RB Global Inc (RBA) 2017 Q3 法說會逐字稿

Good morning. My name is Christina and I will be your conference operator today. At this time, I would like to welcome everyone to the Ritchie Bros. Auctioneers Third Quarter Conference Call. (Operator Instructions) I will now turn the call over to Mr. Zaheed Mawani of Investor Relations to open the call the conference call. Mr. Mawani, you may begin your conference.

Good morning, and thank you for joining us on today's call to discuss our third quarter results. I'm joined this morning by Ravi Saligram, our Chief Executive Officer; and Sharon Driscoll, our Chief Financial Officer. Also with us today for the Q&A portion of the call will be other members of the leadership team. Ravi and Sharon will open the call with prepared remarks regarding the quarter and the other leaders will join in to answer questions for the Q&A portion.

The following discussion will include forward-looking statements as defined by SEC and the Canadian rules and regulations. Comments that are not a statement of fact, including projections of future earnings, revenue, gross auction proceeds or other items are considered forward-looking and involve risks and uncertainties. The risks and uncertainties that could cause our factual or actual financial and operating results to differ significantly from our forward-looking statements are detailed in our SEC and Canadian securities filings available on the SEC and SEDAR websites as well as our Investor Relations website at investor.ritchiebrothers.com.

Our definition of gross transaction value 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 third quarter results were made available yesterday evening after market close. We encourage you to review our earnings release and Form 10-Q report which includes our MD&A and financial statements, which are available on our website as well as EDGAR and SEDAR.

On this call, we will discuss certain non-GAAP financial measures. For the identification of non-GAAP financial measures to most directly comparable GAAP financial measure and a reconciliation between the two, see our earnings release and Form 10-Q.

Additionally, our third quarter 2017 earnings news release yesterday evening incorrectly listed the affected site closures. The correct sites to be closed have now been updated, and the complete and correct release was reissued. Presentation slides accompany our commentary today. These slides can be viewed through the live or recorded webcasts or downloaded from our website.

All figures discussed on today's call are in U.S. dollars unless otherwise indicated. While we may use million or billion dollar figures for brevity in today's discussion, all percentage changes have been calculated in using full unrounded figures.

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

Thank you, Zaheed. Good morning, everyone. I'll kick off the call with a quick synopsis of what's going well, the challenges we are facing and then turn the call over to Sharon to discuss the quarter's results.

It's been 5 months since we acquired IronPlanet, and although we are in the early stage of integration, we have accomplished a lot already as a combined company.

First, I'm very pleased and encouraged by the performance of our international business, which grew third quarter revenues 42% up versus prior year, with significant strength in Europe and Australia. Europe, in particular, has shown strong growth throughout the year. Also, the international team is bullish about the IronPlanet brand and it has already been launched in Australia and the UAE.

Further, we conducted a record European online-only featured auction in Tampere, Finland last month.

The fusion of EquipmentOne and Daily Marketplace has been completed and we've launched a new offering, Marketplace E. Our sales teams have really embraced this offering and it is on a solid growth trajectory. I want to thank our EquipmentOne team for their perseverance. Year-to-date, EquipmentOne has grown at a high double-digit rate and has provided a solid foundation for the launch of Marketplace E.

We've just completed a new buyer experience on the IronPlanet website. For the first time, we now have IP, Marketplace E and RBA listings on the same search result, conveying the vast variety and choice of equipment to our buyers.

Let me illustrate. A few weeks ago, the IP website would have shown 6,000-plus items. Today, it would be over 50,000 items. At the same time, IronPlanet has become the sixth largest traffic generator to rbauction.com.

Pricing is robust across all channels. Our CAT alliance is off to a splendid start. Mascus and RBFS are performing extremely well, with strong double-digit growth. I'm delighted with the progress being made by our technology team, and technology is becoming a true competitive advantage for the company. There's good camaraderie amongst the legacy RB and IP teams.

Now let me quickly highlight our challenges. One key challenge is to restore revenue and profit growth in North America. Clearly, the equipment supply shortage is a very major factor, as evidenced by 4 market conditions. First, end users are keeping their equipment longer. Second, rental utilizations are very high. And third, some OEM dealers have become buyers of used equipment rather than sellers. And four, we're finding it difficult to source underwritten business, particularly large fleets, and full and partial dispersals.

The supply situation is exacerbated by some of the growing pains one encounters in a merger integration which has somewhat affected execution. Consequently we are working on supporting our sales teams to improve execution in selling each other's offerings and making the learning curve faster. In particular, we are proactively working with our legacy Ritchie Bros. reps to help them better understand the value proposition of the IP weekly featured auction, its point of difference versus RBA live and how best they can sell it in tandem.

We recognize that the extreme shortage of supply, merger integration, the bringing together of 2 different cultures and other initiatives have created a lot of change in the company. Our leadership team is very sensitive and thoughtful about this issue, but we are very proud of the resilience, tenacity and passion of our teams. I am very grateful to our employees for their loyalty and dedication and embracing change for the long-term good of the company. Our leadership team is focused on stabilizing our teams and getting them back to a regular operational cadence and execution rhythm with a very high sense of urgency.

Overall, I am very optimistic about our future growth prospects and more than ever believe that the acquisition of IronPlanet is truly transformative and will create long-term shareholder value.

Now over to Sharon.

Thank you, Ravi, and good morning, everyone. Let's jump right in and discuss our performance in the quarter. Now including 3 full months of IronPlanet, our consolidated GTV for the third quarter increased 2% to just over $1 billion in what is typically our lowest volume quarter of the year. The increase in GTV was primarily driven by the acquisition but was partially offset by expected lower overall equipment supply in the market and higher equipment utilization rates in key industry sectors, leading to a decrease in the number of auction lots consigned.

Our year-over-year gross was also unfavorably impacted due to the impact of lapping the very large $76 million nonrecurring Columbus, Ohio auction in the third quarter of 2016.

Our consolidated revenues increased $12.2 million or 9% on a reported basis versus the prior year. This increase was primarily due to the acquisition and increases in revenue from other value-added services including RBFS.

On a pro forma basis, as noted in our financial statements, our third quarter pro forma revenues declined 8.3% versus last year.

Consolidated revenue rate was a real bright spot in the quarter, increasing 94 basis points to 13.84% versus the same period last year. This increase in rate is primarily due to strong performance in our at-risk contracts in this low-supply, high-demand environment. Strong revenue rate performance of the government contracts and our newly acquired online channels and growth in our non-GTV-related services as well reduced volumes from our strategic account customers, primarily dealers and rental companies most impacted by the favorable macroclimate.

Our operating income increased $14.6 million compared to $2.3 million in third quarter of 2016 on a reported basis but decreased $13.6 million on an adjusted basis after removing the impact of the impairment losses recorded in Q3 of 2016. This decline in adjusted operating earnings is primarily due to insufficient revenue growth to offset the increase in operating costs and amortization resulting from the acquisition.

Net income for the quarter of $10.3 million was positively impacted by an unusually low effective tax rate, primarily due to the changes in annual estimated earnings in lower tax rate jurisdictions and revised estimates of the tax deductibility of certain stock option, compensation expenses and acquisition-related costs.

All in, we delivered diluted EPS attributable to shareholders of $0.09 for the quarter compared to a diluted loss per share of $0.05 and an adjusted EPS attributable to shareholders of $0.20 in 2016. The additional interest and amortization cost due to the acquisition account for approximately $0.11 per share impact to EPS for the quarter, using an estimated interest and amortization cost due to the acquisition.

Turning to operating expenses. On a consolidated basis, our operating expenses were up significantly from the prior year but this is due to the inclusion of 3 full months of IronPlanet operating costs in the quarter. On a like-for-like basis however, our operating expenses did decline year-over-year including the favorable impact of our synergies realized in the quarter.

With the acquisition of IronPlanet, our combined company cost structure has become more fixed in nature, with over 75% of our costs coming from employee compensation, facility costs including technology expenses in the quarter.

Thus, as we go through periods of lower GTV volumes and revenues, as we are currently experiencing, our ability to quickly flex down our cost is limited, and the operating margin compression is further magnified in this, our smallest revenue quarter. We are focused on improving incremental revenue flow-through in all of our businesses.

In the third quarter of 2017, we significantly changed how we lead, manage and evaluate our combined business operations due primarily to the completion of the merger. As a result of these changes, we have identified new operating segments as of September 30, 2017. Auctions and marketplaces is the company's only reportable segment. Ritchie Bros. Financial Services and Mascus will be reported in the other services category in addition to our appraisal, refurbishment and logistical service offerings.

Our auctions and marketplaces segment is made up of our live auction network including Ritchie Bros. unreserved auctions, Cat auctions and Kruse Energy. And our online offerings include IronPlanet weekly featured auctions, GovPlanet, TruckPlanet, Marketplace E and Ritchie Bros. Private Treaty brokerage services.

Getting into our segment performance, auctions and marketplaces GTV was up 2% versus the prior year on a reported basis due to the completion of the acquisition. Our volume of underwritten commission contracts decreased to 18% of GTV in the third quarter from 27% in the prior year, primarily due to the pressure on used equipment supply driving stronger price realization, which resulted in fewer opportunities for the company to pursue these types of deals.

Turning to segment revenue. Overall, auctions and marketplaces revenue increased 8% on a recorded basis, driven by the growth due to the acquisition and strong international performance. Our geographic revenue performance was led by our international business, which delivered growth of 42% versus the previous year, primarily driven by robust live auction volume in Europe and Australia.

Our Canadian business was down 9%, most significantly in Western Canada, where we are cycling over the surge in supply from oil and gas dislocation in this market in 2016.

Our U.S. business increased 6%, driven by a combination of increases due to the merger, offset by macro softness and a lower sales productivity. That said, we did see some positive momentum in the U.S. with multiple live and online events in September finishing strongly above expectations.

We are pleased with our ability to grow our auction and marketplace segment revenue rate by 66 basis points over last year to 12.78% in Q3, driven by strong revenue rates in our newly acquired online channels coupled with rate improvements from our at-risk contracts and further strengthened by sector mix.

Our RBFS business continues to be a solid growth driver with third quarter revenues of $3.4 million, up 20% versus the prior year, and funded volumes of 15%. Notably, our RBFS annual funded volume is approximately $300 million and growing.

Our Mascus revenues increased 19% to $2.4 million, driven by new customers in other services.

Turning to our balance sheet and liquidity metrics. Our operating free cash flow of $79.9 million declined year-over-year by 34%, driven by lower earnings including the impact from the supply challenges, additional acquisition-related costs and increased interest expenses incurred related to the acquisition. This is combined with an increase in capital spending.

CapEx of 5.8% of revenue on a trailing 12-month basis was well below our Evergreen Model maximum of 8.5% of revenue as we begin to invest to strengthen and link our technology platforms.

Long-term debt as of September 30, 2017 is at $818 million, with a weighted average annual interest rate of 4.6%. This increased level of debt has taken our adjusted net debt to adjusted net -- adjusted EBITDA ratio to 3.2x. Although we are over our desired level, we are focused on short-term debt repayment as a top priority for capital allocation to reduce this metric to below 2.5x as quickly as possible.

In our financial reports this quarter, we have provided some new information around the potential impacts to our business from the first quarter 2018 adoption of the revenue recognition standard. While we continue to finalize the impact, our current analysis indicates there will be a significant change in the presentation of revenue generated from our inventory purchase contracts and our ancillary service contracts, which will be presented on a gross basis instead of reporting net as an agent, which we do today.

Let me illustrate. Historically, an inventory package purchased at $18 million and selling for $20 million resulted in a reported revenue of $2 million, reflecting the commission earned on that package. Once the new standard is adopted in 2018, revenue will be recorded at the full gross value of $20 million under inventory sales. Further, the cost of inventory sold will be recorded at $18 million on a cost of goods sold line.

Therefore, for comparison and modeling purposes, we will be introducing a new non-GAAP measure that we are tentatively calling agency proceeds, which will be calculated as total revenues less cost of inventory sold, the closest approximation of our current net agent revenue that we report today. In this example, agency proceeds will be reported at $2 million.

We have provided a table of the expected retroactive application of the standard. This change will significantly increase the reported revenues from our business with no change to operating income. This change will also add significant volatility to our year-on-year revenue performance due to the variability of inventory purchase activity. I want to be clear that there is no change to our business model and we will continue to support our consignor's needs, whether that be in the form of straight commission, guaranteed proceeds or inventory purchase deals. We will be reviewing how this accounting change will affect our revenue base metrics in our Evergreen Model and our compensation programs, and we expect to substitute agency proceeds for revenue where applicable.

We remain committed to our Evergreen Model based on the existing definition of revenue prior to the new revenue standard. Let me reiterate, we are positioning the company for long-term growth, profitability and creating shareholder value.

And with that, I'll turn the call over to Ravi.

Thank you, Sharon. As we shared with you last quarter, we've laid out key integration milestones by quarter and for the first half of 2018. Overall, we're on track if not slightly ahead of our integration plan as we have successfully completed activities planned for third quarter as well as several of our milestones earmarked for fourth quarter.

Let me briefly touch on a few of these milestones. We are pleased to have recently integrated Ritchie Bros. Financial Services into IronPlanet. Our IronPlanet customers will have access to the full suite of financing solutions, adding to the differentiators we can offer our customers as we continue to grow our solid RBFS business.

Additionally, we are very excited to bring the IronPlanet marketplace to Australia. We're now offering the largest selection of equipment anywhere in Australia and a true multichannel experience with full flexibility for our customers to leverage our on-site or online channels to serve their need.

A key part of our integration has been our sales force coming together as one team to embrace and drive our multichannel solution sales capabilities. As we discussed on our last call, we have integrated our sales team to create a unified sales force in order: first, for our customers to have one point of contact and build the relationship; and second, for our salesperson to fully understand the customers' needs and offer the appropriate product solution from our core portfolio. This trusted adviser approach is absolutely the right way forward for our customers and our front-line teams but is not a process that can take root overnight. Fundamentally and culturally, the teams are coming together well, but the process of our legacy RB and IP teams learning to sell each other's solutions takes time and, consequently, has somewhat affected our productivity decline in the quarter over and above the bigger macro supply issue we're contending with.

In addition, it is important to recognize that legacy IronPlanet sales productivity was significantly below Ritchie Bros. premerger, reflective of the nature of the model. Longer term, we saw combining the sales forces as a revenue synergy opportunity to increase sales productivity of the legacy IP sales team.

Additionally, [so far] volume softness has been the result of our large strategic accounts with large equipment fleets being clearly impacted by high equipment utilization rates, strong backlogs of business and overall new equipment supply lead times and shortages. As discussed in our last earnings call, we were focused on sales force turnover, and I'm pleased to say that we have filled the 10 territory manager vacancies referenced in our last call. Importantly, we have no TM vacancies in the U.S. today and just a couple in Canada.

I'll briefly review a few of the actions that are already in flight with our teams. We are putting our teams through comprehensive solution selling training with an increased focus on cross-selling to fully capitalize on our existing customer base where we have minimum overlap while targeting new customer acquisition and share of wallet. We're also increasing the sales management rigor on driving our sales pipeline and opportunity development, which will be complemented by multichannel sales incentives with a particular focus on the weekly featured auction to create excitement and intensity around the solution.

In summary, we have an exceptional sales team across our organization and everyone is laser-focused on the actions required to drive stability, confidence and increased sales momentum as we move through the integration of our sales force.

In late October, we reached another key milestone. We soft launched the combining of Ritchie Bros., EquipmentOne and IronPlanet's Daily Marketplace into our newly formed Marketplace E. The concept of Marketplace E was introduced shortly after the close of the merger, and since then we've been building and optimizing the product. We have combined the technology and platforms of EquipmentOne and Daily Marketplace into one brand that offers control for sellers and a robust selection of equipment for buyers which can be purchased through multiple formats including negotiated pricing, which is make offer; minimum acceptable pricing, which is reserved marketplace; and fixed pricing, which is buy it now, 24 hours a day, 7 days a week. Marketplace E is our primary offering to penetrate the large $300 billion-plus upstream segment, especially for customers who have reservations with using an unreserved auction model.

Our tagline, "always on, on your terms," telegraphs the brand essence of Marketplace E, conveying control for our customers. Marketplace E will be housed on the IronPlanet marketplace where it will benefit from the robust increases in visitor traffic to all listings and instant access to 1.9 million registered bidders through the IronPlanet site. Customers will also benefit from an online marketplace with $200 million in equipment available at any one time and ability to leverage our industry-leading inspections through Ironclad Assurance and financing through RBFS.

We are excited to embark on a journey to transform our auction operations model, to enable our multichannel go-to-market sales approach while also creating structured efficiencies.

There are 2 key aspects of this operational transformation. The first is site optimization and the second is innovating our auction operations model. Let's start with site optimization. You may recall that we discussed this as a strategic initiative at our 2015 Investor Conference. At that time, we classified our auction size based on return [on rack]. Since then, we've closed auction sites in China and Panama and sold excess land at different sites. However, we feel that it's time to make a bolder move after analyzing 2 long-term key trends, specifically. Over half of winning RBA bids today come from online bidders. And second, our customers are attracted to larger on-site events that feature a more expansive selection of equipment. Considering this, we're closing 5 of our smaller live auction sites, 4 in the U.S. and 1 in Canada by year-end. They're Manchester, New Hampshire; Raleigh-Durham, North Carolina; St. Louis, Missouri; and Albuquerque, New Mexico in the U.S.; and Prince George, British Columbia in Western Canada. These site closures were based on a review of weighted average cost of capital, returns on investment, GTV sold and strategic importance. It is extremely important to note, however, that sales coverage in these areas remains absolutely unchanged, and territory managers based in these regions will continue to serve local customers. We're therefore confident that we'll be able to transition the revenue from these sites to nearby locations -- site locations and our IP weekly featured auction.

Let me now turn to innovating our auction operations model. Ritchie Bros. has had a long history of innovation. We introduced online simulcast bidding in 2000. We launched Virtual Ramp in 2004, timed auction lots in 2009 and added mobile bidding in 2016. Our innovation journey continues.

Leveraging IronPlanet's customer-friendly technology in combination with Xcira's leading simulcast technology affords us the opportunity to move all our core auctions and marketplaces to a single operations platform in the medium term. We're calling this project MARS, which stands for multichannel administration and reporting system. We're in the preliminary stages of this initiative and expect it to be rolled out sometime in 2019. Project MARS is transformative and will allow us to simplify our technology footprint, reduce complexity, spur future innovation and enable the development of customer-facing growth drivers such as more sophisticated personalization, data-driven insights and real-time data-driven marketing.

In addition to our technology initiatives, we're taking steps to optimize our live auction calendar and will institute Thursdays as the exclusive day for IronPlanet's weekly featured auction. We will continue to update you on our progress.

We're tracking on pace in 2017 to achieve the $10 million run rate synergies and we'll deliver a target of $20 million run rate cost synergies by the end of 2018.

We're excited with the momentum we are building with both CAT corporate and CAT dealers. I'm pleased to say that our teams have signed dealer agreements with 40 of the 47 North American dealers in addition to 7 others internationally, 5 more have committed. We also continue to see great progress with our telematics program and are now well into integrating a dealer portal for joint telematics identification and reporting. We'll commence the North American rollout of the program in October. Through the data sharing and the telematics, we're building a solid foundation for supporting CAT dealers to grow their parts and service business. The value and the data sharing is significant. We've already provided thousands of our leads which connects the customers to their CAT support network, and the early conversion rate on these leads seems promising.

I'm also excited to report that we conducted a RB live auction at our Narita, Japan facility a few days ago in collaboration with a major Japanese CAT dealer. The auction was the largest ever in Japan and generated a record USD 9.5 million in GTV, approximately double the volume of the Narita grand opening sale in 2010.

Let me conclude by stating that regaining growth momentum is our number one priority and our teams are committed to doing their very best.

And with that, we'd like to open the call to questions from analysts and institutional investors. (Operator Instructions) Operator, would you please open the line to questions?

(Operator Instructions) Your first question comes from Stephen Volkmann from Jefferies.

Ravi, it seems like you kind of touched on 2 major points, and I'm wondering if we can somehow disaggregate them a little bit. So we obviously had some tightness in the end markets and so forth, and I think that's fairly well documented. But then you also mentioned something, I think you called them growing pains. And I'm trying to figure out if you have a view as to how much of the -- kind of the top line weakness that you're seeing is attributable to the end-market conditions and how much might be attributable to the growing pain portion. And then if you could just give your thoughts relative to sort of the trajectory of the growing pains. How long does it take to kind of get beyond that?

Great question, Steve. And while it's tough to quantify, I'd say the supermajority is really attributable to the supply situation. And I just wanted to us to take accountability of some of the execution, and that's why I wanted to mention it. I would say in the main, 80% to 85% would be the external situation and about 15% or so would be some of the growing pains, and which is why I'm very confident that, over time, that execution will improve, but really -- and that's why we need to focus on what we can control which is optimizing the execution. But I would say I don't want to overblow the execution thing because just our -- the RB legacy folks have been used to the live auction, the IP people online, it is just a learning curve issue. There's no -- there is absolutely, positively no issue (inaudible) rejection the way we had it at E1 a long time ago. Everyone has embraced each other's models and are very excited. It's just a learning curve issue which is why, say, it is about 80% external, 85% external.

Okay. Great. And maybe the quick follow-on for Sharon then. You gave us the October numbers, which looked kind of flat year-over-year. And I guess you're saying that the cost structure is fairly fixed at this point. Do you have any words of wisdom regarding kind of the fourth quarter outlook? It doesn't sound like trends are changing much for the fourth quarter.

Yes. Again, good question. I'd say that October was really affected by the Edmonton sales. So that was a big driver of that performance. I think we're still on our original thoughts related to revenue kind of outlook that we've provided in the last call. But again, we're -- there's some positives. We're seeing certainly the increased deal activity as we think certain suppliers look to be repositioning their fleets for the end of the year. And certainly, our teams are very active right now.

So I'll add. I think we had said for the first half on a reported basis something like 10 to -- sorry, for the second half of 2017, 10% to 13%, and we still are confident of that, our [thesis] -- how we see it. I want Jeff Jeter to comment a bit on what he's seeing in the marketplace in fourth quarter because I do see a little shift in momentum, which is more positive. Without over-egging it, we are seeing some good dispersal activity and some larger packages. And Doug Olive, our Head of Pricing in here, that nowadays, they're talking 3x a day versus third quarter, which was a lot less. Jeff, you want to comment on that?

Sure, Ravi. Steve, I think one of the things -- as I think about Q3 -- and I think Ravi is right. Look, a substantial component of our issue today is just the overall supply tightness. And certainly, we've got to get our respective teams up the learning curve across selling, across all solutions. So we clearly have some training and work to do there. And one of the things I think you see in the market is there's activity out there really across all sectors. You're just not seeing the same level of deal size, and you haven't seen large fleet dispositions. So the size of deal is just -- it's at a very low level as we look at Q3. So there's activity. I think as you look at our at-risk business as a percentage of our total, you can see that, that's down fairly significantly versus prior year, and again, that's indicative of just not the large dispersals. One of the things that I think we have seen a little bit of uptick on in Q4, and typically is indicative of Q4 versus Q3, is we are seeing some end users and larger dispersals in individuals, companies moving them off of their balance sheet by the end of the year. So we've seen some nice dispersals this quarter that we've got upcoming. So that's a little bit of a change from Q3. We'll have to see how that continues into next year, but there is clearly more activity. Doug Olive, who Ravi just mentioned, when we -- we're talking probably 2 or 3 times a day on that risk business and deals and we didn't kind of have that kind of a dialogue pace and frequency in Q3. So some promising things but still, a very tight market out there.

Your next question comes from Joe Box from KeyBanc.

So Ravi, I think last quarter, the expectation was that the used market could potentially loosen up by 2018. I appreciate you've already given some commentary on that, but I'm just curious if you can update us on your view on when that potentially could normalize.

Yes. I think, Joe, great question. And look, it's -- we were on a good track, and I'd hoped that there'd be a dramatic pickup starting in 2018 but since then, you've also had the hurricanes in Houston and so a lot of equipment out in that regard. Florida. So it's -- with all of these natural disasters, the earthquake in Mexico, et cetera, again, that is contributing a little bit more to utilization. If you go to any of these markets, it's tough to find a contractor to rebuild, and it's not just -- it's really residential as well. So that's putting -- that's exacerbating things. On the other hand, I think the OEM production will start normalizing a bit more. So at this point, I would say, I expect probably second quarter, things to start improving in '18, for sure. Maybe second half, but I think there will be -- it'll be very -- the key is fourth quarter. If we had that -- we're seeing the slightest improvement versus third quarter, as Jeff pointed out, and it will be interesting to see how we -- how things go. Now Orlando is building up well for us. And Jeff, maybe you can comment on that a little bit, which is a positive sign. So, Jeff, you want to just...

Yes, one of the things...

No. Go ahead.

One of the things as I -- I'm in the market and think about next year, in Q1, particularly in the first half, there are a lot of -- there's fleet and there's individuals thinking about taking advantage of what will be and what has been very, very robust pricing in the market. So there's a lot of interest in obviously taking advantage of that price lift and the recovery that we can get on those assets sold, and then it becomes a question of can they replace that fleet? So it's a balance of some aging fleet in the market, sellers wanting to take advantage of the price lift and being able to be assured that they can go replace that fleet. So that's the balance and that's what our customers are looking at. And depending upon the OEMs and how -- what happens with lead times and freeing up new equipment I think has an impact on what we see in the first half of the year.

Understood.

(inaudible) quickly comment on Orlando and how we're seeing that.

Yes, I mean, Orlando, look -- Orlando is going -- is building nicely. We've had -- last year, as most of you know, IronPlanet has done live Cat Auction Services, [events], legacy IronPlanet and Cat Auction Services in the last couple of years. So we'll be able to combine that with -- into one auction this year, which we're very excited about. So Orlando is building nicely. The teams are very focused on that. At the same time, we're working on Q4. So again, from our -- my standpoint, the teams are balancing, getting Q4 done and then working rapidly to build Orlando. But Orlando is building nicely. Again, fairly early days for Orlando, but thus far, encouraged with what I see.

Got it. Okay. And then in terms of just a follow-up. Sharon, I can appreciate the color. Thanks for the color on the fixed cost structure, looking more like 75%. I mean, can you just help us understand what the restructuring could look like if the market is kind of tight-ish but potentially alleviating in the back half of next year? And ultimately, what that could mean to the overall margin structure?

Yes. So Joe, traditionally, we've had a very good flow-through rate of our business as we drive incremental revenues in our live business. The add-on of the IronPlanet models does add some fixed nature to the cost structure. But with revenue growth, there really comes minimal incremental cost adds as we drive volume through that -- through the technologies that they have. In addition, their Inspection Services and IronClad Assurance does come with incremental fees that also help offset the incremental costs that are incurred. So I think that we are -- again, we're focused on driving the revenue volume to generate the incremental flow-through that then will have kind of more of our historic levels of margin improvement as that revenue falls to the bottom line.

And we're still committed to the EBITDA margin target on the old revenue definition that we've cited in the Evergreen Model.

Yes, exactly.

Your next question comes from Ben Cherniavsky from Raymond James.

Congratulations on the site closings, Ravi. I think that's a step in the right direction. Although not a (inaudible)

It's -- yes, appreciate that, Ben. But look, it's the right business decision, but we always have to be -- we deal with people's lives and we're very sensitive about it, but you have to make the right decisions for the business in the long term. We think that this will only help our other sites to get stronger. And so for the greater good, it's always -- you take these decisions.

Yes. I'm sure it wasn't an easy one. So that's why I think -- that's why I offered up my congratulations on that. I didn't mean to sound insensitive to those who...

No, no. We -- and I didn't take it that way.

I was wondering just if you could elaborate on the sales force integration and the cross-selling challenges. If we took an example, like say this Grand Prairie auction that you guys press released which is a complete fleet disposal, historically, those were the -- that was -- those were the elephants that the Ritchie Bros. guys would hunt. You'd go find a guy who wanted to get rid of his fleet. You'd convince him that everything needs to go to the auction, create a big event around it, generate some scale and make everybody happy. Conversely, maybe Jeff can comment on this, but I imagine under the IronPlanet model, you'd make the same pitch that everything needs to be sold online. And now I imagine the pitch is going to be "it depends" or somewhere in between. Or what -- could you just walk us through how a territory manager might now have to change his pitch to a customer under a cross-selling opportunity in a case like that, for instance?

Great, Ben, and we actually have a few examples already of that. Why don't I -- Jeff, why don't you give a sense of that, both sort of -- you can maybe mention the upcoming off-site auction, which is a big deal that we're doing in Q4, where we chose to go a live auction route and the [Cohen] equipment and the I'll -- Karl can mention Tampere, Finland. And Brian, you can talk about Grand Prairie.

Ben, it's Jeff Jeter. So Ben, I think -- I mean you alluded a little bit to it. It's -- there' s -- we got to be thoughtful about the play -- what's the right play out of the playbook. And there is a time and a place for us to go stand up a one-owner dispersal sale and we're doing one December 5 up in Minnesota for a large crane package liquidation. So there's time and places to do that. There are other dispersals that are smaller that, quite frankly, it doesn't make sense to go stand up an event. And we can put those online and sell it on a Thursday event just as easy. And that's -- as you referenced, that's what we did at IP. And often, in IronPlanet, we may have an open -- if we had, say, a $2 million to $5 million one-owner liquidation, nice, clean equipment, well maintained, good reputation in the local market, we may have an open house. We may stage that equipment, invite people to come view it, but we would sell it online as part of a weekly Thursday event. So I think it is finding the right -- making a thoughtful decision. The other thing, Ben, that I think that has to change, and I'll give you an example. So we just finished our Houston sale, which we had a very good sale this week. And the difference in our selling cadence and motion going forward is, as soon as we come out of that event, we're not waiting on the next event in Q1, we're immediately consigning for the next IronPlanet Thursday weekly auction. So today, we have -- we know can sell every week as opposed to in the past, we might have 4 or 5 events in any geographic area and that drove the cadence of our revenue and consignments was event driven. And today, we'll still have that and that's a huge part of our business and nothing changes there, but we have to be selling every week, we have to be in front of our customers every day and we got to be consigning equipment to drive revenue every day. So it's getting our territory managers and our strategic account managers capable and comfortable selling across all of our channels all of the time.

Thanks, Jeff. Karl, can you mention the Tampere, Finland example? It started as a live auction. And then I'll let you take it over because I think that's a great example of behavior change that you -- that [Arun] and his team came up with.

Sure, Ravi. Finland is a great example where historically, we've been doing live events in that market. And we took the opportunity to demonstrate the online abilities of the new multichannel platform and move that entire event onto that -- to the IP platform. And it was a huge success here in the last few weeks in that market.

And that was a conscious decision by the team to think about, hey, while it was -- because of the size, let's do this. And if it's -- I think Karl, if I'm not mistaken, if not the biggest monthly auction for IP there, one of the biggest ever.

Yes, it was. We grossed around EUR 3.5 million GTV.

Brian, anything to add from a Canadian perspective and the Grand Prairie example that Ben brought up? Maybe Ben -- Brian has dropped off. Anyway, let me just close this thing out, which has been -- one decision we did take after unifying the sales force was, in the past, our salespeople, legacy RB were linked to a site. Now they're just all -- they're linked to the region as opposed to a particular site. So it does matter, which is why [we] made the site closures as a way of clearly saying there's no change because they're all still in the region. They just have at their disposal not in nearby sites but also the weekly. I think the biggest behavioral change that we're working on is our people are very adept because we're very event-driven going from one auction to another. And how do you -- as soon as a big auction finished, let's review, let me take a little bit of time, decompress, then go to the next auction. Whereas now, we are saying, look, we have event business and flow business. The flow business is the weekly auction. And so the moment the event is done, you start selling continuously so that we also make the business a bit more smooth and predictable because there's a lot of people out there who want the equipment and want to sell it and they don't want to wait until the next big event. So I think that's why we felt the complementary nature of these brands was amazing and it's just getting our salespeople to make it a habit, and that's what we have to work on.

That's helpful color, Ravi. If I could squeeze in one last housekeeping item, maybe for Sharon. I'm just trying to get a better read of the quarter, some of the different moving parts. You mentioned merit increases in SG&A. If you could maybe just quantify that or speak to what that represents. And then on the tax rate, it's just -- I'm not clear exactly if there was a huge recovery it looks like in your taxes on a certain item and that -- what does that mean for future tax rate implications? And what was the magnitude of that in the quarter?

Yes. So I'll address a couple of the issues in the SG&A. So some of the merit increases referenced were kind of a rebalancing based on the merger. And again, it was not a major, major change but also would've picked up some increase in incentives as we kind of reset some targets to motivate people through the back half of the year.

Which is primarily for the salespeople.

Yes. That's right. And with respect to the tax issues. Again, it's -- I think it was about $4 million of overall tax recoveries that came into the quarter. They really just were revised estimates under U.S. GAAP accounting rules. You have to estimate your annual tax in all jurisdictions and we had changed our estimates in the quarter and more of our income was being generated in those lower tax jurisdiction regions. And then also, we got clarification around a particular deductibility of certain expenses particularly related to the acquisition cost that occurred in Q2. So you should treat that $4 million as a nonrecurring. And I did call it in my remarks that really I'm looking at our current tax rate in kind of that 20% range now, perhaps slightly lower going forward.

Your next question comes from Cherilyn Radbourne from TD Securities.

Ravi, in sort of parsing the different issues in the quarter between sort of tight equipment supply versus some of the growing pains, you seem very definitive in being able to separate the 2. So I wondered if you could just comment on some of the metrics you're using to monitor the integration of the sales force and that progress that just gives you the confidence that you're properly separating those 2 issues.

Yes. I think, Cherilyn, it's -- at the end of the day, I don't want to give -- or mislead you by saying I have this great computer model that is giving me the view. It is based on everything we're seeing in the market, how our TMs are -- the pipelines that we are looking at and the at-risk packages that we look at. So when we look at all of the elements of that, our view is that it is -- and I think it's now -- there's a lot of independent verification of the supply issues out there. So we think it is a small part, but we wanted to take accountability, as I said, but I'm quite confident. It's just because we look at a lot of numbers and we don't go through all of those metrics from a competitive standpoint. But suffice to say, we look at how many deals are coming in, the size of the deals, full dispersals, partial dispersals. We look -- we have a monthly pipeline call with all the Presidents. They have that weekly with their SVPs. So we have a pretty good sense, and that's what gives me that sense.

Okay. That's helpful. And there's little doubt that it is a very tight equipment market. Just for my second question, the revenue rate guidance for the second half was 12% to 13%. So clearly, you did surprise yourself to the upside quite a bit in Q3. Can you just offer some thoughts on Q4 and looking forward?

Yes. I think we've provided -- with the information that we now have, we've also provided the auction marketplace revenue rate, which would be new information. And that clearly does show that for the last 4 quarters we've been above what we've historically set in that sector or in that segment of between 11% to 12%. I think it's perhaps reasonable that, that could -- kind of our base business could be increased by about 50 basis points going forward on a sustainable basis, and that's really driven by a couple of things. As the online business and the GovPlanet business have come online, those are coming in at very strong revenue rates that are adding to what was our historical strong rate performance. So I think you can probably look at a list in that base business and our previous guidance by about 50% -- sorry, 50 basis points.

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

Just actually on that question, I mean, you reiterated your revenue guide of up 10% to 13%. October was up 1%. So are we expecting, I guess, another big auction revenue rate in the fourth quarter? I know that last year I think Q4 had a big benefit from a Private Treaty. Are there any onetime benefits you should be thinking about in the pipeline? Or is it just a combination of a strong -- another strong ARR and a rebound in GTV in November, December to really drive that double-digit revenue growth next quarter?

Yes. I'll start and I'll let Ravi kind of add additional color. But clearly the volume challenges really affect the GTV, our performance on rate. We are more confident that -- with strong pricing environment that, that supply challenge does help to create. We're experiencing minimal to no losses or reduced performance on our at-risk business. We would like to get our at-risk business actually up in terms of percentage of volume. But certainly, the new added channel to our business are proving positive to rate in the marketplace, Auctions and Marketplaces segment. In addition to that, we're very positive around where we see opportunity in driving our RBFS business and our Mascus business in total, which will also be accretive to the overall consolidated rate guidance. So I think probably just still a little cautious on the GTV assumptions for Q4, but a little bit more optimistic on rate.

And I think last year, we did have a very big Private Treaty deal in Q4. And so we will be lapping that, and there is not sort of something lapping in the horizon or something in the horizon that we have. Recognize we do have positive drivers, as Sharon mentioned, [all the ones]. But IP rates are also positive and GovPlanet, for instance, very good rate business. And as that grows, that helps the mix as well.

Yes, that makes sense. And with these new business that are growing and showing bigger -- driving the rate, does it also add a level of cost? I mean, I guess big picture, and this kind of goes to the site closures, if Ritchie's closing some of these live sites and we're starting to move equipment more through these newer channels, is there a risk that we're cannibalizing some of the core profitable live auctions? I guess I'm asking longer term, do you think Ritchie is more profitable or less profitable having more of these transactions through these newer channels than the older platform?

Yes. Intuitively, I don't think that it's an issue because the -- it's -- I think Sharon only mentioned our fixed cost structure and that versus second quarter and third quarter. But generally speaking, and one of the things we felt -- that the volume that you could bring because IP's margins overall were lower because of that cost structure, but not having the revenue with us combining new -- and you get critical mass, the more critical mass you build, the more profitable in flow-through that you start getting. Their model behaves the same way in that regard. So I think it's -- I actually see it as a big positive. And recognize things like inspections are actually -- they -- while they do add to cost but we charge for that. So it's -- at the least, it's a revenue-neutral business. Actually, it adds a little bit on profits. So I don't think that, that should be a concern because the whole structure is -- we're channel-agnostic because we feel, regardless of which way it goes, whether it's from a customer standpoint or our standpoint. And look, long term, we are also going to look at are there things in terms of buyer fees, et cetera, what level of harmonization, et cetera, should we look at down the road? So -- but I think -- and which will only make it further enhancing, if anything, RB's buyers fees are a little lower than IP's at certain rates. So we are going to look at that down the road.

Your next question comes from Larry De Maria from William Blair.

I just wanted to ask as it relates to those growing pains, I know you said it's not the major issue in the quarter, but [yours is] the traditional customers or the nontraditional, maybe IP customers, that are maybe getting a little lost in the transition, and if we need to take steps to change this or if it's just, like you said, a learning curve and just takes time.

Yes. I'll ask Jeff to comment. I just think it's a learning curve issue. And the other thing we're doing is making sure we're being more proactive about using IP, people who are selling IP and the institutional memory of how do you do that model. The other thing is we also have several salespeople who used to work for RB and then went to IP. We want to leverage them because they understand both models. But I really think it's a learning curve issue. I don't -- I'm very confident there's nothing -- there's no fundamental issue here. It is just a matter of time. Jeff, you want to add anything to that?

Yes, Larry. I agree with Ravi. I mean it's -- I don't think any -- we made a conscious decision to go with one selling organization, which was the right business decision and the right decision to service our customers. And obviously, there were some territories changed and we went through quite an extensive territory optimization to make sure we had the right coverage model. And as Ravi mentioned, we now have a full roster of sales individuals. So there's a learning curve. I'm less concerned about coverage and more concerned about -- [hate seeing] some improvement in the overall supply, which we're having to be a little patient as well as -- and, most importantly, getting our guys up to speed on selling across all channels.

Larry, one other -- I just want to reiterate one thing, which is the one thing that was very positive about both companies, which has helped us a lot in terms of the integration, is the, cultural ethos of both companies, which was that the customer is the anchor and both companies really -- and Dave Ritchie created that ethos at Ritchie Bros., it's all about the customer and do what's best for the customer. So I think the one thing that our salespeople, regardless whether they came from IP or RB, are very passionate about making sure they take care of their customer and do what's right for them. And so I think that's a great guiding light that will take us [well] forward.

Okay. Yes, I just want to follow up on -- in terms of the volumes, you mentioned Caterpillar, you've been giving them some leads. Just curious if they're turning into any significant consignments from them yet and (inaudible) is working.

Yes. I think, look -- clearly, the CAT dealers have been a bit constrained on their own equipment because that's -- they've also had the issues of getting new equipment. And as that gets better, we're very confident we'll start seeing the flow of that. And I'm actually feeling good about how that's heading, our relationship's terrific. I don't think there is sort of any sort of reluctance. It's just CAT -- a lot of the CAT dealers have become buyers of use because they're just trying to for their rental fleets, et cetera. Once the new equipment production starts flowing and they get to the right inventory levels, that rental stuff will really start coming to us. Japan, look, we were there for years, and we didn't go anywhere in Japan. In fact, had taken a decision that we'd cease operations. And Karl, on having worked directly with me on the whole CAT deal, was able to really build the relationship with the major Cat dealer there, a place like Japan where we have never get this to get a $9.5 million sale is, to me, incredible. That shows the power of the CAT alliance, and that would never have happened before. So I think with that, Zaheed, one last question.

Your last question of the day comes from Scott Fromson from CIBC.

So if 15% to 20% of the softness has been from integration challenges, who's capturing that business shortfall? Is it other auction companies? Has there been increased competition from rental companies, particularly in light of recent M&A activity?

I think -- and I'll let also Jeff -- look, we have a lot of local and regional competitors. And clearly, whenever you have a little bit of -- when you go through a merger, it's opportune. So it's not one, it's not any single person, but there's hundreds. I mean the U.S. alone, there's like 200 companies just in the auction business, whether it's online or on-site. So some of them have picked that up. But I think a lot of it -- really the phenomenon we're seeing is the majority of it is that people wanting to do it on their own right now because they see a very strong pricing situation and say, "Hey, I can do it on my own." Or at least they think they're going to put that on a listing service and see how it goes. But eventually, I think as we approach the year-end and if it's not transacted, we think we'll get -- we'll the beneficiary of that. Jeff, was there anything else you want to add? Or did you have a different...

Yes, I think, if you're a Caterpillar dealer and you've got used equipment that you're trying to move, your first choice is going into this CAT equipment. You're going to look to sell it in your territory and you can sell it direct. Rental companies, certainly, very high utilization. But whatever they're turning over, they have the opportunity to retail that equipment. If you're some of the captive finance OEMs that are financing equipment, if you're getting lease returns and repos, that volume can easily go back into distribution. So to Ravi's point, a lot of the equipment that's moving is just moving through other channels. And (inaudible) one of our key kind of growth initiatives and visions is for us to get upstream and for us to help sell upstream to auction. Look, we've got the largest buyer base in the world, right? We can bring to bear a global buyer base like nobody else. And a part of our strategy with Marketplace E and some alternative channels is to help these customers sell all the time and sell upstream to auction.

So it sounds like you're confident you can regain the lost market share as the sales integration progresses and the learning curve flattens.

We are extremely confident.

Onwards and upwards. With that, thank you very much and have a good holiday season.

This concludes today's conference call. You may now disconnect.