RB Global Inc (RBA) 2015 Q2 法說會逐字稿

Good morning. My name is Michelle, and I will be your conference operator today. At this time I would like to welcome everyone to the Ritchie Bros. Auctioneers Q2 2015 earnings call.

(Operator Instructions)

I would now like to turn the call over to Jamie Kokoska. Please go ahead.

Thank you, Michelle, good morning, everyone, and thanks for joining us in our fiscal second-quarter 2015 earnings conference call. Discussing Ritchie Bros. performance today are Ravi Saligram, Chief Executive Officer; Sharon Driscoll, Chief Financial Officer; and Rob McLeod, Chief Business Development Officer. Joining us for the Q&A session following the formal remarks will be Jim Barr, Group President, and Randy Wall, President, Canada.

The following discussion will include forward-looking statements as defined by 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 your 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 rbauction.com.

Our definition of gross auction proceeds may differ from those used by other participants in our industry. It is not a measure of financial performance, liquidity or revenue and is not presented in our statement of operations. Our second-quarter 2015 results were made available yesterday after market close. We encourage you to review our earnings release, MD&A and financial statements, which are available on rbauction.com as well as EDGAR and SEDAR.

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 US dollars unless otherwise indicated.

While we may use million- or billion-dollar figures for brevity on today's call, all percent changes have been calculated using full, unrounded figures.

I'll now turn the call over to Ravi Saligram, Chief Executive Officer.

Thank you, Jamie, and thanks for everyone for joining us on our earnings call today. As you saw in our earnings release today, the momentum we built during the first quarter continued into the second with strong revenue and earnings growth, and importantly, positive contributions from every one of our business units including EquipmentOne and RBFS.

This has been an exciting quarter despite FX headwinds. We achieved a terrific revenue rate of 12.32% and a record revenue quarter. We generated the highest EBIT margin in the last four years of 40.2% and the highest EBITDA margin of 47.1%. We had a record earnings quarter, and we have fantastic cash flow. We have free cash flow up 91% versus prior year on a trailing 12 month basis.

We also completed some important leadership appointments during the quarter as we welcomed our new CFO Sharon Driscoll, who is on our call today, and welcomed Terry Dolan, our new President of US and Latin America. We're also pleased to announce the appointment of Rob McLeod, Chief Business Development Officer, an important role, given our growth plans and sector penetration strategies. We now have a strong roster of highly experienced, senior line executives and the functional leadership required to effectively execute our strategy across all our geographies.

I'll now take some time to walk through financial highlights for both the quarter and the first half of the year and discuss some strategic and operational updates. Sharon will give you an update on capital allocation with a focus on dividends, after which Rob will discuss our financial performance in more detail.

During the second quarter we achieved meaningful growth on many key performance metrics. First, GAP grew 3% compared to second quarter last year, but this figure reflects the headwinds of our FX, foreign exchange, translation to US dollars. More importantly, on an organic basis, using the same exchange rates as second quarter last year, GAP grew 11% over the prior year.

Second, revenue grew by 10% during the quarter in spite of these FX headwinds. On an organic basis, revenue grew 19% compared to second quarter last year, yes, 19%. Operating profit grew 21% year over year and 30% on an organic basis. Our operating free cash flow increased 91% compared to the same period last year, and RONA improved nearly 500 basis points, on a normalized basis, due to reclassification of some debt.

Every one of our business units and geographies contributed positively to this quarter's performance. I believe it is an indication of our commitment to execution, the strength of our multi-channel platform and most importantly, the efforts of our worldwide team. Let's go through some details of our performance.

Much of the GAP growth we achieved in second quarter was related to a 15% increase in lots volume compared to the same quarter last year. Lot growth came from a variety of customer sectors, but mainly from the heavy and light construction industries, which grew 24% and 15% respectively. Customers from these two sectors provided nearly 40% of the incremental increase compared to second quarter last year.

Equipment from companies in the oil and gas and mining industries did increase as well compared to the second quarter last year, however, neither of these industries were dominant in growing GAP. As you can see from the chart on slide 5, assets from the oil and gas sector increased by 69%, or about 1,000 lots, relative to second quarter last year.

Lots from the mining sector grew 113%, but off a very low base, providing just over 600 additional assets compared to last year. As you may have noticed, the average GAP per lot sold 55 marginally relative to Q2 last year. There were several variables influencing this metric. The vast majority of the decline was due to the FX impact on gross auction proceeds, which diminished reported GAP growth in some of our geographies and had an impact on average GAP per lot during the quarter. We estimate average lot value decreased by approximately 7% as a result of FX alone.

In addition, we did see some equipment price declines, especially late in the quarter. This shouldn't come as a surprise to anyone given recent commentary from dealers and rental companies. While we are off the pricing peak that occurred in the first quarter of 2015, we consistently hear from bidders at our auctions that equipment is selling for more than they had initially expected.

We believe there may be some overly pessimistic pricing expectations by some in our industry, especially as it relates to equipment that can be moved from one sector, such as oil and gas, into another like construction. Power tractors would be a good example of that -- or bulldozers (inaudible). So, however pricing on equipment specific to the oil and gas sector is experiencing softness, example would be like winch tractors, ultimately, pricing trends are asset and sector dependent with some categories performing better than others. Late model small to mid-size construction assets continue to perform well given the strong demand of equipment supporting nonresidential construction activity, especially in North America.

As well the mix of what we sold during the fourth quarter contributed to some of the average price decline, as we saw a 21% increase in small value lots, most of which we sell through our [valued option] lot system. This correspondingly led to a shift in proportion of low-value and high-value assets sold during the quarter. And finally, we sold significantly more high-value mining assets in second quarter last year, including rock traps and drilling equipment, which made for a difficult average price per lot comparison.

As many of you are aware, the age of machinery we sell is also an important factor in our mix and impacts our GAP performance. Consistent with our previous comments and consistent with our expectations, the age of equipment we're selling continues to improve. The void of equipment production that occurred four to six years ago is now apparent in the four- to six-year-old equipment being sold. So far in 2015, three- to five-year-old equipment, our traditional sweet spot, has comprised 24% of GAP, which is up from 19% during 2014 when historical production declines impacted our business most.

Now turning to revenue, we achieved an all-time record for quality revenue, generating $155.5 million of revenue in the second quarter, a 10% increase from the same quarter last year. Our revenue rate for the quarter was 12.32%, which was driven by stronger under review performance at many of our auctions. We estimate that about 40% of our increase in revenue was attributable to rate improvements, with the remaining 60% -- which was attributable to an increase in auction volumes. Asset last quarter, changes in foreign exchange rates did have an impact on our product performance.

On an organic basis, using the same exchange rates as Q2 2014, revenue grew 19% from the year-ago quarter. This growth was diminished by 9%, resulting from our foreign exchange translation, mostly due to the decline of the Canadian dollar and euro. On a reported US dollar basis, revenue grew 10%.

As I mentioned earlier, the performance of our under-review business contributed to the increase in our revenue rate this quarter. We believe the initiatives and focus we have had in improving the performance of this business since January is beginning to show results. In fact, during the first half of 2015, our underwritten revenue rate improved 225 basis points compared to the first half of 2014. It's an achievement I'm very pleased with and due entirely to the efforts of our sales and valuation teams.

On a regional basis, both the US and Canada contributed to 41% of our revenue, with Europe and other geographies generating approximately 18% in Q2 this year. As you may recall, our two largest auctions during the second quarter were held in Canada. On a local-currency basis, revenue in both the US and Canada grew 19% from the year-ago quarter. Europe grew 7% and other regions, primarily Dubai and Australia, grew 17%.

Earnings for the second quarter grew 20% from the year earlier, to $46 million, another quarterly record. As discussed, the rate and volume increases led to revenue growth. This combined with store expense growth contributed to increase in earnings.

Moving to auction operations now, there are few auctions to highlight from the second quarter. In April and May, we not only benefited from the record breaking Edmonton auction we discussed on our Q1 call, but also from strong performance in Texas. While Europe remains a bit more challenged than other regions due to macroeconomic factors, the April auction in Moerdijk, the Netherlands, generated great results for both our customers and the Company. We also had great auctions in Caorso, Italy, and Ocana, Spain.

In June, one of the most active months on our auction calendar, we generated more than $560 million in gross auction proceeds. Some key auctions in June include the Dubai auction. We generated $33 million in GAP. Our Denver auction, which broke site records, and two successful auctions in Australia, which combined generated over AUD52 million in GAP. As well, we had yet another auction in Edmonton, just a month and a half after the massive May auction, where we sold nearly CAD100 million of assets.

It's important to highlight that our Edmonton team sourced and sold over CAD310 million of assets over the course of just 45 days this quarter. That is a phenomenal achievement that takes seamless organization from our sales, operations and marketing teams, and it reflects the talent we have in that region and our support teams in Vancouver. My hat's off to them.

Turning to EquipmentOne. We accomplished a very important milestone this quarter with EquipmentOne generating its first positive EBITDA contribution on a trailing 12 month basis. We feel reassured about the financial viability of this brand. Consequently, we feel confident in investing in this business to drive its long-term performance. Therefore, in the second half, you may see us investing in marketing, website improvement, sales incentives, et cetera to scale the business and gain critical mass.

Sales on EquipmentOne generated $31.7 million of gross transaction value during the second quarter, an increase of 7% compared to second quarter last year. As well, website traffic to the site grew 19% during the quarter based on average monthly users.

As many of you know, we're in the process of training our US sales team in regards to EquipmentOne's value proposition and when it may be best suited for customers. We've learned a lot from the initial pilot programs and incorporated what we've learned from the pilots into our training classes. The roll-out to the entire US field is well underway. We've already completed training sessions with 19 of our 22 regional sales teams in the US.

We've also made enhancements to the user experience on EquipmentOne during the second quarter. Aspects of the site design have been updated to ease navigation. We also updated the terminology on the site to be more consistent with the terms that customers are used to in an online auction business. For example, offers are now referred to as bids. These changes are based on direct feedback we've received from the EquipmentOne customer base and more in line with what they expect when doing business with Ritchie Bros.

Furthering our better together multichannel value proposition, we're also integrating EquipmentOne consignments into the search experience on rbauction.com, giving buyers a greater array of equipment for sale through Ritchie Bros. channels.

Now while we don't often talk about it in earnings calls, as it remains relatively small, but growing and growing fast, part of our business, which is Ritchie Bros. Financial Services, and it is having a tremendous year. In fact, second-quarter earnings for Ritchie Bros. Financial Services were up nearly 45% compared to second quarter last year. Much of this can be attributed to higher business activity. In the first half of 2015, Financial Services generated a 51% increase in loan applications and achieved a 37% increase in funded volume compared to the first half of 2014. The RBFS team has also recently expanded their service offering with the launch of leasing options for customers, which we provide through our financial partners.

And with that overview of our second-quarter performance and operations, I will now turn over the call to Sharon Driscoll, who joined us in July as Chief Financial Officer.

Thank you, Ravi, and good morning, everyone. I look forward to meeting many of you in person in the coming months. As I have not been in my role for long, I am going to focus my remarks on our capital allocation priorities and dividend increase, and Rob will comment in detail on our Q2 results.

Our priorities for capital allocation remain unchanged with what the Company disclosed in January. As you may recall, our first priority is to grow our dividend in line with earnings. I'll speak to this momentarily.

Our second capital allocation priority is to hold our fully diluted share count flat, which the Company is accomplishing through its share repurchase program initiated this past March. As Rob discussed in the first quarter, 1.9 million shares, which totaled $48 million, were repurchased and canceled to offset our expected dilution from options during 2015. While we may need to make some adjustments as the year progresses, the bulk of this buyback was accomplished early in the year to provide the most impact.

Our third capital allocation priority is investment in acquisitions. As Ravi stated on our first-quarter call, M&A remains a top priority for the Firm and we expect capital will be allocated for transactions in the coming months and quarters. Only after all M&A opportunities are explored or completed will we consider the next two priorities of opportunistic share repurchases or paying down debt.

On that last point, we want to highlight the accounting treatment of long-term debt this quarter to ensure there is no confusion. CAD60 million long-term debt was reclassified as a current borrowing in the second quarter, due only in to the provisions in the lending contract and accounting requirements. We do not intend to pay down this debt. We expect to refinance this debt with another long-term loan utilizing our existing credit facilities.

As a reminder, we routinely use cash on our balance sheet to pursue underwritten transactions. While this is not listed in our capital priorities, our ability to use our strong cash balance for underwritten opportunities is something that differentiates Ritchie Bros. from our competition.

As you saw in yesterday's earnings release, we have increased our quarterly cash dividend by 14%, or $0.02 to $0.16. This is nearly double the dividend growth we announced in Q2 last year and reflective of our commitment to growing our dividend in line with earnings and achieving our payout ratio range of 55% to 60%. Using 12 months trailing adjusted earnings, a $0.16 dividend works out to be a 58% payout ratio at the high end of our target range.

At this point I'll turn the call over to Rob to discuss our second-quarter financial results in detail. I look forward to discussing our financial results with you on future earnings calls.

Thanks, Sharon, and good morning, everyone. I'll discuss our second-quarter performance in detail, then briefly cover the results of the first half of 2015. Gross auction proceeds during the second quarter were $1.3 billion, a 3% increase from GAP reported in quarter-two 2014. As with other line items, GAP faced foreign exchange headwinds. On an organic basis, using the same exchange rates as quarter two last year, GAP grew 11% from the year-ago quarter.

On a 12 months trailing basis ended June 30, Ritchie Bros. has sold over $4.3 billion of assets on behalf of our customers. I'm also pleased to tell you that in July, the first month of our third quarter, GAP was $268 million, a 15% increase compared to July, 2014. On an organic basis, using same exchange rates as quarter three last year, GAP grew 25%. Our full monthly auction metrics will be posted on our website following this call.

As Ravi discussed earlier, our second quarter generated more revenue than any other quarter we've reported, which was due to a combination of rates and volume increases compared to the second quarter last year. We saw particularly strong revenue growth in the US and Canada. However, the translation of Canadian revenue into US dollars for reporting purposes moderated the revenue growth from Canada.

As you heard on last quarter's call, our April 28 to May 1 Edmonton auction produced the most revenue of any auction we've ever held. The strong performance of our US auction during the quarter also generated record revenue from our US business, which achieved 19% revenue growth compared to the same quarter last year. The revenue rate for the second quarter of 2015 was 12.32%, 78 basis points higher than the year-ago quarter. This rate was achieved through consistently better performance from our underwritten business across most of our geographies.

Operating income for the second quarter grew 21% from Q2 last year to $62.4 million. This equates to a 40.2% operating income margin, or a 370 basis point margin improvement, compared to quarter-two 2014.

Net earnings during the quarter were $46.4 million, an increase of 20% from the comparable period last year. Diluted earnings per share were $0.43, a 21% increase. I'd also note that we have a low tax rate in quarter two this year consistent with a low tax rate in second quarter last year.

Earnings growth is largely attributable to the fact that our expenses grew far less than revenue during the quarter. Revenue grew 10%, while our total operating expenses grew 3%. Total operating expenses include both SG&A and direct expenses. Specifically, direct expenses decreased 3% compared to the second quarter last year, while SG&A grew 5%. Within SG&A, expenses related to travel and admin as well as building facilities, both declined 10% and 1% respectively.

The majority of expense growth this quarter was due to increases in certain components of employee compensation, which grew 10%. Through [a concrete] percent of the increase in employee comp expense was related to incentive compensation. The increase in this component is due to relatively low incentive comp in 2014 when we were not meeting our performance targets. During the second quarter of 2015, we hit our key performance metrics, which in turn generated higher incentive compensation for our employees as per our incentive compensation plans.

Second, 5.7% of the increase in employee compensation expense was attributable to share-based comp expense. Much of this was attributable to an increase in the price, or fair value, of our share units, which is driven by the performance of our stock during the quarter. And our shares performed particularly well during the second quarter.

Next there was an increase in the volume of options in share units, mostly related to the addition of new executives over the past year. And finally, there was also accelerated vesting of options in share units during the second quarter related to previously announced executive departures. This expense increase is due entirely to timing and should not recur at this level in the future.

The result of revenue growth and our disciplined expense management led to the highest EBIT and EBITDA margins the Company has produced in years. As you're aware, the second and fourth quarter are typically our largest quarters and generally produce our best margins given the operating leverage inherent in our business model.

But we wanted to highlight the quarter two 2015's EBIT, or operating income margin, was 40.2%, 370 basis points better than in quarter two last year. In the first half of 2015, our EBIT margin was 34%, over 500 basis points better than the first half of 2014. Our EBITDA margin during the second quarter was 47.1%.

As you're all aware, Ritchie Bros. reports in US dollars but operates in multiple currencies and the translation effects of converting our results into US dollars has muted our year-over-year reported growth. This is especially true for our business units that operate in the Canadian dollar and euro, as both currencies have experienced significant decline against the US dollar since mid 2014.

As slide 26 shows, on an organic basis, using the same exchange rates as quarter two last year, GAP grew 11%, revenue grew 19%, expenses grew 12% and operating profit grew 30%. We believe these organic growth figures more accurately reflect the operational health of our business as they showcase how our business has performed absent these translational foreign exchange headwinds.

Turning quickly to the results of the first half of 2015, the Company generated $2.2 billion of GAP, a 6% increase compared to the first half of 2014. Revenue was $271 million, a 13% increase. And operating income was $92.1 million, a 33% increase. Earnings per share for the first half of 2015 were $0.65, also a 33% increase from the first half of 2014.

Our results in the first half benefited from an improved revenue rate of 12.22%, which is up from 11.53% in the same period last year. As well, we saw significantly more business volume, with a 15% increase in auction lots sold compared to first half of 2014. Our tax rate on a year-to-date basis increased to 26.5% as a result of increased taxable income in higher tax rate jurisdictions.

I will now review some key balance sheet and capital metrics for the 12 months ended June 30. Operating free cash flow increased 91% compared to same period ended June 30 last year. This increase is attributable to more cash generated from increased operating activity as well as less capital spending.

In fact, CapEx intensity fell to 3.2%, a 369 basis point decrease from the year-ago period. As a reminder, CapEx intensity highlights the amount of net capital expenditures we've made in the last 12 months relative to our revenue. We will continue to make investments in our business that support our growth, so CapEx intensity as low as this period's may not be truly indicative of what we'd expect over the long term. As we noted in our evergreen model, we're focused on achieving CapEx intensity equal to or less than 10%.

RONA for the 12 months ended June 30 was 24.9%, an increase of 738 basis points. This includes the positive effect of the CAD60 million term loan that we reclassified from noncurrent to current volumes. As Sharon noted, we intend to refinance this borrowing when it falls due in May, 2016. Excluding the effects of this reclass, RONA for the 12 months ending June 30 would have been 22.5%, an increase of 495 basis points compared to the same period last year.

And with that financial overview, I'll now turn the call back over to Ravi for closing remarks.

Thank you, Rob. We're clearly pleased with the performance of our Company since announcing our new strategy in January. Our sales and management teams have focused on using underwritten contracts more effectively. Our entire employee base has come a long way in viewing EquipmentOne as an important alternative model to RB Auctions and everyone is rallying behind our growth plans.

Ritchie Bros. has historically been a growth Company, and the success we have had in the first half of the year has reignited the enthusiasm, ambition and entrepreneurial spirit that is the hallmark of Ritchie Bros. culture.

In the first half of 2015, GAP grew 6%, revenue grew 13% and operating profit and diluted EPS both grew 33%. These are figures we are proud of, but we believe the more revealing story about the strength of our business lies in our organic growth numbers. On a constant-currency basis, GAP grew, in the first half, 14% during the first half of 2015, revenue grew 21% and operating profit grew a whopping 41%. Yes, 41%.

We acknowledge that the dislocation of the oil and gas sector has provided ample opportunity to sell losing equipment supplied from that industry, but it is not what has been the clear driver of our recent success. As we stated before, assets from the construction sector and transportation continue to provide the majority of volume growth and increase of these assets is due entirely to the efforts of our sales teams, the magic we create for our customers on auction dates, our auctioneers and operations team, the reach we drive through marketing and finally, the value we provide to our customers, be they buyers or sellers, through our entire system.

Let me conclude by saying how proud I am of the entire Ritchie Bros. team for delivering exceptionally strong results in the first half. In particular, I'd like to thank our US team for an incredible 23% revenue growth in the first half and delivering an all-time record in first half revenues. The strong performance in the US helped offset currency-related impact in Canada and Europe.

As we turn to the second half, we're off to a solid start in July with the 15% increase in GAP compared to 2014, excluding movements and timing of auctions that increase would have been 7%. And August is off to a decent start, and we had a great sale in Denver yesterday.

And with that, we'd like to welcome questions from analysts and institutional investors. Given the level of participation on today's call, we'll request that you please limit yourself to two questions to provide time for others on today's call.

And joining me for the Q&A are Jim Barr, Rob and Sharon, obviously, Randy Wall and Terry Dolan, our President of US and Latin. Operator?

(Operator Instructions)

Your first question comes from Nate Brochmann from William Blair. Your line is open.

Good morning, everyone, and congrats there on a great quarter.

Morning, Nate.

So I'm going to talk about a couple things. One, obviously good steady performance at this point. You have the management team in place where you want it and obviously we reinvigorated the sales a little bit.

Where do we stand in terms of your viewpoint, Ravi, of hiring some channel experts to go after some of those underserved markets like oil & gas or agriculture and whatnot in terms of where we stand with the progress of getting after some of those end markets?

Great question, Nate. I think that's part of our strategic plan and that's indeed what each of our regional presidents is doing. And in Rob's new role we're going to put global sector specialists to transfer best practices.

So we already have one of those, David Hobbs, frontrunning that, he's come up through that. So we're going to keep expanding that.

Terry is looking at strengthening the whole agricultural side in the US, which we think's a tremendous opportunity. As you know, Terry has background in agricultural, so I think he brings some great perspectives there. We already have an agriculture team in the US in the central region with Rick Racker, but we're going to continue to build that.

So this is, I think once we got the fundamentals right, this is our big next opportunity, Nate. So over the course of the next 12 months, a lot of focus on this.

Okay. And then my second question is, and it might be too early to answer this, but now we're two quarters into this in terms of seeing a higher auction revenue rate. And again, I appreciate that it might be too early to call, a little less volatility there.

But are you more confident today than you were six months ago with the efforts you made that that might be a little bit more sustainable in terms of already having less volatility? Or do we still have a little bit more to go before making that call?

So, Nate, what do people do when they joke about quarters? First quarter was it a fluke? Second quarter did you get lucky?

Look, I think, all kidding aside, our teams have really taken the at risk business and the volatility very seriously. We put good controls in place. I've not seen a better working collaboration between our valuation teams and our sales teams.

So I think we're putting all the building blocks in place. And so far salespeople have even started kidding me about our ARR access rate and they're calling it the MahaRavi rate. (laughter) So clearly this is getting around, but-- we are very pleased with our performance.

I still feel comfortable, the high internal modeling on the 11% to 12% that we put out there. I'd like to continue to drive this execution. And right now in the marketplace there's a lot of different types of assets. I'm not yet ready to declare a victory, this is not going to be a sprint, it's a marathon.

Okay. Makes a lot of sense, I'll turn it over. Thank you.

Thank you, Nate.

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

Good morning guys, how are your?

Hello Ben, how are you?

Great. You enjoying this lovely weather?

Lovely weather is compounded with lovely results. How can you not enjoy life? (laughter)

Well, congratulations. Good to see the first quarter wasn't a fluke. I had a couple questions in mind.

One is just about the equipment demographics, and it's -- this is something that Peter and the team started to talk about, as you know Ravi, before you got there, maybe 2 years ago now, 2.5 years ago. When the GAP was a bit slower and they said look, we've got -- if you go back to 2010, there was these big production cuts. And now you're working your way through that and you're seeing more favorable demographics as production ramped in 2011 and 2012.

What does that mean a couple years from now when you consider that manufacturers are once again reducing their capacity? And is there anything you can do, anything that you've learned from that cycle, that would prepare you for another inevitable round of those challenges in a couple years? Or do you think those challenges are inevitable?

Yes.

Rob, go ahead.

Great question, Ben, and yes, I think you have to anticipate that those challenges are inevitable because that, those production levels will ebb and flow for sure. And certainly on the recent calls from dealers in Canada, talking about the reduced sales into the Alberta market. And so that on a microcosm, if you will, in terms of a macro effect that we saw in 2010.

So I think yes, we do have to anticipate it. And I think the way to tackle it, which we began years ago but whether we were really focused enough on it, is the diversity of sectors. Having that focus on construction along with that focus on transportation, agriculture, oil & gas will mitigate that and is the sector model of our geographic diversity. And so I think having that diversity will help with those ebbs and flows of, in particular, construction manufacturing.

So one is sector diversity, which Rob pointed out, and that's clearly a very strong element of attacking this, Ben. Also, there are two others, which is as we look at in totality how do we read growth, I think channel diversity, to become a multichannel Company, is a very critical factor. So that's why a lot of emphasis on E1, so that E1 gives those who are concerned about controlling price, there you have that as an option.

We're also in the process of launching, and we're piloting our way through it, a private treaty brand. And so that very much provides yet another channel for us. So becoming a multichannel business helps.

And then finally, the services side, which I already mentioned RBFS and as we are scaling that. I think that can be a tremendous way because I think in totality we look at that as how do you drive revenues and we've got to look at diversity of sectors, channels and services.

So you basically hope that any inevitable cyclical challenges you can offset with strategic initiatives, strategic growth and penetration?

Yes. I think you've got to ask, Rob -- look, we can't control what happens on the new equipment side, and there will be ebbs and flows. And I think what we've got to be doing is acknowledging that reality and being pro active and saying how do we grow the business despite that. And then, of course, the last one is also geographic, which over time you'll see cycles in different parts of the world, and that's another piece for us to look at.

Great, thank you. Second one If I may.

The operating leverage, you've highlighted in your commentary and deserve due credit for that, but there's two ways to think about the operating leverage, at least the way I look at it. You know, your costs over your revenue -- sorry, if you look at the EBIT to your revenue versus to your GAP. And if you look at it relative to GAP, because your revenue is going to be a function of how you perform on your underwritten business, which I don't really see as doing more with the same assets. Obviously, being more productive at how you underwrite, but I guess where I'm going is the SG&A line, that if you look at it compared to GAP, it was actually adjusted currency actually increased faster than GAP did.

And so the concept of just driving more equipment volume, more transactions, more iron over the ramp with the same cost base I think has been a key issue for investors over time. Because I think there's limits to how much you can drive your underwritten business to fuel the revenue growth.

So, you know, is there more work to do on that front? Or are you satisfied with how the SG&A performed? And if you look at leverage from that perspective, would you have any comments on that?

Ben, look, I think we talked about this before. My examination of the Company is, with the complexities of the amount of volume we sell, there are places we have clearly done a good job investing in, sales force, et cetera. But we have underinvested in our infrastructure, the support staff, et cetera.

And when I look at our overall SG&A, there is not a lot of low hanging fruit to say, let's take a whack at it. It's compounded by the fact that we've got these legacy systems that require a lot of manual intervention.

So at this stage for me, and we are going to look down the road at certain structural things from what we can do to make that SG&A more efficient. My first priority right now is to get that revenue growth line going and getting growth back. So once we get that and -- our commitment has been we'll grow SG&A lower than revenue growth, we did not talk about, and I had a green model of our GAP growth.

I understand where you're coming from, but at this stage my focus and priority is really getting that revenue line because I cannot hack my way through it and say our way to prosperity because that is not the model this Company is built on. And if we attempt it, we'll kill the Golden Goose.

And I don't want you to take that away as saying that I'm not respectful of the SG&A issue, but I think it has to, our first priority, let's get the revenue going And if we need to tackle the SG&A, we are to do it on a more structural basis and it will take time.

But at some point, you know, where the business model and the power of it should kick in is where more equipment just starts to fall into the yard and onto the websites without the necessary increase in SG&A to do that. Like that's sort of the network effect and then, what in theory has been sort of the appeal of the business model, which in practice we haven't really seen happen.

And, Ben, I'll just make a quick comment as well. One we highlighted here in the call, the incentive comp increases in SG&A which are, I would argue, more highly correlated to revenue than to GAP. And while revenue and share price, which is related to revenue in earnings growth, I would take that part of it out when maybe looking at it relative to GAP.

Okay. That's good color, though. Thank you.

Your next question comes from Steve Volkmann from Jefferies. Your line is open.

Hi, good morning. I'm wondering if we can dig down a little bit on the underwritten business.

I'm curious if you've had to make any sort of changes there to get the performance to be improved? And I guess I'm thinking about are you focused on different types of equipment in the underwritten business or different geographies? Or is it costing you a little bit more capital to underwrite the good stuff? Or maybe just sort of any color in how you've actually changed your approach to that would be great.

Sure, Steve, let me address it first and then Rob can add some color. So the first thing was really creating a strong awareness about the importance of this, and that we've got to reduce the volatility. And that we don't use underwritten business as a way just to chase GAP and market share.

That really, it has to be sound, and I think I've said it in the past, we had, not my term, but what our teams call dumb deals where, going in you know you're going to lose money. And then after you say, we should never have done that. Well, then why did we do it in the first place?

So I think we've raised awareness of that quite a bit and demonstrated we've done a lot of best practice transfer. Every opportunity we have at our sales meetings, our valuation teams have been very proactive, and we've given them, they're being more equal partners in this. So we have a very good process now in place.

And the second place was where, in smaller deals, and we still have a long way too go on that, mind you, but on smaller deals we were not providing the scrutiny as much as we should have in the past. So now there is a lot more scrutiny.

And ironically, we tend to make many times higher margins on our larger deals than on our smaller ones. And so I think it is just being more judicious.

And finally, it is what is the real purposes underneath the deal? It's either when, we have got a wonderful fleet of equipment, that the equipment owner has concerns for as a one time -- or first time into the auction site, and we provide them reassurance and peace of mind. Or it is a fleet of equipment which is very nice equipment that acts as a magnet to fill the sale.

So we're reinforcing that as well, that this is a strategic weapon. And so I think a lot of it is training and we'll continue to do it. It's going to be a long process, but I'm very bullish about our underwritten business and the marching orders to the team is be aggressive, but use good judgment, and we've got good controls in place.

Rob, anything you want to add?

I guess in addition to Ravi's comment in general, about more eyeballs on the deal structure. But also, again using that deal structure and our strategic use of our capital in that. If it embellishes our ability to get that package of equipment by presenting a guarantee deal or an inventory deal -- an inventory deal where we're putting our capital up front before the auction, we will do that.

But again, more eyeballs on it, more focus on that that's a strategic tool that we have in our toolbox, is to apply that capital. And there's a cost to using that capital. So if it gets us the deal, we'll do it all day long, but we want to make sure we're doing it strategically.

Steve, one last comment, you asked about the nature of equipment. Definitely that comes into play. It depends on where sectors are.

So as we are getting more and more expertise, how we now look at a transportation deal is quite different from how we might have looked at it a year and a half. Because we're looking at, we're becoming a lot more knowledgeable about that industry. Or, the risk factor of particular sectors, like oil & gas right now where there is pricing softness, we will be very conservative when we do an at risk deal compared to construction like assets. So, we're applying various sort of factors to this, so that it is not just an art but actually a science as well.

Okay, good, thanks. And then maybe I can just throw three real quick modeling questions at you.

The outlook for the tax rate in the second half, is financial services actually generating any positive earnings at this point? And then, I think maybe it was Ravi said that increased EquipmentOne spending in the second half, and the order of magnitude?

I'll do the RBFS one very quickly. (laughter) Yes, I think I also mentioned the huge growth rate. It's 45%, so yes, it's actually making money and one day it will be a very material part of our business.

Steve, your questions on that tax rate -- tax rate in quarter two is relatively low. The year-to-date tax rate 26%, 27% is probably on the slightly low end of what we would expect for a full year.

And then, order of magnitude for further investments of EquipmentOne. I don't think that will be a material number overall for Ritchie Bros. but an important amount of money for EquipmentOne, just because it's a relatively small operation right now.

The big thing on EquipmentOne, Steve, is we've got to scale it. And we are now, I think we have proven that the model works for us. And now we really want to, we're excited about it. As we get our TMs to consign equipment, we also need to make sure we market to our buyers to start getting the whole thing to go.

On the tax rate one, other quick mention. Part of the issue for us is, the more we sell in the US, that increases the tax rate, so keep that in mind as well. Thank you very much, Steve.

Got it. Thank you, guys.

Michelle, we probably have time for two more questions.

Okay. Your next question, then, comes from Sara O'Brien from RBC Capital Markets. Your line is open.

-- Competitive landscape for commission rates, if we talk to, if you peel out the at risk business, given the volumes in certain regions and perhaps the slowdown in certain oil & gas regions, how are those rates trending?

Sara, we may have missed your first part of what you said. So which rates are you talking about, the at risk?

Sorry, the competitive landscape for the commission rates. So if we ex out the at risk business, we could always address that separately, but definitely the underlying business at auction, what the trend is in those rates.

It's been steady and we're very proud. I think, in fact, our straight commission business has grown and we're very, very pleased with the performance of our straight commission, because that's the core to business, and it's doing extremely well.

And then if you talk about the at risk business, is it getting more competitive in the oil patch for that, those types of deals?

I think it's the other way around, Sara. We are being very judicious about what we take because there is pricing softness there.

There's a lot of people who want us to take equipment. We're the ones who are being very cautious because we're very fine with oil & gas equipment that can be repurposed into construction, bulldozers, et cetera. But very pure ones like frac tanks, et cetera, you've got to be real careful.

So the team knows that we've got to be ultra cautious on the at risk side there. So there's no dirt for us to do that, we're just being smart about it.

As are our competitors.

Okay. And then maybe just on acquisitions. You mentioned as a priority as early as the next months, how large are you comfortable --

Sorry, forgive me, we didn't say as of next month. We just said it's a high priority, we didn't talk about any month I don't think, so forgive me. I just want to make sure we were not misinterpreted

Okay. So acquisition growth, a priority for the Company. How large is Ritchie willing to go at this point to find other segments you want to get more active in? But I wondered if we could see Ritchie take a bolder move at this stage of the game?

Go ahead, Ravi. (laughter)

We don't comment on specific acquisitions per se, Sara, but look, we're-- He or I said, we look at all three things, bolt-ons and things that fill gaps for us for sector expertise. And we're also, if there's big needle movers out there that will improve our trajectory, we certainly have the balance sheet.

And this is an entrepreneurial Company, there's no dirt of being bold, but always bold with judiciousness, and the most important thing there is, does it drive shareholder value? Will it be accretive? Is it strategic rather than just sort of saying hey, let's do acquisitions?

Growth for growth's sake.

Yes.

Okay, that's helpful. Thank you.

One more caller, please.

Okay. So your final question will come from Bert Powell from BMO Capital Markets. Your line is open.

Yes, thanks. Just a question for Jim on E1. Jim, you've done your pilots, or it sounds like you've done them.

We've talked in the past about getting more products in the shelves in that offering. How are you thinking today about the fee structure, or the commission structure in that?

Sure. Yes, I mean this year is really about reintegrating and accelerating in E1, and getting it to be part of habit forming in the field. And that's going to drive a lot of our consignments.

We're looking and testing a variety of different fee structures. You can see what our standard rate is on there, where it is buyer premium focused. But we are testing, just like you would in any industry when you're trying to get growth, you're testing various price elasticities of both buyer and seller, and we're looking at that very strongly. We're just looking for whatever combination is going to drive the results best and we've got several tests going on as we do that, and we've tried different structures on many of our different deals.

So I think I'll add to that. For us, a critical priority it to start freeing the shelf more rapidly. We made some progress, but I'd like to see more acceleration.

Now that, because what we want to do it in an orderly manner, regrettably we've saw a loss 2.5 years due to the horrible rejection issues. The good news is today, I think we've come a long way and that is a thing of the past. So now we're making up for lost time.

And we're also doing things, but with maybe interesting, like if you look at an at risk deal, and some of that we're finding that it's not doing so well, certain equipment, we're now saying, hey, let's put it on E1. And that thinking was completely not there in the past, whereas we've actually done some of that now. And so a variety of things, because the whole concept here of E1 is, it's better together. It's really putting the power of Ritchie Bros. sales force and relationships because EquipmentOne is not a dot-com B to C market. It is very much a B to B Internet model where we do the first, push the product onto our sales force, then pull it.

So I think we're making progress in that regard. Anything else, Bert?

At this point I think that he has dropped from the question queue.

We can probably take one more question, Michelle, before we end.

Okay, then I'll take the next question from Scott Schneeberger from Oppenheimer. Your line is open.

Oh, great. Thanks for squeezing me in.

I'm just curious, Ravi, or anyone -- a big fan of your slide 5, in the breakout of incremental lots per customer sector. Oil & gas, very strong volume in first quarter and second quarter. But then again, as you pointed out, heavy construction, very strong as well.

Just your comments on what you would expect in the back half. What inning are we in the volume on oil & gas? And how strong do you see nonresidential construction supporting that growth of heavy construction in the back half of this year? Thank you.

Sure, Scott. I think on the oil & gas, while we have seen pops, it's already low base. Oil & gas specific assets, very clear that's specific, is actually a very small percent of our GAP, I think less than 5 if I'm not mistaken. It's an area where we're building our expertise.

Right now, we have a lot more deals than the thing we're really looking at it, say can we make money on this stuff? So to me the focus continues to be on construction, transportation, ag, et cetera.

To your other question on construction, in the second half. Right now we're not seeing anything that makes us bearish on that. Rob, have you seen anything?

No, it appears to be nice activity from our teams in the US, for sure.

Randy or Terry, anything on the construction side that you want to comment on, the oil & gas side?

This is Randy. On the oil & gas side, as Ravi said, it's not just the specific assets that are usable only in that sector that have been loosening in supply. And we're somewhere past the middle, I would think, of the volume curve there.

And on the construction side, nothing really troubling that we see out there. Transportation has been very strong. Forestry has been quite notably good and we've had great success in ag as well. So, it's the multi sector diversity I think that's really helping.

Great.

And this is Terry Dolan, I would probably concur with Randy. You know, I haven't been on our board about 60 days. I'd say it's pretty similar down in US and Latin America business.

Great. Thanks, everyone, I appreciate all the answers. I feel spoiled now. If I could sneak one more in, Ravi, for you.

Go ahead.

The smaller transaction underwritten business, receiving more scrutiny, it seems like that's really benefiting. Is that the lion's share or is there just so much more to come with opportunity that you have in that area? And thanks, I'll stop there.

Sure, Scott. I think the small items won is icing on the cake. That's not the cake, it's really-- where it works, like Helena, we do an amazing job. And I want the Canadian teams, and they do extremely well even on agriculture, to continue to push that and they just get consistently higher rates across different fleet sizes.

I think we've got, we need to continue to improve in the US. In the US it's spotty. Some regions are very, very good, some regions are really not good.

And our regional heads know where they're not good, because they get a lot of love letters from me. (laughter) And it's an issue of transferring best practices, getting better, changing attitudes about hey, it's not just chasing GAP. This is shareholder dollars, use it judiciously.

So I think it's, this is going to be a marathon. And I feel very good about that this is going to be one of the single biggest competitor advantages for Ritchie Bros. over the next several years.

Great, thank you.

Thank you very much, everybody, appreciate your support and that's it for us. Thank you.

Thank you, everyone. This concludes today's conference call. You may now disconnect.