for me.
spk05: Just filling out some of the C-level positions that are open.
spk06: Yep, got it. Yeah, no, so really the major one that we're going after is the CFO first. We are down to a handful of candidates that have now made their way through our committees. And we had an internal committee going through it and then a couple members of our board going through the process and And we're hoping that in the next 30 days, we're going to have someone in seat as we're going through it. But now we're down to the financial part of the position.
spk02: Great. Thanks and good luck.
spk01: Thank you. There are no further questions at this time. Please proceed.
spk06: All right, everyone. Thank you for taking the time. We really appreciate it and looking forward to catching up with everyone. Thank you so much.
spk01: Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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