RB Global Inc (RBA) 2017 Q4 法說會逐字稿

Good morning. My name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ritchie Bros. Auctioneers fourth quarter conference call. (Operator Instructions)

I will now turn the call over to Mr. Zaheed Mawani of Investor Relations to open the conference call. Mr. Mawani, you may begin your conference.

Thank you, Jody. Good morning, and thank you for joining us today to discuss our fourth quarter and full year 2017 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, and other members of the management joining them for the Q&A portion of the call.

The following discussion will include forward-looking statements as defined by the SEC and 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 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.

Our definition of gross transaction value may differ from those used by other participants in our industry. It's not a measure of financial performance, liquidity or revenue, and is not presented in our statement of operations.

Our fourth quarter and full year results were made available yesterday evening after market close. We encourage you to review our earnings release and Form 10-K, 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-K. 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 today 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 percent changes have been calculated using full or rounded figures.

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

Thank you, Zaheed. Good morning, everyone, and thank you for joining our fourth quarter earnings call. In recognition of closing out 2017, I'll share my thoughts on the year, and then pass it on to Sharon to discuss the fourth quarter financial and operating results in more detail.

I am encouraged by our fourth quarter results, which reflect the strengthening execution of our combined team. I'm especially pleased we grew revenue, both on a reported and a like-for-like basis, despite continuing softness in equipment supply. Of course, we have work to do as we aspire for more, but the heavy lifting of the integration is largely behind us, and we are now focused on execution, serving our customers and working hard every day to stay ahead of our competitors.

16 months after the announcement of the IP acquisition and 8 months after closing, I remain as excited, if not more, of this transformative acquisition. We have reshaped our future and are becoming a true multichannel asset management and disposition company. We are uniquely offering a variety of channel and format choices to both buyers and sellers, and have significantly increased our global reach. Every day, our teams are discovering new ways of working together to leverage best practices, strengthen innovations. And last week's Orlando auction demonstrated the power of that combination. The network effect is beginning to take hold.

Operationally, 2017 was both a progressive, yet very challenging year. No one fully predicted the surge in local and state level infrastructure projects post the presidential election in the U.S. We saw a dramatic increase in construction work, pipeline projects, and record high equipment utilization rates, especially in the U.S. At the same time, OEMs were not able to ramp up production of new equipment to respond to the market's needs, resulting in an unprecedented supply shortage of heavy equipment.

In the face of these significant macro headwinds, we reported full year GTV of $4.5 billion. Our revenue of $611 million was up 8% from 2016 with the addition of IronPlanet on a reported basis, and down 2% on a combined company like-for-like basis. In fourth quarter, on a pro forma basis, we were up 3.6% like for like.

Our full year financial results are a reflection of the unprecedented shortage of equipment supply, softness in Alberta's oil patch, and uncertainty caused by significant delay in regulatory approvals that led to higher than normal salesforce turnover, especially in the U.S. We did, however, make substantial progress last year on many fronts. Let me mention a few.

We delivered $112 million in operating cash flow before returning $73 million to shareholders through dividends. Our international business returned solid growth, delivering 13% revenue growth and expanding to represent 19% of our total auction and marketplaces revenue.

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To [foster] through our CAT Alliance with over 75 more agreements signed with CAT dealers, including 15 North American contracts and 25 internationally. We have made tremendous progress and strong in Telematics and providing data to CAT. Our volume through CAT dealers also slightly improved in the fourth quarter.

We have made significant advancement on technology and digital product management and marketing. Marketplace E is our fastest growing brand across all geographies. We executed to deliver and exceeded our stated synergy targets for 2017, and we have successfully completed our stated integration milestones. For these accomplishments and the countless others during the year, I would like to thank our team, express my gratitude for their tremendous efforts and tireless dedication this year.

With that, let me pass it on to Sharon.

Thank you, Ravi, and good morning, everyone. Turning to our consolidated fourth quarter results, our GTV increased 24% to $1.3 billion, our highest quarterly GTV ever recorded. The increase in GTV was primarily driven by the acquisition, along with notable strong live auction comps in Dallas/Fort Worth, our Chehalis site and solid performance in Spain. Additionally, our GTV sold through online channels, including our weekly featured auction in Marketplace E, increased over 400% during Q4.

Our consolidated revenues increased 22% on a reported basis versus the prior year. This increase was primarily due to the acquisition, revenue growth in Europe, and solid revenue performance from other value-added services, including RBFS and Mascus.

On a pro forma basis, our fourth quarter combined company revenues increased 3.6% versus last year. Consolidated revenue rate declined 30 basis points to 13.81% versus the same period last year; however, this decrease in rate was due to cycling over the strong performance of a Canadian Private Treaty inventory dispersal in the fourth quarter of 2016, which impacted both revenue dollars and revenue rate. Excluding the impact of those dispersals that were lapped in 2016, we generated positive revenue rate growth in the fourth quarter of 2017.

Our reported operating income declined modestly to $40 million versus $40.6 million in the fourth quarter of 2016. This decline is primarily due to our higher base of cost of services, SG&A and depreciation and amortization all driven by the acquisition, partially offset by increases in our revenue. Our operating income also included the impact of certain onetime severance and restructuring costs recorded in the fourth quarter. Excluding these costs, on an adjusted basis, our operating income increased $1.6 million.

Net income for the quarter increased $8.9 million, or 32%, in the fourth quarter versus last year. The improvement included the positive impact of $10.1 million attributable to the revaluation of our net tax liability position resulting from the recently passed U.S. tax reform, reducing the estimated federal U.S. tax rate from 35% to 21%. Net income for the quarter was negatively impacted by higher interest costs incurred during the quarter due to the increase in long-term debt required to complete the acquisition of IronPlanet.

All in, we delivered diluted EPS attributable to shareholders of $0.34 for the quarter compared to diluted earnings per share of $0.26 in the fourth quarter of 2016. On an adjusted EPS basis, excluding the severance and restructuring costs and the favorable impact of the onetime tax revaluation, we delivered adjusted EPS of $0.26 for the quarter compared to $0.30 for the fourth quarter of 2016, which excluded the debt extinguishment costs incurred last year.

For the full year 2017, our consolidated GTV increased 3% to $4.5 billion, also our highest annual GTV. The increase in GTV was primarily driven by volume from the acquisition, but was offset by a number of factors; first and foremost, the unprecedented short supply of used equipment resulting from the strong infrastructure demand environment, principally in the U.S. This supply-demand imbalance resulted in strong price realization for consignors, which reduced their desire for underwritten contracts in 2017, with overall at-risk volume in 2017 dropping year over year from 25% to 16% of GTV.

Secondly, we cycled a number of significant events in 2016, amounted to over $100 million in GTV headwinds. Namely, we lapped the significant Western Canada oil and gas sector dispersals, including our largest ever auction in Grande Prairie in Q1 of 2016 and the Columbus, U.S. auction in 3Q in 2016.

Our consolidated revenues increased $44.1 million, or 8%, 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 RPFS and Mascus. However, on a pro forma basis, our combined company revenues declined 2% versus last year, driven by the factors impacting our GTV, as I have discussed earlier.

Our consolidated revenue rate was a real bright spot for us this year with our rate improving 59 basis points to 13.66% versus the same period last year. This increase in rate benefited from the strong pricing environment, together with the accretive business components such as our IronClad Assurance program, our government business and growth in our other value-added services.

Our operating income decreased $28.2 million compared to $135.7 million in 2016 on a reported basis, and decreased $30.2 million on an adjusted basis. This decrease in operating income is primarily due to higher operating expenses and amortization in 2017 as a result of the acquisition, as well as higher acquisition costs in 2017.

Net income for the year of $75.3 million was $16.8 million lower than 2016 as a result of lower operating income, higher interest costs, offset by the lower effective tax rate, including the U.S. tax reform net tax liability valuation benefit.

We delivered diluted EPS attributable to shareholders for the year of $0.69 compared to diluted earnings per share of $0.85 in 2016, and adjusted EPS of $0.81 for the year compared to $1.15 for the prior year.

Before I move on, I'd like to close out our dialogue regarding the financial assumptions and supplementary context we provided on our second quarter call. I do not intend to go into detail regarding all of those assumptions today on this call, but overall, I'm pleased to say our actual performance for each of the components were within the respective ranges we communicated, with the exception of our tax rate.

Our full year effective tax rate came in at 2.7%, significantly lower than our estimates. This was driven primarily by the onetime valuation impact of U.S. tax reform on our net tax liability position in this quarter. But also by better than expected realization of our previously identified tax synergies resulting from the IP acquisition, and refined estimates for tax deductibility of stock option compensation expenses and acquisition-related costs during the second half of 2017.

Getting into our segment performance, fourth quarter Auctions and Marketplaces GTV was up 24% versus the prior year on a reported basis, driven by the acquisition volume. Our 12-month trailing GTV surpassed our previous peak experienced in Q3 of 2016 during the height of the oil and gas dislocation.

Turning to segment revenue. Overall, Auctions and Marketplaces revenue increased 20% on a reported basis to $163.7 million in the fourth quarter versus last year. This increase was primarily due to the acquisition and improved U.S. sales team execution, which drove U.S. revenue growth to 51% in the quarter.

We continue to see strong international performance with revenue growth of 24%, driven by robust live auction volumes in Europe and Australia.

Total revenue performance was partially offset by an 18% revenue decline in Canada due to the significant Canadian Private Treaty deal transacted in the fourth quarter of 2016. Lapping this large Private Treaty transaction also reduced our Auctions and Marketplaces segment revenue by 49 basis points to 12.64% in the fourth quarter of 2017 from 13.13% last year.

Turning now to other services category, our RBFS business, which has now financed over $1 billion in equipment since inception, is now being offered to customers in our weekly IronPlanet auctions and continues to be a solid revenue growth driver. Fourth quarter revenues were $4.6 million, up 19% versus the prior year, with funded volumes up 29%. Our Mascus revenues also generated solid revenue growth in the quarter of 40% to $3 million, driven primarily by listings growth and an increase in subscriptions.

Turning to consolidated operating expenses. On a reported basis, total operating costs increased 31% with cost of services up 54% to $25 million with reported SG&A of 25% to $92 million in the quarter. These increases are driven by the addition of IronPlanet operating expenses. On a like-for-like basis, however, our operating expenses were essentially flat in the quarter, driven by operating leverage from our improved revenue performance, along with synergy realization in the quarter and disciplined cost management.

With Q4 now our second full quarter with combined company cost structure, we are starting to demonstrate the operating margin leverage that comes with revenue growth. Looking at our expenses on a sequential basis, our cost of services Q4 over Q3 came in roughly flat on a rate basis, which is a function of those costs being more variable and moving with auction volumes as expenses such as inspection services that are higher when auction volumes are growing.

However, our SG&A expense rate sequentially declined significantly in the fourth quarter to 52% of revenue versus 61% of revenue in the third quarter of 2017. This sequential rate improvement was driven by our improved topline performance, and demonstrates our ability to deliver improved fixed cost leverage and flow-through characteristics of our model. As an additional proof point of flow-through leverage, Q4 2017 adjusted EBITDA margins rose to 33%, up from 23% in Q3, driving full year 2017 adjusted EBITDA margins to 31.4%.

Turning to our balance sheet and liquidity metrics. Our operating free cash flow of $111.9 million declined year over year by 24% due to lower earnings, including the impact from the supply challenges, additional acquisition-related costs, and increased interest expense incurred related to the acquisition. Despite these factors, we generated operating free cash flow of 128% of adjusted net income, and we are extremely pleased with our ability to generate strong free cash flow from the business, which is a testament to the strength of our operating model and our disciplined cash management during the year.

CapEx of 5.6% of revenue for the year was well below our Evergreen Model maximum of 8.5% of revenue, but did increase from prior year as we invested in technology to integrate the companies and leverage the IronPlanet digital capabilities into our live auctions as demonstrated during our recent Orlando sale.

Long-term debt as of December 31, 2017 is at $813 million with a weighted average annual interest rate of 4.8%. This increased level of debt has taken our adjusted net debt to adjusted EBITDA ratio to 2.9x. Although we are over our desired level, we continue to be focused on debt repayment as a priority for capital allocation to reduce this metric to below 2.5x adjusted net debt to adjusted EBITDA as quickly as possible.

Our financial focus for 2018 will be on delivering synergies, realizing benefits from the U.S. tax reform, optimizing our capital allocation, and managing the impact of the new revenue recognition accounting standard.

Turning to synergies. As Ravi mentioned, we are pleased to be on track and are staying focused to deliver $20 million of run rate synergies at the end of fiscal 2018. As of the end of 2017, we have exceeded our 2017 synergy expectations, completing initiatives that are generating $14 million of run rate synergies.

In terms of the U.S. tax reform, the impact of the lowered federal tax rate from 35% to 21% has already resulted in a positive impact to earnings in 2017 with the revaluation of our net tax liability position. Although this does lower the NOL value of the tax assets acquired with the IronPlanet acquisition, this impact has been included in the $10 million revaluation benefit booked in Q4 of 2017. We will still generate a cash tax benefit as these losses are utilized over time.

In light of the significant U.S. changes, we will be reviewing our current tax structures and strategies, such as transfer pricing agreements and internal financing arrangements, but believe that these reforms will be positive to our long-term earnings as we continue to grow our U.S.-based operations and add to our already identified tax synergies resulting from the acquisition.

For modeling purposes, we would suggest a current tax rate for 2018 to be between 20% to 23%, based on current U.S., Canada and international tax regulations, but may expect some quarterly volatility as regulations become clearer over the next few quarters.

In terms of our capital allocation, we expect to continue prioritizing dividends, and are focused on debt reduction as we look to get our ratio of net adjusted debt to adjusted EBITDA to 2.5x or lower over the short term. Also, as we mentioned last quarter, we will be adopting the new revenue recognition accounting pronouncement, also known as Topic 606, beginning in the first quarter of 2018. We encourage you to review the remarks from our last earnings call and the additional disclosures we have provided in our third quarter 10-Q as well as our 10-K to assist your understanding of the impact.

I do want to reiterate and be very clear: Adoption of Topic 606 does not change how we fundamentally operate or manage this business, nor does it have any impact on our operating profit, earnings, cash flow or our balance sheet. It is strictly a change in revenue presentation from net to gross as we discussed in detail on our third quarter call. We expect to keep you apprised on this issue as we progress through the quarter.

Before I pass to Ravi, I would like to thank all of our team members across the company for their dedication and perseverance in 2017. It was a challenging year, but one that has positioned us exceptionally well for the future. Ravi?

Thank you, Sharon. As we have shared, over the past 3 quarters, we have laid out key integration milestones targeted for completion in the fourth quarter and for the first half of 2018. Overall, we continue to stay on track, if not slightly ahead of our integration plan, whilst we have successfully completed the bulk of activities planned for the fourth quarter, as well as several of our milestones earmarked for the first half of 2018. Let me briefly touch on a few of the critical initiatives in the first half of 2018.

We are very excited to won the nonrolling stock DLA contract in the U.S. This will be a large contract that we have started mobilizing across many DLA sites. It's a complex logistical project, and our GovPlanet team has already gained momentum. We expect to be operational towards the end of first half.

We're also well along on our journey to connect our channels to create an excellent customer experience. We now have IronPlanet listings on rbauction.com and RB listings on IP.com. Customers sell specifically for equipment, and a wide variety of equipment on our website will continue to accelerate website traffic growth.

Let me comment on the buyers' fee, which we now refer to as transaction fees. At RBA, we have not changed this fee in the last 5 years, despite significant investments in the customer experience. Importantly, given the IP acquisition, we felt it was important to harmonize our transaction fees across our core product and channel offerings to make customers, especially buyers, agnostic of the channel. We're partially harmonizing the RBA fee structure to be closer in line with IP. This was implemented in mid-January and will positively impact revenues.

A proof point of our combined company coming together and being laser focused on execution was our Orlando auction last week. Last year we were competitors, but this year, the combined strength of Ritchie Bros. and IronPlanet was a testament to the accretive power of the combination. It was a historic week as our teams delivered a record breaking $278 million in GTV, amounting to 24% like-for-like growth over last year for the combined company. Wow. We consider this to be a barometer of both end user demand, as well as superb execution of our sales, marketing and operations teams.

Despite continued tightness of supply, our teams leveraged existing customer relationships and penetrated new accounts. We had slightly more sellers than last year, but importantly, average lots per seller increased high-double digits, the share of wallets. Registrants were up 30%, with online registration up 45%. Importantly, many registrants came online through IP referrals. Average GTV per lot sold was also up high-double digits; a reflection of good mix and strong pricing.

We also implemented several innovation, bringing IP's technology to the live auction. Specifically, we created a virtual sales option where we sold hundreds of lots remotely by offering the IronClad Assurance and not moving the equipment to Orlando, but it was sold live by an auctioneer using high quality pictures. For the first time, we sold our TAL lots remotely from our yard in Atlanta rather than using up valuable real estate in Orlando.

Finally, not only did we do well in construction, which is the majority of the GTV, we saw strong performance on both vocational trucks and over the road trucks. It is good to see pricing rebounding on transportation.

Ultimately, the success of Orlando was due to, first, excellent execution of our team. Second, Orlando's a mega auction and a magnet that is global in scope. Our teams send consignments to Orlando from different parts of the world, and consignors know you get great pricing in Orlando.

Before moving on, I'd like to add the Surgeon General's warning that we need to be careful not to extrapolate Orlando's results to the quarter or the year. Based on numerous conversations with customers, dealers and OEMs, the supply constraint are as tight as in 2017 and will persist through at least the first half of 2018. Supply is still short on excavators, reloaders, dozers, aerial, and is not restricted to any one OEM. Nevertheless, Orlando is great, and as someone said, no matter which way you slice it.

We're investing in technology as a differentiator and a key enabler of our business, and are advancing our capabilities by applying machine learning and advanced data analytics. Specifically, we have enhanced our sales capabilities. Buyers now find it easier to locate the inventory across all our websites, while sellers leverage both our rich data repository, as well as our Platform Solutions tools to give them the insights, tools and solutions to manage their assets in an informed, efficient manner. We are focused on helping buyers find what they are looking for easily and quickly, while providing access and visibility to the largest equipment inventory across all our brands and solutions. And enhanced such capabilities now allow us to extend our reach to more customers in a channel-agnostic manner.

We also successfully combined the technologies and customer features of equipment won at IP's Daily Marketplace, both of which were growing throughout the year, to launch Marketplace E in November. Marketplace E is our fastest growth channel, and provides control to sellers and buyers through reserve price, make offer and buy it now formats.

Platform Solutions is a true partnership play with OEMs and their dealers, rental companies and large strategic account customers. We allow customers to leverage our size, scope and reach, but allow them to have their own storefronts on our umbrella IP website. Think of it: it's a website within a website, and allows them to control disposition channels, pricing, et cetera. It allows us to become very sticky by connecting to customers' ERP systems. As trusted advisors, we provide tools, data and insights to help our customers make real-time asset disposition decisions, and allow them to select appropriate channels based on their needs for specific asset classes. Our efforts in this area are embryonic, but gaining steady momentum. Both IP and RB had a few clients each, and we're now working on scaling this offering.

Finally, we are looking to replace our legacy live auction operation system with IP's purpose-built and highly integrated and highly integrated, simple to use technology. We will have one unified live and online auctions operations management technology platform by 2019. Of course, we'll continue to use Xcira as our simulcast technology. The unified platform project is called MARS, and will result in a better customer experience, reduced complexity while garnering us efficiencies.

As a final word on innovation and technology, we're now providing customers the ability to search, register and bid at our Ritchie Bros. auctions around the world on mobile devices. In the fourth quarter, approximately 7% of our online transactions were made using the mobile app. Mobile capabilities provide another opportunity to make our customer experiences easy and flexible so they can conduct business with Ritchie Bros. 7 days a week, 24 hours a day.

And let's shift to providing you our outlook for H1 of 2018. As you know, we do not provide guidance since it's extremely difficult to forecast this business. However, we are offering the following insights for your consideration as you model first quarter 2018.

Supply continues to be very tight, while demand continues to rise. Expect shortages to last at least through the first half of 2018. Rental and dealer utilization continues to be extremely high.

In terms of auction comps, we'll also not have a 2018 Las Vegas auction in the first quarter. You'll recall we had ConExpo last year. The first quarter Dallas/Fort Worth sale is expected to comp significantly lower given major dispersals in the previous year as well as the nonrecurrence of Private Treaty deals in Canada and 2 large fleet deals in Edmonton in the first quarter. From an auction calendar perspective, we have 4 fewer auctions as a result of closed sites in the first quarter.

Now let me talk about the tailwinds. Pricing strength continues to take hold. Transportation demand is picking up, along with pricing, and the sector is seeing fewer supply challenges. We also see the nudging up of oil prices as slightly positive and with mining also getting stronger. Our salesforce is stabilizing, and the learning curve on multichannel is improving. Finally, many of the January and February auctions today have had decent comps.

Turning now to our Evergreen Model update. We created our Evergreen Model in 2015 and showed it to you in our investor conference to reflect our expectation of how we believe our business will grow on an average annual basis over a 5 to 7-year cycle. And recognize this is not meant to be annual guidance. On an average basis in the first 2 years, notably 2015 and 2016, which we achieved all our targets with the exception of GTV. In 2017, we were challenged in delivering most of the metrics, expect for the 3, since it was both a transition year and we were severely impacted by the supply shortage.

We unveiled a new Evergreen Model when we announced the acquisition, and subsequently shifted timing of achievement of ROIC and EBITDA margin targets by 1 year. Today, we are reiterating this model going forward in 2018 with 2017 reported numbers as the base. Note, given the forthcoming adoption of the new recognition standard, we'll need to restate certain targets as a proxy for our old definition of revenues. We'll have a fulsome discussion on the Evergreen Model sometime later this year.

Let me summarize our long-term objectives and strategies. Our 3 key strategic objectives are, first, to gain share of the auction segment. Second, penetrate the upstream segment. And upstream we refer to as the non-auction segment; the volume that comes through private sales, brokers, dealers, rental companies, et cetera, all the way to retail where rental companies, for instance, are selling to their own customers. And this whole non-auction segment, because the auction segment's about $25 billion, the non-auction segment's very large. Over $300 billion globally. The third objective is to deliver magical customer experiences.

To deliver these objectives, we have 5 key strategic priorities. The first is to create auction segment share by selling RBA live and IP featured weekly auction in tandem, based on customer need. Sometimes you event versus flow. Sometimes both, depending on the fleet. Second is to drive upstream penetration through Marketplace E, Platform Solutions, Private Treaty and Mascus. Third is to connect the channels to improve search, integrate listings and provide single [time on] for customers to enhance the experience. Four is to make technology a competitive advantage and touch all aspects of our business. And finally, pursue structural efficiencies be controlling cost, dispose of unused land, continue to rationalize inefficient sites if necessary, and step up to find the next level of synergies.

In conclusion, we recognize we have a very challenging macroenvironment relating to supply constraints that are outside of our control. However, we are undaunted in the face of this challenge, and we will concentrate our efforts on what we can control. In essence, we are coming out of the integration best-together mode, and are laser focused on driving growth through outstanding execution. Our new mantra for the combined company is simple: We are one. Move, build and grow.

Speaking of grow, we have over 10 growth drivers our teams will focus on. First, growing our share of wallet with loyal customers through selling multichannel, thereby improving sales productivity. Our TMs and strategic accounts managers will aggressively pursue new account acquisition. We'll pursue growth in construction, transportation and agriculture, while going after oil and gas and mining opportunistically.

We will grow GovPlanet in the U.S. and the U.K., and this is a tremendous business. We believe international is now truly on the map of RBA and is a growth engine. We're marrying IP's formats with RBA's scale in Europe and Australia. We're offering Ritchie Bros. financial services on IP. Energy may become a sectorial opportunity if oil prices keep increasing, and we have the very reputable crews in this business. Marketplace E and Platform Solutions will be our key reaches for upstream.

And finally, the harmonized fee structure will generate incremental revenues, and increase our revenue rate but up to 50 -- 25 basis points. Consequently, we have moved up the lower end of our A&M segment revenue rate, the Auctions and Marketplaces segment revenue rate, from 12% to 12.25%. Thus, the new range for A&M segment revenue is 12.25% to 13.0%. Hopefully that bar demonstrates that we are not sitting still and will find new ways to grow.

And with that, we'd like to open the call to questions from analysts and institutional investors. As with past calls, we ask that you please limit yourself to one question and one follow up. Operator, Jody, would you please open the line to questions?

(Operator Instructions) Your first question comes from the line of Michael Doumet of Scotiabank.

Great quarter. On Q4 GTV, the results were quite strong. The Orlando results also looked quite impressive. Ravi, last quarter you broke out the weakness, roughly speaking, into what you thought was macro versus company-specific drivers. Now I believe GTV grew on a combined basis, despite supply constraint. Any way you can give us a sense of whether macro conditions are at least starting to improve, or if it's mostly pricing and improved salesforce productivity that drove the relatively strong GTV numbers?

Michael, I'd say, let me answer that. Clearly, I think we have come a long way on salesforce execution, and we'll continue to get better. But I really strongly believe that some of the challenges we had and growing pains that I referred to are behind us. We have a highly motivated sales force, and we're beginning to hum. I would say the supply challenges, and I'm sorry I sound like a broken record, but it's to me no longer anecdotal; it's fact. And point to hundreds of customers, not only personally but also through our whole teams, supply constraints are really quite a lot. They're still there, still feeling it in 2018. So then the question is, gee, then how did you see the rise in Q4? Recognize Q4 always there is a little bump up just seasonality, and people do try to get rid of their inventories. I think the difference is we were laser focused on going after it. The same in Orlando. We were laser-focused on going after it, and very much making sure that from an auction segment, even though we were hundreds of competitors, we were quite focused on making sure that we did not lose share, and in fact if anything, gain share.

Your next question comes from the line of Craig Kennison of Baird.

Looking at your territory managers, you saw a nice sequential uptick in the number of territory managers. I guess that's a loaded question, but could you discuss the composition of your territory manager team, and maybe what percentage are still on their first year, for example, and how productivity improves as a territory manager matures.

There's no question we had sales force turnover, both voluntary and involuntary, because as we did the territory optimization at the beginning of the integration of the combined companies. So we do have new territory managers. Turnover has always been an issue in this business, like it is for most sales-driven companies. Our turnover clearly was exacerbated in 2017. We've brought it down significantly. So in third quarter versus fourth, we brought down the rate of turnover not only in the U.S., but globally. And so I think we lost 32 in Q3, but only 6 in Q4. So that shows you that we're doing that. I don't have right now the breakdown by how many and their longevity. Suffice to say that we're working very hard on training the people and getting them up to the learning curve. The one -- I think we have got 2 things. When new people come in, one positive is they don't have biases of a channel, and it's easier for us to get them where you don't have to have behavioral changes, and the veterans bring a lot of the relationships. I think we're getting a very good blend of the two. I'm satisfied with our progress that we are making on that whole front.

And as a follow-up. Could you just address any compensation plan changes you've enacted as you've integrated the two companies? Thanks.

Jeff, do you want to answer that for the U.S.?

Craig, the compensation plan changes for 2018 are very aligned to a few of the things that Ravi talked about; namely new acquisition driving multichannel. We've got a component this year that is different for our reps to hit a quarterly production number, and then for our strategic accounts team to drive the upstream volume that Ravi talked about. So I feel very good about the components of the comp plan that are very aligned to our strategic objectives, whether it's gaining new share of wallet, going after new business or driving upstream and multichannel selling.

Your next question comes from the line of Ben Cherniavsky of Raymond James.

I'd like to just talk a little bit about the macro and supply conditions and how -- well, let me go back and just recall during previous cycles, Ritchie always actually performed very well in markets where prices were rising, customers were re-fleeting, OEMs were scrambling to keep up. There had been a misconception I think that Ritchie, used to say Ritchie did well in good times and better in bad times. And I think the fact the numbers show, if you look at the mid-2000s coming out of the 2001 recession, or even coming out of 2010, the GAAP activity, or GTV, accelerated with the other bellwethers in the industry. So why would it be different at this point? Why would you not be seeing the higher pricing and the turnover and the frenzy to re-fleet, et cetera, the shortages translating into more activity in your yards?

Great question, and since you have been a great historian of the company, fair point on our whole concept of how we do, good times and bad times. This is not your normal cycle. And so as I mentioned I my stated remarks, after the elections in November in 2016, we started seeing that in our auctions where pricing started going up. And throughout 2017, we have started seeing pricing go up. And in 2018 it's continuing, including Orlando, where anecdotally, we had some better -- customer who would bid on 80 things and did not get a single. We really feel bad about that, but because the pricing was so strong. Right now, pricing is at a very, very strong level. So having established that, the problem is this. The unusual situation has been -- and this is not restricted to a single OEM. Most of the, I'd say the majority of the OEMs, that we've talked to all of the majors, for years since the recession had been cutting down on capacities. And a lot of their part suppliers, and many of them supply to many of the OEMs, either went out of business or reduced their production. This thing which was really related to the U.S. election. And it's not that there were any laws passed, but there was a business sentiment that just for, especially on a local basis and a state basis, to really release a lot of projects. Also, contractors started feeling comfortable bidding on things. It just created a huge frenzy and demand that we've never seen before. So it's not like a normal equipment cycles that you see. And the issue was it caught every one of the OEMs unawares, and they were not able to ramp up fast enough. And even if they could, they didn't have a lot of the help from the part suppliers. Second, for many of the OEMs, China, which had been the doldrums for a few years, suddenly took off in the beginning of 2017. And so people who have production in China, and they used to export parts or machines, they had to take care of their own domestic business. So you had a situation where dealers have had huge backlogs. So things have been where if they have asked for certain machines that may be 4 months, 6 months, et cetera. And dealers in the U.S., which is a U.S. phenomenon, have been getting actively into rentals. They have had to take other rental fleets. So all of this has created where no one wants to release their equipment because they're not sure that they're going to get the new equipment. And I know that the OEMs are working very hard to try and solve the problem, and some of them are hoping that towards the second half, things will ease. So when you don't have supply, that's one of the reasons you see then our at risk business. Half our people jokingly say we can't give our money away because pricing is so strong, customers think that, hey, Ritchie Bros. will do extremely well. In fact, if you look at the volume drop, it's kind of correlated highly with the GTV shortfalls that we've experienced. So very long answer, but when you don't have equipment, there's very little we can do. Our execution right now is superb. Now having said that, this is a huge used (inaudible) market, and we're going to go beat the bushes as we did in Orlando and find the equipment.

Because at the end of the day, your story's always been more about a secular growth opportunity, and even more recently with IronPlanet, it's about share of wallet and pulling more people to your channels. So irrespective of what the cycle does, you should be able to grow through that. Recognizing that at sort of inflection point you're going to get hit by macro, but sooner or later, it's up to you guys to just deliver the growth, right?

Well, that's what we're focused on.

If I could just have one follow up on you mentioned in your 2018 commentary, some of the yard closures should be taken into consideration. And you know that I think that was -- I applaud you guys for closing some of those yards. But wasn't part of the strategy also not really to lose any business, and to make sure that the sales in those markets go to other yards nearby or to other channels like the Marketplace?

No, absolutely. And that's -- we're giving you both the tailwinds and headwinds and the factual stuff to keep into account for modeling purposes. Our every intent, because we still feel very strongly that those were the right decisions. And so our intent is to either, so for instance Raleigh, which we closed, our view is to try and get it to Nashville or Atlanta. And over at St. Louis, it is to try and get it to Kansas City or Chicago. So one is the light piece. The second is to get it onto the weekly auction. Our sales team -- because we didn't change any of the sales teams in these places. So that's exactly what we're trying to do, but we just noted it so that all of this stuff is clear and transparent.

Okay, great. I know you guys are working hard, so keep it up. Thanks a lot.

Your next question comes from the line of Cherilyn Radbourne of TD Securities.

Wanted to ask a question around the Evergreen Model. And specifically, you continue to guide to an EBITDA margin of 40% in 2019, notwithstanding the fact that you seem to be expressing a fairly cautious view around 2018 from a top line perspective. What gives you the confidence that you're going to have the top line growth to create the operating leverage to generate that kind of a margin in 2019?

Cherilyn, let me start it, then Sharon can maybe add stuff. I think we're -- notwithstanding the supply challenges, and I don't want to beat a dead horse, and I think Ben's question we articulated what that was all about. Our job now is to figure out how to grow. And I enumerated in my prepared remarks all of the growth drivers that we have. So what we're really going after is new customers, and which that's one of the reasons Orlando did well. We also getting share of wallet, which we did well in Orlando as well and other places. So right now we're, on the core, it is trying to improve share of wallet because there's not a lot of customer overlap between the two companies and sell each other's offerings. Second, we have a lot of other businesses. GovPlanet, that's a huge contract. And as we mobilize and get revenue growth, we'll have the full year of that in 2019, for instance. And this supply thing is not going to go on forever. We think that -- we're saying at least through first half of 2018. So at some point, the OEMs are going to catch up. But also, we're going to find new places. Third, this whole area of upstream, Platform Solutions, Marketplace E. As I said, we showed tremendous growth on the individual components of Marketplace E, which namely E1 and Daily Marketplace. And so we've got a number of things, and now the thing is we're just very focused because we've become one team. It's not so much about integration anymore. There are still technology projects, et cetera, that will carry on. And it's all about the whole team. There's only one thing on our minds: drive revenue growth.

And then maybe a follow up with more of an administrative question. But Sharon, could you just clarify your guidance on the tax rate, and just decompose that into an effective tax rate and then the cash tax rate.

Cherilyn, what I'm quoting is really what I see as the cash tax rate, or what would show up on the current line of the financial statements without consideration for anything coming through deferred tax type changes. And again, the benefit that we're basically projecting into 2018 comes on the heels of U.S. tax reform with what we have as a significant now U.S.-based business, but also driven by certainly some of the tax strategies that we have in place, so our transfer price agreements and internal financing arrangements.

Your next question comes from the line of Scott Fromson of CIBC.

Good quarter. Just a quick question on what are the customers saying about the new combined Ritchie Bros.? Is the feedback on customer service consistent along the spectrum from large to small?

Scott, let me take a quick shot at it, and then I'll have Jeff and Brian maybe quickly comment because they are closer to ground. But we also put some quotes in, in Orlando I think in the press release. So far, the reception of the customers has been very positive. They were quite in awe of a lot of how we have taken the innovations in Orlando, kind of using both. And there's a new spirit with Ritchie Bros. in terms of the fact that we were able to take the IronClad Assurance and incorporate that into a live auction. So I think customers are very excited. Our consignors are thrilled about the pricing we got for them in not only this auction, but we had auctions in Phoenix and other places, and they have been thrilled by IT. So I think all in all, at least the feedback I'm getting, we had a huge customer dinner in Orlando. I talked to a lot of our customers. They were all very positive about the direction of the company. Jeff and Brian, anything you want to add?

Yes, Scott. This is Jeff Jeter. One of the things I thought was very unique going into building the Orlando was that we talk a lot about there are customers that we weren't overlap. But there obviously were customers that we did have overlap where quite frankly, both IronPlanet and Ritchie Bros. had relationships. So last year, or the last few years, when we went into -- IronPlanet legacy went into building our Orlando event and Ritchie went into building theirs, we were completing obviously for volume to go into Orlando auction. Competing in customers where we both had relationships. And I think for a lot of our customers this year, it was so refreshing that just the tension wasn't there. And we weren't -- we were there trying to find, as a combined company, the right solutions for that customer, and we weren't in there competing for equipment. And I really felt that a big, big change in just the relief of that, and quite frankly, forging even stronger relationships with our customers. So it's been very, very positive.

So with the new combined platform, is there increased pricing power, or is that covered by the new harmonized fee structure?

I don't like to use those terms at all, because ultimately, pricing is a reflection of supply and demand. I think what we're all about is providing the best value to our customers, be they buyers, be they sellers. And our job is to provide the better IT, make great customer experiences. And there's hundreds of competitors. This is a market that will really punish you if you try to get greedy, and that is not at all our view. Our job is to provide the best value for our customers.

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

You're guiding to a 40% EBITDA margin by 2019. If I look in the past, Ritchies, your past 40% EBITDA margins, before I think you guys did above 40% margins from 2003 through 200, and at the time, your ARR was around 10%. Your revenue's now clearly above those levels. Your ARR is closer to 13.5%, 14%. So is the Ritchie Bros. business model just kind of fundamentally different now in terms of how to grow earnings? Is it costing you more to get that $1 of future revenue?

I'll handle that, Michael. I think certainly we have some new revenue streams that come with a different cost profile. Those are in our other segments. So basically RBFS, Mascus, et cetera. But we also do have other lines of business that if I take IronClad Assurance, it comes with inspection fee revenue, but it also comes with operational costs to be able to drive that. So there have been some minor changes. The profile still of this business is that with additional revenue will come improved flow through over those costs, and so those costs will not necessarily increase at the same rate of revenue. That part still remains true. The commitment to getting back to the 40% EBITDA margin was what we announced at the point of acquisition, and that was as we are acquiring a company that was operating at a significantly lower operating profit margin index compared to our base business.

That's really helpful. Now you guys have 2 quarters under your belt with IronPlanet. Just to try to get a sense of that drop through, if revenues increased 10%, what do you think, Sharon, is a right incremental margin or range we should expect to drop through?

I'd point you back to that sequential slide that we showed. You'll have quarter volatility, depending on the revenue levels. And clearly our Q2 and Q4 quarters are our highest volume quarters where you would end up with more like performance to what we witnessed inside of Q4. And just in addition, we are continuing to execute on our synergy efforts, and we will continue to drive volume and keep our expenses well managed.

I think on the core business, just to add, our flow-through characteristics have not fundamentally changed. Now it's where in moments of time, we've just brought in IronPlanet. The reason we were confident of the 40% by 2019 was really to say it has similar characteristics. But they didn't have the critical mass that we did. And we took on a lot of their SG&A, and we are now, through synergies, getting to the right base, and we're working hard on controlling cost. It's just a matter of getting to the revenue bases, and we are now seeing the improvement. So it's step by step, and I don't think there's many businesses that offer 40% commitment on EBITDA margins, so it's a good flow-through business.

That's helpful. And then just lastly, on the mix of equipment showing up at auctions, I believe OEMs stopped producing in 2015 with the oil downturn and the industrial downturn in the U.S. I'm just curious if you could comment about the mix of equipment showing up at auctions. Maybe the age of equipment of what you could expect for 2018. Thank you.

Mike, I think in 2017, we really did see a degradation in terms of age. With the supply shortages, we were getting more older equipment because people were giving us -- it was tough to find things that were newer, less hours, because they were all being utilized in the field. And so we hope as the supply eases, that we'll be able to get back. I think in Orlando, we actually had a pretty nice mix, and we were very pleased, which is one of the reasons that GTV per lot actually increased. One was strong pricing but the other was mix. So our aim is to continue to have a good balance mix, and partially just based on what the market can offer and we'll keep working at it.

And due to time constraints, our final question comes from the line of Maxim Sytchev of National Bank Financial.

Sharon, this question is for you, if I may. When we're looking at SG&A at roughly $93 million, clearly some of that is going to be sticky Q-on-Q, but how should we think about it playing into Q1? How much of that $92 million will be around versus if we should be thinking about percentage terms as you hit the first part of the year?

Q1 you would expect to be a little bit lower just because you do have some incremental volume-based costs still embedded in the SG&A line to support the larger volume that we experienced inside of Q4. And then the only other piece to remove would be the incremental severance and restructuring type costs that showed up on the acquisition line. But those would really be the only kind of additional pieces of information I could provide.

And sorry, are you talking about the percentages or the absolute number?

I think absolute number would go down a little bit just because of those variable base components that are still embedded inside of SG&A.

And then Ravi, just a quick question. And again, don't want to belabor the whole supply issue dynamic. But when you talk about second half as the trigger point of seeing some improvement, is this your internal modeling that tells you or provides those signs, or are there any green shoots from the OEMs that maybe you can share with us? I guess any color on those two fronts, please.

Max, I wish I had a crystal ball. I don't know if there's anyone today who can give a definitive answer on it because it's not -- if it were one OEM, it's one thing. I think it's affected all the OEMs. It is not based on internal modeling. It's really based on a composite of all our harmonizations. I've personally talked to a lot of dealers, a lot of our end user customers, and to the OEMs to get a firsthand view, but then our people are constantly in the field talking to them. What I can say is it's not going to improve in the first half. So let's just hope -- what I've heard from some OEMs is at least in certain categories, they do feel that things will start getting back on track in the second half. I think to me, the way I'm viewing it is, it is what it is. And rather than just worrying about that, because it's not in our control, we're now focusing on -- because it is a large market. We're just going to go hunt. Our salespeople are very clear directed. Just cannot be farmers; they've got to be hunters. They've got to find new business. They've got to improve share of wallet. That's what this was all about. We've got to look at all the -- we've got other drivers, whether it's GovPlanet. So go after those and find it, strategic accounts. They've got a whole target list of new customers. Every salesperson has a target list of new customers to go after, and that's what we are hoping. Because this supply thing, who knows. Our job is to get growth, and that's what we're laser-focused on delivering.

That's very helpful. Thank you.

Okay. Thank you very much, everybody. Onwards and upwards.

Thank you. Thanks, everyone. That concludes our call for today.

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