RB Global, Inc. (RBA) Earnings Call Transcript & Summary

Good morning. My name is Colin, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Ritchie Bros. Auctioneers Conference Call. [Operator Instructions] Thank you. I'd now like to turn the conference over to Mr. Sameer Rathod, Vice President of Investor Relations and Market Intelligence, to open the conference call. Mr. Rathod, you may begin your conference.

Hello and good morning, and thank you for joining us on today's call to discuss our announcement to acquire Euro Auctions. Joining me here today are Ann Fandozzi, our Chief Executive Officer; and Sharon Driscoll, our Chief Financial Officer. The following discussion will include forward-looking statements. Comments that are not a statement of fact, including projections of future earnings, revenue, gross transaction value and other items; our ability to satisfy conditions of Euro Auctions acquisition agreement and the consummation of the transaction on the anticipated time line or at all; the benefits and synergies of the Euro Auctions transaction; the future opportunities for the combined business of Ritchie Bros. and Euro Auctions are considered forward-looking and involve risks and uncertainties. The risks and uncertainties that could cause our actual and operating results to differ significantly from our forward-looking statements are detailed in our SEC and Canadian securities filing available on our Investor Relations website at investor.ritchiebros.com. We encourage you to review our Euro Auctions release and Form 10-Q, which are available on our website as well as EDGAR and SEDAR and the Euro Auctions investor presentation, which is available on our website. On this call, we will discuss certain non-GAAP financial measures related to Ritchie Bros., including certain forward-looking non-GAAP financial measures. For the identification of non-GAAP financial measures, the most directly comparable GAAP financial measures and a reconciliation between the 2, see our news release and Form 10-Q and investor presentations. We are unable to present a quantitative reconciliation of forward-looking non-GAAP financial measures discussed on this call. I will now turn the call over to Ann Fandozzi.

Thank you, Sameer, and hello. We had so much fun speaking with you on Friday, we decided to have another call today. We cannot be more excited to announce the acquisition of Euro Auctions. This meaningfully accelerates Ritchie Bros.' global journey. Euro Auctions, much like Ritchie Bros., is an omnichannel, customer-centric provider of unreserved auctions in the commercial asset space with a very strong international presence, foremost Europe. Much like Ritchie Bros., Euro Auctions has an at-risk business, which they view as a key sourcing mechanism for their auctions, something I will touch on shortly. In 2020, they did approximately GBP 480 million of hammer value, hammer value was approximately gross transaction value, and GBP 220 million in revenue. The purchase price is approximately GBP 775 million, which we plan on financing with a combination of cash and new debt. The implied EV to EBITDA multiple is approximately 15.3x, including run rate synergies. We currently expect to close the transaction by late Q4 of this year or Q1 of next year, subject to regulatory clearance and other closing conditions. We are happily retaining all key employees with the 4 Keys brothers committing to continue with Ritchie Bros. for a minimum of 3 years and Derek and Jonnie Keys playing key leadership roles. We currently expect the transaction to be accretive to GTV immediately and impacting other financial metrics meaningfully in the 18- to 24-month time frame. At our Investor Day last December, we laid out our strategy of becoming a global marketplace for insights, services and transaction solutions and crystallized that strategy through 5 strategic pillars to deliver it. The Euro Auctions acquisition uniquely strengthens each pillar and accelerates our vision. The customer first concept is ingrained into the Euro Auctions culture, and this shared DNA is one of the principal reasons we are so energized by this opportunity. Our combined organization will be able to bring unprecedented and diversified global choice to our customers. This will allow for better price discovery for consignors and more equipment selection for buyers. Next, on the employee pillar. Euro Auctions has an incredibly talented team with expertise in asset sourcing, auction operations, sales and customer service. When bringing 2 organizations together, we are eager to facilitate learning best practices from each other and providing a forum to discuss unique geographic perspectives on the equipment market. The combination will create a global platform for career advancement and development longer term, which we are quite excited about. Next, on modern architecture. We are on the journey to transform our systems into a modern, scalable architecture to provide a solid bedrock to grow on. And adding Euro Auctions to our platform will enable us to provide similar improvements to a broader set of customers globally. Moving to IMS. Euro Auctions is going to allow us to power our marketplace by accelerating our IMS adoption globally. Recall that IMS is our gateway into our marketplace and the combined organization will help us further establish a marketplace for equipment and value-added services, allowing customers to track, sell and buy equipment when, where and how they want around the globe. Lastly, on accelerating growth. Euro Auctions gives us a platform for growth in Europe and other international markets. It supports our financial evergreen model and the combination will empower a global platform. Euro Auctions has deep institutional relationships and knowledge on sourcing equipment and directing that equipment to the location of sale for optimum price realization. We are excited by what we think the combined entities will be able to achieve in this arena by giving customers access to a robust platform globally regardless of transaction size. What you see here on the slide is the percent of equipment Euro Auctions sells from outside the country of sourcing. For example, 64% of the equipment sold in Germany by Euro Auctions was sourced from outside the country. This approach, of separating where equipment is sourced from where it is sold, will allow the combined entity to be more agile and provide customers with better and deeper solutions. It will also unlock our ability to enter new markets and regions with equipment sourced from other areas. We are excited what this combination can do. The Euro Auctions business is much like ours in terms of hybrid channel model with online search, bidding and buying supported by regional yards for care custody, control and inspection. As you can see from the pie chart, they are primarily in Europe with a much smaller presence in the U.S. through their Yoder & Frey brand. They have 9 permanent location sites with 71% of the revenue coming through their online channels. 90% of their customers are repeat, and they have 220 employees, which we will warmly welcome to the Ritchie Bros. family across 14 countries. Now over to Sharon.

Thanks, Ann. The numbers that I'm about to present are reflective of Euro Auctions' records and may not be consistent with U.S. GAAP presentation. All numbers are presented in British pounds giving you a cleaner view of their historical financials excluding foreign exchange impacts. I would note that their hammer value has been stable over the past 3 years with moderate revenue growth over that same time frame. This financial performance has been supported by the expansion of their omnichannel offerings and the strong returns driven by their sourcing approach aided by strong global demand and price realization environment during the latter half of 2020. Euro Auctions' results include a higher mix of inventory revenue and GTV compared to Ritchie Bros.' historic levels but in line with our international region. The last chart shown highlights the strong inventory return by dollar and rate delivered by their sourcing structure presented in a similar format that we show in our quarterly earnings presentations. This slide gives you a quick overview of the combined company on a preliminary pro forma basis. The acquisition would increase our GTV to over $6 billion. And given Euro Auctions' predominantly international footprint, the combined entity in 2020 would have had 22% of GTV sold internationally compared to 14% sold by our company today. Our mix of revenues between inventory and services revenue will also shift to closer to a 50-50 split. We will fund the transaction through a combination of cash and debt, and we have a fully committed bridge financing agreement in place that is structured to limit market risk over the course of the sign-to-close period. Prior to the closing of the acquisition, we will seek an amendment to our existing syndicated credit facility and will seek to issue new senior unsecured debt securities. With the raise of incremental financing to support this acquisition, we expect our adjusted net debt to adjusted EBITDA ratio on close of this transaction to be just below 4x. That said, we expect, much like after the IronPlanet acquisition, the opportunity for rapid deleveraging, and we will target to get to 2.5x by 2025. Now let me talk about revenue and cost synergies. First, let me highlight that our approach to this integration will be about bringing the best of Euro and the best of Ritchie Bros. together. Our first priority will be to streamline customer touch points across the combined organization, and we think this will lead to modest synergy opportunities, primarily within our general and administrative areas. We also see auction site efficiencies across end market sectors. For example, we have a much larger presence in transportation assets in the U.K. and currently, RBA and Euro Auctions' sites are relatively close. We think there are customer experience advantages by dedicating one of the locations to transportation and the other to construction. We will continue to test and learn here and let our customers guide us on how best to serve them, and we will work to reduce rent expenses in the combined organization in the future. In addition, it is very important to note that we will be building this organization to be poised for growth, and we'll focus on investing in technology and operational processes to unlock the full potential of the marketplace platform in this key international region. However, to unlock some of these efficiencies, we will require technology modernization and investments in line with our modern architecture strategic pillar. And with that, I will hand the call back over to Ann.

Thank you, Sharon. We are very excited to welcome the Euro Auctions' team to the Ritchie Bros. family and to accelerate our journey of becoming a global trusted marketplace for insights, services and transaction solutions. With that, let me hand the call back over to the operator and open it up for questions.

[Operator Instructions] Your first question comes from Craig Kennison from Baird.

Question on your fee structures. How do they compare to Euro Auctions? And is there any opportunity you see to harmonize that fee structure?

Craig, Ann Fandozzi here. The fee structures are pretty much set by market, if you will. So there may be opportunities. As I discussed on the call that we had, I think, several calls ago, our approach to fees is more of a competitive landscape. So it's going to be less about harmonization and more about looking around the competitive landscape, which is a process we're going to engage in on a regular basis, minimum once a year and basically, say, in every market where we do business does an opportunity present itself. We'll be applying that same kind of methodology to Euro Auctions. So it's going to be less of an internally focused exercise and much more of a market focused one.

Great. And then with respect to your synergies, is there a way to quantify the level of synergy you anticipate? And then maybe put those savings into various buckets.

Yes. Let me just kick off, and then I'll turn it over to Sharon. I think the synergies, there should have been a pie chart included and I completely recognize that we're catching you guys live and in person with announcing late last night and then a call first thing this morning. But the synergies we have put forward are $13 million with SG&A being $10 million of it and then lease about $1.5 million and then $1.5 million in other. So I think we've tried to give you a perspective of where that comes from. The time line really to think about it is, obviously, the GTV and revenue synergies are immediate and then the cost synergies come over kind of 18 to 24 months post close. Sharon, anything to add?

No, I think that's right. It's definitely bringing the best of the best together and poising for growth. So it is somewhat of a kind of a moderate level of synergy reduction we're looking for. We're really looking at building scale. And then in addition, we did call out that there will be some investments required on both sides to really deliver on our modern architecture pillar to be able to truly unlock the potential that the marketplace provides.

Your next question comes from Gary Prestopino from Barrington Research.

Congratulations on this. It looks very interesting. Ann, could you maybe talk about the genesis of this transaction. Was this a deal that was shopped around? Or was this more or less that each of you know each other very well and you've been talking for years about the potential of combining both companies?

Gary, yes, we are so excited about this transaction. The Euro Auctions team is really -- is first rate. So let me just kind of do a backdrop. So first, the Keys brothers, specifically Derek Keys, were highly influenced by Dave Ritchie, and who wouldn't be, right, first rate, when he was starting his business. So culturally, and this is a very important part, whenever you're integrating businesses that are similar in nature, despite the fact that we operate in a $300 billion marketplace, right, so together -- coming together, we're still a very, very small percentage of the market as I said exists, the cultural fit of the organizations is very important to ensure kind of proper integration and realizing the vision. So that's one part of the backdrop. The second part is, when we kicked off our strategy, the one we took you guys through in December of last year, about becoming a global marketplace for insight, services and transaction solutions, we were clear that the pillars were all about the what. And now we were going to be open to the how. And as you'll see in this presentation, Euro is an incredible fit for how to get some of these pieces done, specifically accelerating our global journey and allowing us to really accelerate IMS adoption globally. So that's a little bit kind of from our end, why it was such a perfect fit. Euro Auctions have kicked off the competitive process. We were included in it. They were kind enough as strategic and having much mutual respect for each other to make the management team available. COVID, with the U.K. shutdown and restrictions, Derek, Jonnie, and myself actually met in Iceland, in Reykjavik, because, again, when you bring these companies together, there's the numbers on paper, but then there's the reality of the fit and do we share the vision and how is this going to work together. And it was apparent from the get-go that this was going to be really something spectacular. So that's how it came together.

Your next question comes from Bryan Fast from Raymond James.

Could you talk about how the 2 companies differ when it comes to technology? Do you see opportunities for Ritchie, I guess, to leverage their technology across the Euro Auctions platform?

Bryan, so the short answer is yes. So at the highest level, in the auction-only arena, we go to market similarly in the unreserved space, meaning that 70% of their transactions are currently online and 30% live. But that's where it kind of stops and where our excitement -- obviously, in the live unreserved auction space, we're very excited as well. But our excitement goes to the next level when you think about the broader omnichannel and technology solution that Ritchie Bros. has and the one we're building. So when we think about our reserved auction, marketplace-E, and the fact that, that has been growing leaps and bounds, the ability to bring Euro Auctions over time, obviously, onto that platform and what that could mean for the customer base is really something exciting. Also, a big portion of our revenue -- a significant portion of our revenue is services, something that Euro Auctions does not offer on the underlying assets, giving us an opportunity to drive revenue and be accretive as soon as the businesses come together, and we're able to put all of those processes in. And then last but not least, you've heard us speak about our excitement about the modern architecture and IMS, and the ability to do that over a larger scale with a broader customer base is an accelerant that speaks for itself.

Just a follow-up, I guess. Are there any redundancies in auction locations? Just maybe talk about the overlap in the business and how you plan to manage that?

Yes. There are a few, and Sharon, in her prepared remarks, spoke a little bit. So the first is, no decisions have been made because, as Sharon noted, this is about growth. This is about acceleration. So we're going to look at any overlapping sites and say, what is our growth trajectory there? Is there a better use of that footprint? Should one be commercial? Should one be transportation? Or is this a cost synergy and we really -- we can take that. Just as a reminder to everybody on the phone, we're testing a lot of things with satellite yards, again, with an eye towards growth. Our fifth pillar is all about accelerating that growth. So we're going to look very carefully around any overlaps and understand will they facilitate and accelerate growth or are they truly overlapping and ability to save some costs.

Your next question comes from Michael Feniger from Bank of America.

I've always thought that Europe was a little bit of a struggle for Ritchie Bros. in terms of, when we look at the growth in the U.S. and Canada. Is there just anything you can tell us that is different about the European landscape when it comes to auctions, unreserved, reserved, online versus live. Anything there in comparison to the Canada and the U.S. market?

Yes, Michael. Ann here, again. So, yes, we -- this is part of why the Euro Auctions acquisition was so fascinating to us. So Europe is an important market for Ritchie Bros. for sure, one we've been in and an ability to take a look at an operation with an incredible legacy like Euro Auctions was fascinating. What's very interesting about Euro Auctions is that their sourcing model is a complement to our own. So the way we think about at-risk, and I talked about this a little bit, but let me go a little bit deeper here. The way we think about at-risk, it's really sales specific. So we think about if there's an opportunity in arbitrage, if you will, to put our money at work because we see an opportunity in the market, a customer wants liquidity much quicker, we put our money "at-risk." That is very different than the way Euro Auctions views the market. They view their capital as a sourcing model and the disposition model is actually the globe. So there's a page in the deck that shows that despite the fact that a vast majority of their sourcing comes from Europe, but -- a big chunk from the U.K., where it's sold is actually all around the globe. It is this capability that when we talk about bringing the best of the best, this is a capability Ritchie Bros. has been very interested in developing and Euro Auctions has well established. So we're really excited about it on both sides. What it means for us in terms of accelerating Europe and accelerating the growth, but also a new capability, a different capability for us of how to think about sourcing and then a global disposition.

Understood. And you were saying how this is about growth. And I might have missed this, but the slide shows that they grew revenue, I think it was 3% in 2019 and 4% in 2020. Do we know how they performed in the first half of this year so far? And I understand it's a sourcing model. So curious if Europe is seeing any of the constraints that you guys highlighted last week in the U.S. market?

Yes. So let me broach that. So both 2020 -- because of COVID restrictions, so Europe is actually hit on 2 sides of this, so -- which we anticipate both opening up. So the first is the cross-border transportation has been very, very difficult and 2020 was actually a suppressed year because of it, both for our European business as well as for Euro Auctions and then the tightness in the supply environment we're seeing, they're seeing as well. I don't believe we're speaking specifically to their 2021 growth numbers. Suffice it to say that much like in our world, we know 2 things for sure. Supply will catch up; equipment is aging, two; and I guess, three, when COVID is a thing of the past, although Delta variant is giving us a run for our money, borders will reopen and there'll be a much freer, stronger movement of product around the globe. Sharon, anything to add to that?

Yes. I think the piece I'd add, Michael, is just remember, this business is, first and foremost, a relationship business. And we have certainly experienced difficulty moving into new markets because establishing those relationships is difficult. And I think the piece that we were so impressed with the Keys brothers and Euro Auctions is just the strong relationships that they hold with a lot of the strategic accounts primarily and customer base that is in the European market. And so again, I think the growth potential that we see is how to leverage those relationships with the buildup of our total marketplace view so that we can bring additional services to that customer base to provide even more value going forward. And I think that vision is equally shared by ourselves and the Keys brothers, which is what makes this transaction just so exciting.

Your next question comes from Maxim Sytchev from National Bank Financial.

Maybe the first question for Ann or Sharon, I guess, whoever wants to address it. In terms of when we look at the rate spike to 12.8% in 2020, how should we think about this on a going-forward basis? Do you expect this to kind of stay at that level? Or should it normalize back to the historical run rate that Euro Auctions was producing?

Yes. Let me start, and then I'll turn it over to Sharon. So they in fact, they, Euro Auctions did a similar exercise to what Ritchie Bros. had done, which is take a look at the competitive landscape and adjust fees and rates because of it. So that's part of what's in that 12.8% number. So that's number one. Number two, the price performance of the market in the underlying, what they call, sourcing business, we call at-risk, has just been stellar, which has driven that as well. So there's kind of 2 elements there: One, here to stay. The other will normalize somewhat as we move forward. Sharon, anything to add to that?