Auction Technology Group plc (ATG.L) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Auction Technology Group webcast. [Operator Instructions] Please note, this call is being live streamed to a webcast for a wider audience and will be recorded. [Operator Instructions] I would now like to hand over to John-Paul Savant, Chief Executive Officer, to open the presentation.

Hello. Thank you for joining today. I'm happy to be with you and discussing ATG's acquisition of Chairish. And also, if you'll note, what we're trying to do is have this call at 2:00 p.m. because we've had multiple of our American investors asked that we have our calls at a time that is actually suiting to multiple time zones. So hopefully, this accommodates several people. So in discussing Chairish, the big thing to keep in mind, I think, is to look at the overall picture of where ATG has said, it's trying to go over these last 4 years. And we've talked about the fact that ATG is here really to transform the industry, both on the industrial and commercial side and on the Art & Antiques side. And this acquisition clearly is firmly placed on the Art & Antiques side. And when you're thinking about transforming an industry and you look at the dynamics of that industry, one of the key things that we felt you needed to do was when you look at this industry and you look at it over the long term, the idea that auction and fixed price for specialized and unique items needs to be under one roof, just made a lot of sense to us and enables us to address the full range of buyer needs. People don't wake up and say, what do I want to buy online at auction today. They wake up in this sector and in this category thinking where can I find unique or specialized item, and therefore, where can I go? And sometimes they're willing to wait a little bit longer, and they want to get a great deal and they'll go to Auction. And sometimes they want it now and they're willing to pay more and they buy it at fixed price. And we think that having both under one roof is going to differentiate ATG's proposition and it creates exciting growth opportunities for both the fixed price side and for the auction side. And so with that, if you can turn to the next page. For us, we really see lots of different reasons why this is an exciting acquisition, but there are 3 big categories where I guess I'd ask you to put this. And the 3 big areas that excite us is, first of all, this acquisition greatly strengthens our core marketplace position. Marketplaces really thrive based on a strong supply side and a strong demand side. And the more of that you can have, the better the flywheel that you create and that flywheel in turn allows you to acquire buyers more cost effectively, which in turn helps you bring on more inventory in a cost-effective way. And Chairish, very clearly will help accelerate our flywheel based on the better supply and the new sources of demand that we will bring on. The second big thing that excites us about the acquisition is the opportunity to put in place our marketplace playbook that we put in place several times before, where we were able to grow businesses faster than they were growing before. And I guess the best example of that most recently is ESN growing about 8% before we bought them, 2 years in a row of north of 28% and well ahead of the group this year as well. And again, that's been simply applying a playbook to them and creating some of the synergies that we benefit from based on our model. We believe, again, the same can be applied to Chairish, and I'll talk a little bit more about that later. The third area that really is exciting to me is that it enables the transformative growth that many of you have heard me talk about before. And this is where you really leverage the data of ATG and a fixed price provider, and you do that in order to monetize the underbidder. And again, I'll talk a little bit more about that, but owning Chairish and the $2.6 billion of inventory that they bring, 1.3 million listings, really increases the speed with which we will be able to pursue that transformative vision for ATG. So if you go to the next slide, just to give you a quick feel for Chairish itself. They have 1.3 million active items. That compares to about 14 million items on the Art & Antiques side for ATG. They have 4.1 million accounts compared to our 6.7 million. They have 4.5 million monthly sessions compared to our 25.5 million in the Art & Antiques space alone. And I should note that -- and then $2.6 billion of inventory compared to the $5.6 billion of Art & Antiques inventory that we possess. So again, when you're looking at supply or demand, we feel that this is a very exciting acquisition for ATG. Next slide. Here, what we try to talk about a little bit is around how this accelerates the flywheel. And as I said before, marketplaces thrive by offering a unique supply in the largest source of demand. What we're adding here is $2.6 billion of inventory, 1.3 million items sold by over 12,000 sellers in the Chairish network. And interestingly, they had some good inventory in areas where ATG has high interest, but less supply. And then on the demand side, 4.5 million monthly sessions and 1.5 million social media followers. So again, increasing our reach into new segments that we haven't been in before and just a lot more people. As we said, we're following that proven marketplace playbook to we've used with Proxibid, BidSpotter, Lot-tissimo, ESN, et cetera. And we believe that there's many opportunities here for doing the same at Chairish. And then the last part that gets us excited is that the fixed price or list price component of the Art & Antiques and collectibles market is about 3x the size of the auction market. And so this gives ATG a much larger TAM to play in with very differentiated proposition. So if you go to the next slide. The way that we're approaching the acquisition is really to break it down into 3 parts or 3 horizons. Our initial focus is really going to be on extracting the $8 million in synergies that we've identified during the due diligence process. And we've worked with specialists in the integration, post-merger integration world, including Boston Consulting Group, to help identify the synergies that we feel, and we have very high confidence around these $8 million. Obviously, there are other ones as well, but $8 million in very high confidence synergies that we think we can execute on over the next year. The second big horizon for us is really executing that marketplace playbook I talked about. And it's things that you've heard me talk about before. So it's leveraging our ATG Excel, our cross-listing product, to connect people from the partner network and from our marketplaces into Chairish to help drive their demand higher. And it's also leveraging our value-added services. So for instance, the digital marketing and payments and potentially down the road shipping. And then the third component is the transformational growth that I spoke about. And this is really around how do you leverage the data to monetize the underbidder with the new available-now inventory. So if you go to the next slide, if we look first at that $8 million of cost savings, $3 million to $4 million of that comes from overlap in people, where we will be rationalizing the Chairish side, along with some of the ATG elements where we see overlap, so those are high identified and ready to execute on quickly. The second area is on the marketing, where they have about $2 million to $3 million in spend on areas that we thought had very low ROIs that are immeasurable ROIs, and we believe that we're able to cut that and supplement the inbound traffic that they were getting through the cross-listing onto the various ATG marketplaces. The idea is cut marketing expense is low return, cross-list them with a huge amount of visitors that we have within ATG and therefore, retain and grow that revenue. And then the last bucket is simply by doing what we've done with LiveAuctioneers, which is adjusting the payment monetization levels to the LiveAuctioneers levels. And we believe, again, that's worth about $2 million in synergies in year 1. So that's the source of the $8 million, and that's what we'll be executing on in this first year. When you look at following that proven marketplace playbook, the big actionable area that we see beyond the cross-listing is really leveraging our AMP product. And for people who aren't familiar, that's where we sell services to the auctioneers or the sellers who are looking to list on our platform in order to help them reach elements of our bidder base more effectively. And we see this as a huge opportunity at Chairish as well. And just to give you an idea of that, if you compare Chairish to LiveAuctioneers overall on a dollar spent on digital marketing compared to $1 that we sell for them in terms of GMV, they're only -- the sellers on their platform are only selling about -- spending about half of what LiveAuctioneers is able to achieve across the board. But when you look at the more representative group of optionees within our LiveAuctioneers base and see how much they're spending, which is more retail-like setting, Chairish is currently earning only 1/5 of what we earn from those retail-like clients. So we think there's a huge opportunity to increase AMP there. And then if you look beyond us at how much the sellers are spending within Chairish compared to what they spend on an eBay or an Etsy, again, it's between double and 5x the amount that people typically spend on these other channels. And so we have high confidence that there's a rich opportunity for us to mine there within Chairish. Go to the next slide. So many of you have heard me talk about monetizing the underbidder for the last 4 years, and that transformative growth really comes from capturing the demand that auctions leave behind. And the reason we say that is because if you look, we have about 180,000 to 200,000 winners in any given year. But what we also know is that there's 17 million unconverted bids. And so those are people who bid, who told us an amount they were willing to spend, they may have been the penultimate bidder, they may have been somewhere in the sequence leading up to that. But the idea is that they said, here's an amount I'm willing to spend and commit to buy. Today, very little happens with that. And even if we for them within our auction network, it may be that there's an auction coming up in a few days, there may be another situation where they need to wait and they have to worry about being out bid. And now instead of people having to wait, there's an opportunity to present them with available-now, buy-it-now inventory through the $2.6 billion that we see within Chairish. So we think this is a huge opportunity for us to mine. And to also create interesting reasons for people to pick LiveAuctioneers over any other channel through which they buy because LiveAuctioneers will be the only channel through which a bidder will get a buy-it-now, available-now inventory presented to them if they don't win the item that they're looking for at Auction. So an incredibly exciting opportunity for us. So now over to Sarah to talk through a little bit of the financials.

Thanks, John-Paul. Yes, I'll move on to the financial considerations for the transaction. So as you've heard, we are paying $85 million purchase price on a cash-free, debt-free basis, so about 1.6x current revenue. In terms of the financial returns, we do believe this is going to have a very compelling financial returns. And if I sort of move to where we think we can get to in the medium term under our ownership, we strongly believe that this business will be a double-digit revenue growth business and with adjusted EBITDA margins of around 30%. And if I sort of break that down, there's really 2 buckets that, that comes in. The first is, as John-Paul said, around operational synergies. So we've got the $8 million of high confidence operational synergies that we've got strong plans against and which we will deliver more than half of that during '26. And we'll have a full run rate of those synergies into '27. And now on a sort of similar revenue basis to where Chairish is today, that gets us to about a 15% margin. And then the second element of the financial returns comes from the material revenue benefits that we see. Again, John-Paul has talked about the opportunities for AMP using the marketplace flywheel and actually being able to replace some of the marketing investment with our network of buyers and sellers. And a combination of all of those and things like cross-listing across our platforms, bridges you from the sort of 15% margin to the 30% margin in the medium term, but also allows us to have confidence in double-digit growth for the medium term. So that's sort of how we think about the business under our ownership. In terms of what that means from a returns output metrics, so we will have a positive contribution to adjusted EBITDA of the Chairish business in full year -- in financial year '26 will be accretive to adjusted EPS in financial year '27 and then have ROIC, return on invested capital, materially ahead of cost of capital by financial year '28. And then as I said, for the medium term, we are confident that under our ownership, we get to a business which is double-digit revenue growth and with adjusted EBITDA margins in that 30% region. If I talk about the funding, so we are fully funding this acquisition through cash on balance sheet and our existing drawings under our existing RCF facilities. And what we are also doing to ensure significant headroom around liquidity and to keep our financial flexibility, we are extending the RCF facility by another $75 million which we're doing with our existing syndicate of banks and on exactly the same terms as our existing RCF. So we'll be moving to $275 million of capacity under the RCF facilities. But just to reiterate, this acquisition will be fully funded through cash available on our balance sheet and drawing under our existing RCF rather than that incremental. In terms of leverage, what that means is that we will get to an adjusted net leverage on a pro forma basis of 2.3x post the acquisition. And as you know, we're a pretty unstable cash-generative business. And so we would expect to start to delever relatively quickly. And that will be very much our focus on reducing that leverage. But just to confirm, significant headroom and very comfortable to our covenants under that RCF. So that's sort of from a funding perspective. And then maybe the final thing just to say before I hand back to John-Paul is just to say that similar to ESN business, we will be reporting Chairish in the A&A segment for ATG going forward. And I think with that, John-Paul, I'll hand back to you.

Okay. Sounds good. So again, thanks for attending the call. For us, as kind of a final recap, we're incredibly excited by this. We think this is going to be an acquisition that people look back on and see as a pivotal moment for ATG when it began to establish its ability to truly transform this industry. And so again, just to kind of repeat the 3 big things. It strengthened our marketplace flywheel in a very material way while differentiating our offering from others in the online auction space. It has high confidence synergies that we've identified and which we can execute on in the next 12 months, generating a very strong financial return. We have the marketplace playbook, particularly around digital marketing that we believe that we can execute on that drives steadily higher margins out of the business and which is something that we can build on through the rest of our value-added services as well. And then lastly, the combination of ATG and our existing online marketplace data, combined with the list price data of Chairish, creates an incredible opportunity for us to monetize the under bidder and to create a truly transformative experience for both the bidders and for the sellers. So with that, I will stop and leave it open for questions.

[Operator Instructions] We will take our first question from Ross Broadfoot of RBC Capital Markets.

I thought I'd have a second bite at the cherry today. So a few from me. Could you give any color on the existing take rate at Chairish? Number two, have you seen much uptake where you already market the under bidder as you do with existing sort of future auctions coming up? Just trying to get a feel for how transformational the buy-it-now could be? Number three, are you still on the lookout for M&A post this deal? And then the final question, can you give any more color on the recent ATG trading, whether the downgrade is driven at the THV conversion rate or take rate levels? Happy to repeat if we've missed any there.

So maybe, Sarah, if you want to take the take rate one, and I'll do the buy-it-now and the M&A, and then you can talk about future trading.

Yes. I mean, I'll keep it relatively brief for us because we're not going to be giving detailed KPIs at this stage. But I think from a metrics point of view and a take rate point of view, what we can see, if you look at ATG's value-added services growth over the past sort of 18 months, even though it comes from a combination of shipping payments and marketing, so our AMP program. And I think we would see from a Chairish perspective that, that shipping is a reasonable proportion, but we think there's significant opportunity in both the payment space and in the AMP space, which, as you know, is a higher-margin area for us. So I'm not going to give anything specific on the metrics, but that's how we're sort of thinking about the opportunity from a take rate perspective.