RB Global Inc (RBA) 2018 Q3 法說會逐字稿

Good morning. My name is Andrew, 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) Thank you. 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.

Good morning, and thank you for joining us on today's call to discuss our third quarter 2018 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.

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 and 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 at investor.ritchiebros.com. 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 third quarter results were made available yesterday evening after market close. We encourage you to review our earnings release and Form 10-Q, 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 the most directly comparable GAAP financial measure and a reconciliation between the 2, see our earnings release and Form 10-Q. Presentation slides accompany our commentary today. These slides can be viewed through the live or recorded webcast or downloaded from our website. All figures discussed on today's call are in U.S. dollars unless otherwise indicated. I'll now turn the call over to Ravi Saligram, our Chief Executive officer. Ravi?

Thank you. Zaheed. Good morning, everybody. And thank you for joining our third quarter earnings call. GTV growth in the third quarter was up 2% with agency proceeds improving and growing 13% versus prior year. Our focus on new business, leveraging our large loyalty customer base and executing our multichannel strategy in a tight supply environment resulted in strong revenue and agency proceeds growth, with sequential improvement in our Auctions and Marketplaces revenue growth. Agency proceeds growth was driven by strong online performance, solid industrial live auction performance in Canada, continued growth in our services business and the partial buyer fee harmonization on live auctions, offset by surplus in the Canadian agricultural business and fewer live industrial auctions. We are pleased that our online marketplace has showed a second straight quarter of momentum with 16% GTV growth.

Total company agency proceeds growth, coupled with disciplined expense management improved our operating leverage, which contributed to doubling our diluted adjusted earnings per share versus last year to $0.18.

Let me review some of the third quarter highlights and provide some additional color on the quarter. First, our U.S. business had another positive quarter, generating double-digit agency proceeds growth. Key factors influencing the U.S. business were strong performance of live auctions in the Western region, growth in strategic accounts, momentum on the weekly featured online auction, the resurgence of Kruse live auctions and the partial buyer fee harmonization. Specifically, we delivered double-digit GTV growth in our weekly featured online auction. I'm pleased to see this progress and momentum building as our teams continue to embrace our multichannel strategy. And we have achieved nearly 100% participation from our core U.S. territory managers on our online weekly featured event. Regionally, our Western region delivered a strong GTV performance with over 20% total growth over prior year. Our strategic accounts team has continued their momentum of a very strong second quarter, once again delivering nearly 20% GTV growth in the quarter as they increased volume with new acquisition accounts, leveraged upstream selling opportunities and continued to see strong performance in the construction and rental sectors.

And finally, yet another positive highlight from our U.S. business was our Kruse Energy performance. In the third quarter, our Kruse business delivered their highest GTV quarter in 2018, growing by over 60% in the quarter on the back of a very successful major auction in September. Agency proceeds for our Canadian business was also up double digits, driven by the continuing industrial market recovery in Western Canada with strength in our Edmonton and Saskatchewan yards, the benefit of the delayed Q2 Grande Prairie auction moving into Q3 and the impact of the buyer fee harmonization. Offsetting the positive growth was softer performance in agriculture, driven by fewer on-the-farm auctions and lower market pricing. Canadian online performance was strong in the third quarter, and we are pleased to see good acceptance of Marketplace-E. Importantly, our TMs are beginning to leverage our multichannel assets to drive incremental volumes from new customers who might not have had a strong affinity for the live auction. International continues to be a growth opportunity, and in the quarter, we transacted a few large inventory deals from Africa, Turkey, et cetera, which favorably impacted revenue growth. Weekly featured online auction and Marketplace-E delivered substantial online growth of over 50% versus Q3 of last year, albeit on a low base. Marketplace-E, in particular, is gaining traction in several geographies. Japan continues to be a bright spot, and we've had another strong live auction in retail as a result of our CAT Alliance.

Looking now at our third quarter auction highlights. 60% of our live industrial auctions showed year-over-year growth versus Q3 last year with our average GTV per industrial auction on a trailing 12-month basis being up $2.9 million, or 18%. Our live auctions, live on-site auctions saw an increase in vocational and over-the-road trucks as part of our total mix in North America, while our international regions saw an increase in construction equipment mix in the quarter. The age of equipment also continues to influence our GTV. The percentage of equipment in our sweet spot of 3 to 5 years is down roughly 190 basis points year-over-year as late-model equipment continues to be impacted by most of the strong economic conditions in the U.S. and higher utilization rates in the rental sector. Some notable U.S. auctions include our Los Angeles auction, which delivered 85% year-over-year growth, our Denver auction with 66% growth and our Northeast Maryland auction posted $30 million in GTV and 30% year-over-year growth.

Our Canadian team conducted a $29 million auction at our Grande Prairie site, along with a $32 million auction in Toronto generating 19% year-over-year growth. The Toronto auction was the largest third quarter auction over at that site, which set a record for the number of lots sold for over-the-road trucks. Stripping out the unfavorable impact of foreign exchange, our Q3 Edmonton auction drove nearly $80 million of GTV and delivered 5% growth in local currency. Internationally, our Moerdijk, Netherlands auction drove $39 million of GTV and posted 16% growth over the previous year. Also as I mentioned earlier, our Kruse Energy auction was very successful with 61% growth and sold a drill rig for $5.5 million, that's right, $5.5 million, the most expensive drill rig ever sold by Kruse.

Overall, our third quarter had a number of positives as we grew our top line and improved both earnings and operating free cash flow with better operating leverage. Our services business continues to deliver the strength, and I'm pleased to see our online momentum building each quarter as well as our overall TM productivity sequentially improving, again, in third quarter. With that, let me pass it on to Sharon.

Thank you, Ravi, and good morning, everyone. As we turn to an overview of our Q3 consolidated financial performance, our strong revenue and agency proceeds results, as Ravi has already outlined, combined with disciplined expense management during the quarter contributed to our delivery of $32.7 million of adjusted operating income. This is an improvement of 93% over last year, after adjusting for $1.5 million of nonrecurring acquisition-related costs due to synergy and cost actions taken in the quarter. Our diluted EPS of $0.21 improved 133% over last year and includes a $4.9 million gain on the sale of our minority equity investment in Machinio, partially offset by the $1.5 million in acquisition-related costs I have mentioned earlier. Excluding these 2 nonrecurring items, adjusted EPS was $0.18 for the quarter compared to $0.09 in the third quarter of 2017.

Overall, we are very pleased with our earnings per share growth and the improvement in operating leverage resulting from our disciplined cost focus in the quarter.

Turning to our A&M's segment agency proceeds. Auctions and Marketplaces agency proceeds rate grew 11% in the quarter driven by strength in our online performance, strong price realizations, the favorable impact of the partial fee harmonization and Kruse Energy performance. On a rate basis, our A&M agency proceeds rate improved 110 basis points to 13.9%. The year-over-year rate improvement was driven by the continuing strong pricing environment and the favorable impact of the partial fee harmonization implemented in the first quarter. Also growth in our inspection fee revenues and growth in marketing-based consignor agreements providing fee revenue without GTV, such as our Brazil deal, which Ravi will address shortly on this call, benefited our overall Auctions and Marketplaces agency proceeds rate.

Turning now to our other services category. Our Ritchie Bros. Financial Services revenue was $4.8 million, up 40% versus the prior year, with funded volumes up 32% to $85.6 million. Ritchie Bros. Financial Services continues to deliver profitable growth, and I'm pleased to say with the RBFS revenue growth this quarter, it marks the 26th consecutive quarter of double-digit revenue growth. We will continue to invest in RBFS, as we see this as a critical value-added service for our consignors and a key driver of overall revenue growth. Mascus also generated strong revenue growth in the quarter, up 15% to $2.8 million, with our ancillary businesses also up 3% this quarter. Overall, we continue to be very pleased with the performance and growth of our services business.

Moving on to expenses. Cost of services and SG&A expenses combined increased 2%. Cost of services decreased 1% to $33 million, primarily due to the lower live auction activity in the quarter and lower costs required in our ancillary and logistics service businesses. Our SG&A increased 4%, driven by investments to operationalize our new GovPlanet surplus stock contract with the DLA, higher share unit expenses and volume-related expense growth. Offsetting these increases were general cost decreases in professional services and administrative costs.

Overall, we are encouraged by the fact that total revenues and agency proceeds growth nicely outpaced our SG&A expense growth. On a rate basis, SG&A was 55% of total agency proceeds, down roughly 500 basis points from Q3 of last year, and on the lower end of the range of 55% to 57% that was shared during our earnings call last quarter. We've taken positive steps over the past few quarters to thoughtfully manage our expenses, and we'll look to continue to implement efficiencies throughout our operations and functional cost areas to drive greater revenue flow through and improved profitability. This has delivered a 320 basis point improvement to our 9-month agency proceeds adjusted EBITDA rate to 33.9%.

Going into the fourth quarter, we are planning to make some investments in SG&A to support GovPlanet as well as marketing and digital investments to support sustainable growth in our online channels and recently launched RBFS solutions. In addition, we also expect higher incentive compensation costs over last year due to the improved business performance in 2018. Although we do not offer guidance for your models, we expect continued leverage on our SG&A rate as a percentage of agency proceeds. As such, in the fourth quarter of 2018, we expect a rate improvement of between 50 to 150 basis points versus our fourth quarter of 2017, which had a SG&A rate of 52%.

Turning to our balance sheet and liquidity metrics. Our trailing 12-month operating free cash flow of $107 million improved from $81 million last year. The improvement was driven by higher net income partially offset by an increase in inventory balances related to our GovPlanet surplus stock contract and international inventory contracts. At the end of quarter 3, we converted the IronPlanet financial systems onto the Ritchie Bros. Oracle platform. To derisk the transition, we accelerated payments to trade vendors, contract inspectors and auction consignors, which had a minimal, but negative impact to the quarter's working capital position. I'm pleased to say that the system conversion is now complete, and for quarter 4, we are integrated on one financial platform. I'd like to express my sincere appreciation to the finance and technology teams that were involved in the success of this conversion.

Our agency proceeds CapEx rate of 5.5% was down roughly 30 basis points versus 5.8% last year. This continues to be the below our Evergreen Model maximum of 8.5% of agency proceeds. Our CapEx investments in the quarter continue to be focused on technology investments, led by our MARS platform initiatives, backend infrastructure integration as just discussed and investments to support the implementation of the GovPlanet program and related warehousing facilities.

Long-term debt at the end of the quarter was $752 million with a weighted average annual interest rate of 5%. Our favorable operating results in the quarter together with our debt repayment year-to-date has resulted in an adjusted net debt to adjusted EBITDA ratio of 2.3x, which is well within our Evergreen target of below 2.5x. With our strong cash flow characteristics, we remain focused on debt reduction and further strengthening of our balance sheet providing us with the maximum financial flexibility, while reducing our interest expense. Overall, our positive third quarter financial performance reflects the continued progress we are making as a combined company to deliver value to our consignors and build a scalable organization to improve shareholder returns. And with that, I will turn the call back over to Ravi.

Thank you, Sharon. Our third quarter had a number of positive operational highlights. And I'll speak to a few here. First, our GovPlanet business is now actively scaling up in terms of surplus auction inventory and merchandising capabilities after fully operationalizing our non-rolling stock distribution centers last quarter. Our key priority now is to start disposing off the accumulated non-rolling stock surplus inventory using the full force of Ritchie Bros. multiple channels and marketing muscle. We've initiated a Tuesday online GovPlanet auction dedicated to non-rolling stock, while continuing the Wednesday auction for rolling stock such as Humvees. I'm also pleased to announce that on December 7 and 8, we'll plan a very special dedicated live auction in Las Vegas and Atlanta featuring over 10,000 non-rolling stock surplus items, including furniture, tents, exercise machines and medical equipment. The live auction will be in conjunction with the weekly online auctions. This will be the very first time that we use both live and online channels to dispose non-rolling stock, and it should be a massive event.

We're also building on -- we are also working on building the state, local and municipal business, in addition to our efforts in the federal and defense spaces. In third quarter, we successfully executed the first GovPlanet live auction event for the State of Pennsylvania, selling more than 350 equipment items and trucks without reserves in a single day with this being made both on-site and online. Being able to expand the services we can offer state and local governments through both online and live auction options gives our customers absolute flexibility and the best of both worlds. The progress we're making with our government business is exciting because the investments we're making now position us extremely well in this space for future growth.

Second, the channel lines and relationships with the dealer networks continue to build positive momentum. We're partnering with CAT dealers on a global scale and basis to drive volume for both organizations. In addition to our successes this year in Japan, our international team partnered with CAT dealers in Brazil to orchestrate a very unique Marketplace-E dealer event. We partnered with 2 major CAT dealers in Brazil who featured some of their best used equipment for this special MPE event. The event was online, but the equipment was merchandised on the dealer's yards. The CAT dealers were able to leverage our global buyer base, our marketing prowess and use the reserve pricing functionality to retain control and did not have to move the equipment. We were able to leverage our existing assets and penetrate and create a new country expansion opportunity without actually entering it. Yes, that is, we did not have to invest in overheads and experience all the trials and tribulations of entering a new market. I understand that this model was a marketing fee agreement, so we did not count the GTV for this and the several such deals in the future.

Now I'd like to spend a few minutes sharing the news of our official launch of RB Asset Solutions. We've previously discussed this concept with our investors using the generic term platform solutions as a major upstream opportunity for us. Since the close of the IronPlanet transaction, we've been developing this unique platform by fusing together our Mascus equipment run on IronPlanet technologies, and I'm pleased to say that on October 2, we officially launched this solution. RB Asset Solutions provides an innovative SaaS-based offering to our customers, leveraging the power of our technologies, global reach and network effect, driven by our platform. It affords our customers ultimate flexibility and ease of use in disposing their equipment either on the road, selling directly to affiliated customers or cascading through any of our multichannel solutions while optimizing price realization. In addition to our superior technology, RB Asset Solutions brings a wealth of services such as RBFS financing, equipment self-inspection capabilities, our RB auction yards for storage and asset appraisal services for off-lease returns. We are truly the one-stop shop for enterprise and retail customers looking to maintain control of their asset disposition, but having the flexibility at their fingertips to leverage the full power and breadth of the RB enterprise toolkit and our network effect.

At the heart of the solution is the relationship aspect. We believe RB Asset Solutions, with its unique way of connecting with customers, will result in stickiness and enduring customer relationships and further accelerate our network effects. Our platform will allow customers to leverage RB Asset Solutions to be their inventory management system with access to robust data to help customers manage their assets, pricing and optimal timing of disposition. We are extremely excited by the launch of this capability. And I'm pleased to say that it's beyond data, and it's already live with a few major OEMs and strategic accounts. We aim to develop a total of 15 to 20 flagship reference accounts during the course of 2019. So ultimately, RB Asset Solutions is the ultimate strategic partnership solution right upstream with retail and enterprise customers.

Let me conclude the call with a few comments on fourth quarter. In fourth quarter, we expect supply tightness to continue and 2018 macro trends to persist. However, we are cautiously optimistic that the tide will start turning in 2019 and we will face less of headwinds and supply will start to loosen up. Let me give you a few reasons for our thinking. First, OEMs believe they've started catching up on light equipment production. Heavy equipment such as excavators especially will be an issue. They also believe that they started catching up on production internationally, including Asia, Australia, et cetera. We've already evidenced this -- the positive GTV growth internationally and in Canada in third quarter across all channels. OEMs have ramped up production. The challenge now is more on the path side. Second, based on conversations with OEM dealers, rental customers, and end users, we believe that fleets are aging in the field and, I mentioned earlier, the equipment that's coming to us. And they will need to be replaced. So we believe 2019 this will start occurring. The rental customers will start replacing their very large fleets that have been used and worked on with high utilizations. We've already seen an uptick in our strategic accounts with our rental customers.

Having said all this, we are, as an organization, focused on what we can actually control. We will continue to leverage our large loyalty customer base for cross-selling multichannel opportunities. You will be pleasantly surprised to learn that over the last 5 years, 57% of our RBA live auction GTV has come from our loyalty customers. We define loyalty customers as those who've done business with us on a recurring basis for the last 3 years. In fact, every year, we generate significantly over $2 billion of GTV from our loyalty customers. Our loyalty customers even in the supply-constrained times are our foundation and make our business more predictable than is commonly assumed. At the same time, we'll continue to be relentless on hunting for new customers. Historically, on our live auction business every year, nearly 43% of GTV comes from acquiring new customers. Our mission now is looking for new customers for whom our weekly auctions and MPE channels meet their needs, be it faster time to cash, not wanting to move equipment or control pricing. Our teams are also focused on finding new consignors in the federal and defense agencies and with state and local governments. We'll also continue to be aggressive in making the appropriate trade-offs between rate and volume, so that we start

getting some acceleration on GTV.

We are also committed to delivering IronPlanet synergies, which is now running at a rate of approximately $25 million in 2018 as well as controlling expense growth. Our aim is to get SG&A growth to be at half the rate of agency proceeds growth during the course of 2019. However, we also want to invest in a few proven growth drivers, maybe GovPlanet, Marketplace-E and RBFS. We need to keep investing in building a strong buyer base for government surplus items, which are different from our regular equipment, but marketing muscle to increase differentiation from Marketplace-E to improve yield and kill rate and achieve price realizations higher than the auction chart and continuing to invest in sales people for Ritchie Bros. Financial Services on a pay-as-you-go basis. In addition, we'll have some additional investments for RB Asset Solutions for its launch and rollout. These investments, I'm confident, will result in sustainable, profitable growth.

Finally, we're excited about a number of promotions and special events we're running in Q4 to drive GTV. Let me highlight a few. We are running a 50% off our commission for first-time sellers capped at $1,000 as part of our new customer acquisition initiative. We're running a special CAT dealer event on Marketplace-E internationally and in Mexico, featuring excellent CAT gear to help with the disposition of the year-end inventories. We're also running a Las Vegas truck live auction in December, an online North American quarry and aggregates auction online on November 14, a mid-November North American Marketplace-E crane sale, and an IronPlanet year-end sale on December 20 and 21. You can see, it's all about execution.

As I end, I just want to say, we've created an incredible platform with the right live auction network, online science, technology that's becoming a competitive advantage and, most importantly, the very best passionate people in this industry. I want to thank each and every one of the 2,100 Ritchie Bros. team members who made second quarter and third quarter great quarters in extremely difficult conditions, and they have really executed it, and from the bottom of my heart, I'm grateful for their efforts. And with that, we are ready to take questions. Operator? Please open the line to questions.

(Operator Instructions) Your first question comes from the line of Derek Spronck with RBC.

Now for next quarter, arguably, you'll be lapping the IronPlanet comp. How should we be thinking about GTV growth in the fourth quarter and into 2019?

So Derek, in terms of fourth quarter, the trend -- as I mentioned in my prepared remarks, the trends are what you see throughout the year. We've not seen a significant change in those trends in terms of any significant loosening of supply, but we are very focused on a lot of things to try to drive GTV. I do have a different or a more cautiously optimistic perspective on 2019. I believe, I enumerated a number of those. I do believe that this situation cannot go on forever. Equipment fleets are aging, and so -- and OEMs are beginning to catch up. Already internationally, we are seeing that catch up occurring, and we have pretty good GTV. Canada, things are looking up. So U.S., the economy is so hot and the demand is so high. That's where there have been some challenges, but even there, we've seen our rental customers, we saw real good growth. So I think 2019, I really feel the tide will start turning. The important thing is when it does disproportionately, we are so prepared, this company is right now so strong that we will start getting that. But having said it, we are very focused on what we can control. We've got a number of initiatives in fourth quarter. And we've got a very good operating plan for 2019. We are laser-focused on execution. The last thing I'd like to mention, Derek, is, GTV is very important. But I would still say agency proceeds -- this business is changing now. The Brazil event, we didn't record any GTV. There are several others like that. So -- and I'm not in any way diminishing the GTV. But this business and our services business, look RBFS, 26 quarters of growth. We don't see GTV, but it's helping agency proceeds. So ultimately, agency proceeds is what flows through to EPS. And so I think that is what we want to get focused on, and in no way am I being defensive about the GTV, but just saying, look, this company is changing. And we just need to be kind of broader in our thinking about how we view it.

Okay. No, that makes sense. Just quickly, before I turn it over, on RB Asset Solutions. Is that a subscription-based opportunity? Or a fee-based, kind of like a consultancy-based? Or is it just more of a customer retention type tool?

It's all 3 of those, Derek. First, it is a SaaS-based fee-based subscription model. And they can buy different modules or collectively all of it. And this way, we are into the ERP systems, it creates a lot of stickiness, which is why we have retention. But importantly, we are also giving them inventory management tools that they can either choose to have. So say it's OEM, we can create a whole private dealer event for them where they can first sell it to dealers. If that doesn't work out, then they can start cascading it to our channels, any of those, they can first say, hey, I want to put a reserve and put it on Marketplace-E, let's see how it does. And if that doesn't work out for them, they can put it into a live auction or a weekly. So we will (inaudible) on 3 ways. One, you'll get a SaaS-based fee model, and that to me is really the opening the door and building the relationship and getting sticky. Second, because we don't want to compete with retail customers and OEMs. We want to be more in the middle with competition and in the auction site. We want strategic partnerships at the top of the house. And this is the best way, which is leveraging both our buyer base, our technology, our network effects. So you'll start with the SaaS model, that is just an entry level, that's not going to meaningfully drive off the revenue side, but the important thing is it gives us a lot of opportunities for the cascade to occur on the transactional side. That's why it's a beautiful, beautiful thing. Now it's going to be long term, don't expect that just overnight. That's why we've said 15 to 20 reference accounts, but long-term, I'm so excited about this because this changes our very complexion of the company and allows us to start capitalizing on that whole big upstream opportunity that we've talked about.

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

So it looks like the shift of the Grande Prairie and Moerdijk auctions into Q3 from Q2 had a pretty big impact on the quarter. So I wondered if you could just speak to the Q4 auction calendar? And whether there is any similar shift that we should be aware of?

Jeff or Kim, if you're on the lines, anyone want to give a view on it. Because we do -- we have a number of geographies, Cherilyn. We've been shifting things around, some quarters having fewer auctions versus others, and we'll think about whether we can put that on the website or something. I don't know that I have it off -- right off the back to give you an answer.

Okay.

One second, Cherilyn. I think one of my teammates has been here.

I mean, Cherilyn, I think the one Ravi mentioned. I mean, we -- there are some things that are added to Q4. We added a truck event that we're doing in Vegas. And Ravi also mentioned the 2 events in Vegas and Atlanta for the gov business. So there are movements that do happen, but other than that, I don't think of anything other meaningful in that regard.

Okay. And then I also wanted...

And we have certain online events that I talked about, Cherilyn, on MPE with CAT dealers and other MPE events that they're doing. So -- but we can -- Zaheed can get back to you on that and maybe put something on the website.

Okay. And also wanted to ask about the inventory deals in Europe. And just why you think consignors in that market were, during Q3, more willing to do inventory deals versus in North America?

Karl, you want to comment on that, please?

Sure. This is Karl Werner. We've leveraged a few situations in different countries and (inaudible) but in Africa, and we had some in southern Europe where there are some financial issues, economic issues that we're going in and actually assisting different OEMs and dealers in those areas and helping them move inventory from a less popular market into Europe where we are seeing some more brisk sales. Was that helpful?

Cherilyn, let me just add. The economy in -- so some of these are big deal stuff. Southern Africa, we did a major deal of some equipment that had been bought and hadn't got used in many years. We found it, we worked through the CAT Alliance and helped get back. We're also seeing deals in Turkey. And as you know, Turkey's economic situation right now is quite bad. And look, unfortunately -- or fortunately for us from our model when things are difficult, we're there to help consignors. There is a contrast in the U.S. with the economy so hot. So that's why people need every piece of equipment to utilize them on their jobs, That's the contrast. So -- and that's why you're seeing bigger deals. And now with Brexit and stuff, there could be more loosening of that internationally. And the key is, we're are a global company. So we leverage. Wherever there is opportunities, we'll go leverage those.

Our next question comes from the line of Steve Volkmann with Jefferies.

I apologize, but I'm still trying to get my head around sort of how you're thinking about the fourth quarter, Ravi. Because if you're talking about through similar trends in GTV, I don't -- does that mean sort of up 2% as what we had in the third quarter. And yet you have listed kind of a plethora of additional opportunities in the fourth quarter relative to new ways to kind of get equipment out, whether it's the military stuff or the CAT end of your auction, et cetera, et cetera. So I -- you've listed a couple auctions on the site already, some of the big ones that look like they're kind of up double digits year-over-year as well. So I guess, I'm just trying to get my head around what we really should be thinking about for the fourth quarter. Sorry for the long question.

No. No. That's a fair comment, Steve. But here -- let's separate out the 2 issues, right? One is my comments are more, the market in terms of trends, it's -- we will not get anything handed to us on a flight. It's right now hand to hand combat in the field. Our teams are trying to get every piece of equipment and do whatever it needs to unloosing it. So there is no help from the market, is what I mean. And I don't think you will see -- the fourth quarter, we're saying, is similar to what we've seen throughout the year, and I was not trying to give you any guidance on it's a 2% or 3% or whatever. I'm just saying, look at the year-to-date and the market is reflective and -- of that. In fourth quarter, we are -- as we are gaining momentum on execution, because we can only focus on what we control, we are doing everything possible to drive volume. And so all the promotions listed are all there to aid and enhance volume. Now in a -- so lot depends on -- we're creating the most positive conditions possible for consignors to give us equipment. But at the end of the day, it will all comes down to supply versus demand because if a customer is utilizing the equipment and feels he cannot get replacement or new equipment to replace it, then no matter what promotion we give, they are not going to be induced to part with it because it's their livelihood. So that's sort of the challenge we are facing. But I just wanted to say, look, we are doing everything we can because this is just a reflection that it's now a hunting organization and a very aggressive marketing organization, because we are just saying, hey, this supply starts to normal, we better really be aggressive and put everything we can to drive it. So we'll just have to see how that transpires.

Okay. All right. I guess, that's helpful. Was there anything in your mind that was unusual about Houston or Edmonton, which you've already sort of told us about, which looked like they were quite strong this year versus last year?

Well, I think what's happened is, we are -- we've reduced the number of live auctions this year, I think, significantly. One because there are 5 sites. So that in itself, I think, reduced the auction count by about 14 auctions. And we also streamlined where in some places we used to have 5, we went to 4; some where we had 4, we went to 3, just to have bigger auctions. So I think that -- those sorts of operational changes as well as the hunting in these bigger sites, and I think people are going with the closed sites. They're going to solve the bigger places where they can get bang for the buck. So I think it's just saying we're executing better, and so -- but not necessarily reflective that the macro has changed.

Okay. All right. That's helpful. And then finally, just on the A&M agency proceeds rate, that was higher than what I was looking for? And I guess, it sounds like you had a little bit of tailwind from Brazil, I don't know if you want to put any numbers around that. But is there a change in thinking about sort of those normalized range for that rate going forward?

Yes, Steve, it's Sharon. I think just to put Q3 into context, Q3 is a relatively small quarter for us anyway. So it -- and so as a result, when you have a deal like Brazil or you're getting incremental revenue on kind of the existing RB Asset Solutions, that's showing up in Auctions and Marketplaces. They just have a bigger fee impact on that lower GTV type volume. So we're really not prepared right now to change kind of the range that we've given. We just see -- we are very pleased with the strong performance that we had in rate, but again, it just takes one deal to kind of shift that profile. So certainly, we're comfortable with the range that we provided, and we will endeavor to provide as good a rate as we can with the deals that come through in each quarter.

So let me just add a couple of quick things on that. One is, we've said 12.25% to 13.25%. Year-to-date if you look at it, we're, I think, at about 13.6%. If you look trailing 12 months, we are 13.4%. And so when we give this rate guidance, we want to check -- we are not trying to give you quarter to quarter because we've said we've stopped the quarterly guidance. It's more where do you think the rates can go. And look, we want the flexibility to be aggressive about getting deals. We don't want to hamper our people just, because we don't have a rate problem today, we have a volume issue. So we want to be able to get the deals. And then as Sharon mentioned, look, on some European deals, we have some softness on the auctions, we never know how it goes. So I think at this point, it's a fair number. We'll keep trying to beat it because that's in all our interest, and it's a good cushioning versus the volume side, but I don't know that we're prepared right now to say, look, let's increase it.

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

Just on the rate you just mentioned, obviously, the goal is to increase penetration of the overall market and you mentioned how it's not just a rate story. And when we think of next year with volumes, hopefully, should be picking up, I mean, could we be thinking there's going to be maybe even a moderation on the rate side because we'll be lapping some of this fee harmonization? Or could we be in an environment next year where you're just seeing volume up and rate up? I was just hoping you could talk about those 2 dynamics as we look into 2019?

Yes. Good question, Michael. I think it's -- look, that's why we've given that 12.25% to 13.25% range. And we think that will adequately cover at this point, unless there is a wholesale shifting of the market and pricing starts tanking or something, which we don't see at this stage, I think we're in good shape. I think what's the thing that we are working on doing is getting our assets volume back up to normal levels. Like this year, I think, we are running at about 16% and in our heyday, just 2 years ago, it was like 33%. So we want to get that bounced up, and typically we do pretty well on assets. So I think on the whole, it's a good range. And our hope is that with decent rates, and yes, you may not -- with the harmonization thing, you will not get the lift, again, but it's not going to go away. So either way, I think that's why the key is to look at agency proceeds versus getting hung up on either rate or on volume, but look at it in totality, because our job is to balance both and to make sure as long as we keep our customers happy, which is the most important thing, and drive agency proceeds and keep our cost at half the rate of our agency proceeds growth, then I think you'll have great flow through, which is what makes this model great because it all turns out into our free operating cash flow.

And I might have missed this, but the fee harmonization. I was hoping you could provide a little bit more color around that. Obviously, I think you instituted it in the beginning of the year. How much has that played a part into that 13.6% you said year-to-date you guys have achieved? How much can you attribute to that fee harmonization and when do we finally kind of lap that?

Yes. I think we were not prepared to comment on the specifics on that. Suffice to say, it's had a positive impact. And it is recognized only on the live auction side because it was harmonizing on the incremental side. So -- and it was instituted in January. So you will lap that beginning in January.

Your next question comes from the line of Larry De Maria with William Blair.

I just had actually a question on technology data. Are you guys finding more ways to leverage your data and technology? And is that playing out yet in the numbers? In other words, I think you maybe private labeling your auction and online marketplace solutions, if that's meaningful? And secondly, are you winning more business because it's easier for RBA and giving you a better predicted pricing and prospecting? Or is that more of a '19 or '20 driver as you guys integrate all your systems and stuff. So just curious, how you guys are leveraging data now and if it's meaningful? And what success rates you're having?

So I will kick it off, and then I'll see if Matt Ackley is on -- is Matt not on the call? Okay, then I'll just cover it. Here is -- the -- we've created a strong data analytics team. The guy who heads it, Ken, is -- just finished a whole course in artificial intelligence and machine learning from Stanford. He brought some very bright statisticians and stuff. So our first priority was taking the IronPlanet data in and Ritchie Bros. data, merging all of it, cleaning it, upgrading the data like, et cetera. So that's easier said than done, and we've done a pretty good job. We're also creating common taxonomy. So that's all been in the works over the last year. In that, now we've created some very good algorithms on pricing and that pricing tool is a part of our RB Asset Solutions that we are now selling to customers as part of our fast-paced solutions. We're also using it internally. So let me illustrate. On Marketplace-E, when our territory managers bring a certain item and want to price it say at $50,000 because the consignor thinks it's worth $50,000. But if the history of that particular item as it sells on third party, the algorithm spits it out and for the make model year, and then we are able to use that data to commit the consignor, look, just because you wanted to be $50,000, doesn't mean the market is going to give you that and you'll improve your kill rate and yield if you put it at the right pricing. So we are using that as well as a way on the weekly auction where we set the entry price, because it's unreserved at the floor. How you do that? And we use pricing algorithms to say where should that be. So a lot of this is first in channel to get better price realization and to make our consignors happy. Second, as a monetization tool, we are now beginning to sell that in RB Asset Solutions. In Mascus, we are selling depreciation curves. So there's a lot of stuff. And long term, I think that it's both internal and external, we'll keep building on it. So this is -- RB Asset Solutions absolutely would not have been possible without technology, and we've taken and merged the best of our 3 technologies and launched it. I'm very excited about that direction as well. And it's a long-term initiative, but I think it'll change the complexion of our company.

Does it -- are you -- is it leading to more -- that's a really descriptive answer. Is it leading to more volume for you now and a competitive advantage? Or is it still relatively early?

I think it's too early, Larry, to say that because, look, the first step is to get sticky. And -- but with that, we've done that with a few customers, but we also have evidence with those customers that it does result in transactional volume. Now the job for us is to scale it. That's a couple of years 2, 3 years to build reference accounts, which is our next step in '19 because we don't want to rush it because in trying to get a little bit of GTV here or there, we don't want to displease customers. This is going into their ERP systems, it's getting them to feel comfortable. Think of it as slightly, it's -- the analogy is like Intel Inside. We are actually going into their house, so when you do that, you've got a bit of trust. So it's going to be a long-term thing. But I think once you get it, it starts becoming a recurring stream of both SaaS-based fee income, but also transactional volume.

Your next question comes from the line of Maxim Sytchev with National Bank Financial.

Sharon, I was wondering if you remind maybe sharing your thought process around the cost of service in Q4. How we should think about it relative to the very good -- or lack of growth that you posted in Q3 on that metric?

Sure, Max. So clearly the reduction in the number of auction events has a big impact on that cost of services line. And so as we build more scalable events, you get to save on cost lines like marketing 2 events versus 1. So that's what's driving some of that efficiency. The other thing that you will see is, we do put our inspection costs in that for online inspection for both weekly featured auctions and Marketplace-E. And some times that work ends up falling into a different timing from when that equipment actually sells. We receive the inspection revenue to cover those costs, but the actual GTV and larger revenue transaction comes at a different time depending on yields of those events. So really inside of the quarter, again, it was just a -- it was a small quarter. With the number of reduction in auction events and activity, that's really what drove that improvement in the cost of services line.

Right. But for -- so for Q4, we should not expect a year-on-year decline in that metric, right?

No, I think that this is really more of an anomaly. We do look at those services internally, but they do generally go on a relative rate to GTV. So you'll see it. You should see it coming in at a lower growth rate than what you would expect the agency proceeds to be, but similar to GTV expectations.

Okay. That's very helpful. And then, do you mind giving us help on how should we be thinking about taxes, especially in 2019?

Yes. So our previous guidance was 20% to 23%. That's really unchanged. Really what you've seen in the current quarter was just a onetime kind of events that made our kind of 17% effective rate in this quarter, but we're really still kind of on, what I would see to be, a tax for the future quarters to be in that 20% to 23% range. What I would call out is that there is a lot of information that still needs to be disseminated related to the U.S. regulations and the tax change that happened a year ago. So there may be a little bit of volatility as new information comes to light, either favorable or not favorable, but really it is a very dynamic tax environment internationally. And I think we've done a very good job of kind of planning and structuring the company. And I'd say the 20% to 23% rate is a contingent outlook that we have for 2019.

Okay, that's helpful. And then, Ravi, as you do, obviously, a much better job in terms of addressing the strategic accounts, do you mind maybe sharing your initial thoughts around sort of the total addressable market that you think you might penetrate for these types of clients over the next couple of years, if it's possible?

So we've not been quantifying on dollar term on that, Max. We've already identified about 800 new accounts that we are going at, that the strategic accounts team is going after. We've already made good progress with about 190. So we're just giving you a sense, that's why we've been able to deliver the growth. Our strategic accounts team is doing a very good job. And now they've also got other products, not just the live auction, but they've got MPE, but also now RB Asset Solutions. RB Asset Solutions is the biggest place where that will be driven by the strategic accounts team. And so a lot of strategic accounts in the past might not have considered us, because they didn't want to be in the transactional piece like a live auction or they would have felt, hey, that's a bit uncertain for us. Now with RB Asset Solutions, it creates a different kind of view point, saying, you can build things on your own, but you can leverage us, the whole Intel Inside thing. So I think there is still -- I'm very -- I feel pretty good about our strategic accounts, new account initiative there, they're on a roll, they -- it takes recognize it's a longer lead time in strategic accounts because it's -- these accounts take time to build the relationship to get there, but once you get it, it's actually a pretty good one because they're recurring businesses. And when you see that number I gave earlier, that 57% of our loyalty customers, strategic accounts is definitely an integral part of that. So I hope that helps, Max?

Right. And then I know it's a bit of stretch, but is it fair to say that going from 190 to 800 accounts, that you can basically do it with the existing workforce? Or is there going to be commensurate scalability from a labor participation perspective as well?

I didn't -- the 190 to 800, can you repeat the last part of the question, Max? Did you say if we really could scale more people or...

Yes, exactly. Yes, to be able to eventually hit the 800 accounts?

Yes. Recognize, Max, 800 is the target. That doesn't mean we will get all 800 because there is always how much can you convert. These things take -- and we didn't start like on these 800 this year. We've been working on it for now, ever since the supply constraint started. So we started the initiative. It takes time. But I think, look, we will -- if we make investments on SAMs, our strategic accounts managers, that will be judicious. We are -- and if we think that that's what's needed, we will make it because that's very important because I firmly believe that any investment in a territory manager or a SAM is a good investment as long as they are productive. And we are seeing that productivity is improving now overall for the company. So -- but it's -- that's a pay-as-you-go. So you start getting it. But I think with the teams we have, I think we've got -- we've still got room to go, to continue to drive growth with just the existing team versus having to add a lot of people right off the back. Sharon has something to add on that.

Max, I think the piece, the way to look at it is because it is selling as software-as-a-solution element, the potential investments you might see even hit SG&A would be integration-related cost to connect their businesses with the technology that we would support and then perhaps some inside service support to manage the technology to support our equipment based sellers with the service aspect required to support a software solution.

And in that regard, Max, we've already taken some of our Mascus people in the U.S. and are helping -- they're helping -- because they are used to this software, they are helping already on the RB Asset Solutions. But we may need to add different type of sales person under Matt Ackley, more like sales engineers who can help, as Sharon pointed out the benefits of that. But those are -- we are not talking about 20 people, 30 people, it's a few. That's why we said we may need to make some investment.

So I think with this, let me conclude our call. I just want to make one final point. I used the word kill rate and yield, which may not be familiar to all of you. Our Marketplace-E, because it's a reserved auction, we need the things listed. And it is -- yield is essentially of the GTV amount, what percent of the listed actually transacted. Kill rate is of the number of items how much transacted. We are working on continuing to improve this. So -- and if we improve it, as we market and build that ground, that will also help GTV because if you get that conversion of listing for transactions, that will also help GTV. So with that, once again, thank you all, and I want to thank our teams, again, for all their hard work. Onwards and upwards. Thank you to everyone.

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