Mr. Ravi Saligram reports
RITCHIE BROS. REPORTS SECOND QUARTER 2017 RESULTS
Ritchie Bros. Auctioneers Inc. has released its results for the three and six months ended June 30, 2017.
All currency figures are in U.S. dollars.
During the second quarter, the company generated $166.2-million of revenue and $17.6-million of net income attributable to stockholders. Diluted EPS (earnings per share) attributable to stockholders was 16 cents. Non-recurring charges of $4.8-million of stock option compensation expense related to the accelerated vesting of IronPlanet stock options assumed as part of the merger, $9.1-million of acquisition and finance structure advisory costs, $1.4-million of severance and retention costs that followed the merger in the resulting corporate reorganization, and an $8.9-million impairment loss recognized on various technology assets were recorded during the quarter. Removing the impact of these charges, diluted adjusted EPS attributable to stockholders (non-GAAP (generally accepted accounting principles) measure) was 33 cents.
"We are pleased that integration efforts with IronPlanet are gaining momentum and our unified sales teams have begun proactively selling multichannel solutions to customers. We are also confident of delivering run rate synergies in excess of $10-million by the end of 2017 and $20-million by the end of 2018," said Ravi Saligram, chief executive officer, Ritchie Bros. He added: "Our results in the second quarter of 2017 were unfavourably affected by a severe shortage in supply of used construction equipment especially in the U.S. as end-users achieved high levels of equipment utilization in state and local infrastructure projects. We expect supply to remain constrained in the second half of 2017. Bright spots for Ritchie Bros. in the first half of 2017 were a return to growth in Europe, excellent growth in Equipment One and Mascus, strong pricing in North America, a high revenue rate, and strong operating cash flow. We are optimistic that our transformative combination with IronPlanet will help us accelerate growth in 2018 as macro conditions improve."
FINANCIAL OVERVIEW
(in millions, except EPS)
Three months ended June 30 Six months ended June 30
2017 2016 2017 2016
Revenues $166.2 $158.8 $290.7 $290.8
Selling, general and administrative expenses 74.4 74.0 145.0 141.1
Acquisition-related costs 22.9 0.6 31.6 1.8
Impairment loss 8.9 - 8.9 -
Operating income 26.9 53.6 50.5 92.8
Adjusted operating income (non-GAAP
measure) 51.1 53.6 74.7 92.8
Operating income margin 16.2% 33.8% 17.4% 31.9%
Adjusted operating income margin
(non-GAAP measure) 30.7% 33.8% 25.7% 31.9%
Net income attributable to
stockholders 17.6 39.7 28.0 69.1
Adjusted net income attributable to
stockholders (non-GAAP measure) 36.4 39.7 49.1 69.1
Diluted EPS attributable
to stockholders 0.16 0.37 0.26 0.65
Diluted adjusted EPS attributable to
stockholders (non-GAAP measure) 0.33 0.37 0.45 0.65
------- ------- ------- -------
GAP 1,257.4 1,275.7 2,156.8 2,295.6
Revenue rate 13.22% 12.45% 13.48% 12.67%
Adjusted (non-GAAP) figures for the three and six months ended June 30, 2017,
include the impact of $7.7-million (seven cents per diluted share)
and $16.3-million (15 cents per diluted share) of pretax acquisition-related
costs, respectively.
Results of operations -- second quarter update
For the three months ended June 30, 2017
Gross auction proceeds (GAP) were $1.3-billion for the second quarter of 2017, a 1-per-cent decrease compared with the second quarter of 2016. Included in the second quarter 2017 GAP is $76.8-million of gross merchandise volume (GMV) from IronPlanet and $55.3-million of gross transaction value (GTV) from EquipmentOne on-line marketplaces, which represents a 33-per-cent increase over the GTV in the second quarter of 2016. The decrease in GAP is primarily due to a 2-per-cent decrease in the number of core auction reportable segment (industrial and agricultural auction) lots, combined with a 7-per-cent decrease in core auction segment GAP (which is total GAP excluding IronPlanet's GMV and EquipmentOne's GTV) on a per-lot basis in the second quarter of 2017 compared with the second quarter of 2016.
Revenues increased 5 per cent during the second quarter of 2017 to $166.2-million, compared with $158.8-million in the second quarter of 2016, primarily due to the merger and IronPlanet's contribution of $10.9-million of consolidated revenues in June, 2017. Excluding IronPlanet, revenues decreased 2 per cent in the second quarter of 2017 compared with the second quarter of 2016, primarily due to lower auction volumes and GAP. This decrease was partially offset by a stronger revenue rate over the same comparative period.
The revenue rate for the second quarter was 13.22 per cent, compared with 12.45 per cent in the second quarter of 2016. The increase in revenue rate was primarily due to the merger and IronPlanet's contributed GMV and revenue, as well as performance of the company's value-added service offerings. During the second quarter, the company continued to actively pursue the use of underwritten commission contracts from a strategic perspective and when the opportunity arose, only entering into such contracts when the risk/reward profile of the terms were agreeable. The company's underwritten contract volume decreased to 17 per cent of GAP in the second quarter of 2017 from 26 per cent in the second quarter of 2016, primarily due to the pressure on used equipment market supply volume. The tight supply of used equipment resulted in less opportunity for the company to pursue underwritten commission contracts. Straight commission contracts continue to account for the majority of GAP.
Selling, general and administrative (SG&A) expenses were $74.4-million during the second quarter, a 1-per-cent increase compared with the same period last year, primarily due to the merger and the resulting $5.4-million of SG&A expenses contributed by IronPlanet in June, 2017. Excluding IronPlanet, SG&A expenses decreased 7 per cent over the same comparative period, primarily due to a $4.6-million mark-to-market fair value decrease in the company's liability-classified share units, as well as a decrease in advertising and promotional expenditures.
Acquisition-related costs totalling $22.9-million were recorded during the second quarter, compared with $600,000 in the second quarter of 2016. Second quarter 2017 acquisition-related costs consisted of $22.2-million associated with the merger, which consist primarily of $9.1-million of non-recurring acquisition and finance structure advisory fees, $4.8-million of stock option compensation expenses resulting from accelerated vesting of options assumed as part of the merger, $3.5-million of legal fees related to the regulatory approval process and closing of the transaction, $1.4-million of severance and retention costs that followed the merger in the resulting corporate reorganization, and various integration costs. These costs are in addition to SG&A expenses.
Impairment loss
During the three months ended June 30, 2017, management identified indicators of impairment on certain software and software under development intangible assets. The indicators consisted of decisions made after the acquisition of IronPlanet that resulted in a significant adverse change in the extent or manner in which the technology assets would be used or continue to be developed in the future, as well as expectations that it was more likely than not that the company would discontinue use of the technology assets before the end of their previously estimated useful lives. Accordingly, management performed an impairment test and concluded that those technology assets should be written off in their entirety, which resulted in the recognition of an impairment loss of $8.9-million.
Operating income decreased 50 per cent during the second quarter of 2017 to $26.9-million, compared with $53.6-million in the second quarter of 2016. This decrease was primarily due to the increase in acquisition-related costs and the impairment loss, partially offset by the increase in revenues over the same comparative period. Foreign exchange rates did not have a significant impact on operating income in the second quarter of 2017. Adjusted operating income (non-GAAP measure) decreased $2.6-million, or 5 per cent, to $51.1-million in the second quarter of 2017 compared with $53.6-million in the second quarter of 2016.
Operating income margin, calculated as operating income divided by revenues, was 16.2 per cent for the second quarter of 2017, compared with 33.8 per cent for the same period last year. Adjusted operating income margin (non-GAAP measure) decreased 310 basis points to 30.7 per cent in the second quarter of 2017 from 33.8 per cent in the second quarter of 2016.
Net income attributable to stockholders decreased 56 per cent to $17.6-million in the second quarter of 2017 compared with $39.7-million in the second quarter of 2016. This decrease is primarily due to the increase in acquisition-related costs, the impairment loss, and interest expense, partially offset by the decrease in income tax expense and increase in revenues over the same comparative period. Removing the impact of $4.8-million of stock option compensation expense related to the accelerated vesting of IronPlanet stock options assumed as part of the merger, $9.1-million of acquisition and finance structure advisory costs, $1.4-million of severance and retention costs that followed the merger in the resulting corporate reorganization, and an $8.9-million impairment loss recognized on various technology assets during the quarter, adjusted net income attributable to stockholders (non-GAAP measure) decreased 8 per cent, to $36.4-million in the second quarter of 2017 from $39.7-million in the second quarter of 2016. Other acquisition-related costs of $7.7-million are included in both U.S. GAAP net income attributable to stockholders and non-GAAP adjusted net income attributable to stockholders figures.
Primarily for the same reasons noted above, diluted EPS attributable to stockholders for the second quarter of 2017 was 16 cents, a 57-per-cent decrease compared with 37 cents in the second quarter of 2016. Diluted adjusted EPS attributable to stockholders (non-GAAP measure) decreased 11 per cent to 33 cents per share in the second quarter of 2017 from 37 cents per share in the second quarter of 2016.
Results of operations -- year to date
For the six months ended June 30, 2017
GAP was $2.2-billion for the first half of 2017, a 6-per-cent decrease compared with the first half of 2016. Included in the first half 2017 GAP is $76.8-million of GMV from IronPlanet and $93.9-million of GTV from EquipmentOne on-line marketplaces, which represents a 44-per-cent increase over the GTV in the first half of 2016. The decrease in GAP is primarily due to a 5-per-cent decrease in the number of core auction segment lots, changes in the auction calendar and a 6-per-cent decrease in core auction segment GAP on a per-lot basis in the first half of 2017 compared with the first half of 2016. With respect to auction calendar changes, the company held its largest-ever auction in Grande Prairie, Canada, in March, 2016, which generated more than $46-million ($62-million (Canadian)) of GAP, with no similar auction on the calendar in the first half of 2017.
Revenues remained consistent in the first half of 2017 compared with the first half of 2016, primarily due to the merger and IronPlanet's contribution of $10.9-million of consolidated revenues in June, 2017. Excluding IronPlanet, revenues decreased 4 per cent in the first half of 2017 compared with the first half of 2016, primarily due to lower auction volumes and GAP. This decrease was partially offset by a stronger revenue rate over the same comparative period.
The revenue rate for the first half of 2017 was 13.48 per cent, compared with 12.67 per cent in the first half of 2016. The increase in the revenue rate is primarily due to the merger and IronPlanet's contributed GMV and revenue, as well as performance of the company's value-added service offerings. The company's underwritten contract volume decreased to 16 per cent of GAP in the first half of 2017 from 25 per cent in the first half of 2016, primarily due to the pressure on used equipment market supply volume. The tight supply of used equipment resulted in less opportunity for the company to pursue underwritten commission contracts. Straight commission contracts continue to account for the majority of GAP.
SG&A expenses were $145.0-million during the first half of 2017, a 3-per-cent increase compared with the same period last year, primarily due to the merger and the resulting $5.4-million of SG&A expenses contributed by IronPlanet in June, 2017. Excluding IronPlanet, SG&A expenses decreased 1 per cent over the same comparative period. Reductions in SG&A expenses were mainly due to a $6.6-million mark-to-market fair value decrease in the company's liability-classified share units, partially offset by period-over-period increases in employee compensation associated with increased head count, technology costs and bank commitment fees resulting from the fourth quarter 2016 debt restructuring.
Acquisition-related costs totalling $31.6-million were recorded during the first half of 2017 and consisted primarily of $29.9-million associated with the merger. IronPlanet acquisitions costs for the first half of 2017 included $9.1-million of non-recurring acquisition and finance structure advisory fees, $8.6-million of legal fees related to the regulatory approval process and closing of the transaction, $4.8-million of stock option compensation expenses resulting from accelerated vesting of options assumed as part of the merger, $1.4-million of severance and retention costs that followed the merger in the resulting corporate reorganization, and various integration costs.
Impairment loss
During the first half of 2017, an impairment loss of $8.9-million was recognized on certain technology assets.
Operating income decreased 46 per cent during the first half of 2017 to $50.5-million, compared with $92.8-million in the first half of 2016. This decrease was primarily due to the increase in acquisition-related costs, the impairment loss and the increase in SG&A expense over the same comparative period. Foreign exchange rates had a negative impact on operating income during the first half of 2017 as a significant portion of revenues are in Canada and the Netherlands. Adjusted operating income (non-GAAP measure) decreased 20 per cent, to $74.7-million in the first half of 2017 compared with $92.8-million in the first half of 2016.
Operating income margin was 17.4 per cent for the first half of 2017, compared with 31.9 per cent for the same period last year. Adjusted operating income margin (non-GAAP measure) decreased 620 basis points to 25.7 per cent in the first half of 2017 from 31.9 per cent in the first half of 2016.
Net income attributable to stockholders decreased 59 per cent to $28.0-million in the first half of 2017 compared with $69.1-million in the first half of 2016. This decrease is primarily due to the increase in acquisition-related costs, interest expense, the impairment loss and SG&A expenses, partially offset by the decrease in income tax expense over the same comparative period. Adjusted net income attributable to stockholders (non-GAAP measure) decreased 29 per cent, to $49.1-million in the first half of 2017 from $69.1-million in the first half of 2016. Other acquisition-related costs of $16.3-million are included in both U.S. GAAP net income attributable to stockholders and non-GAAP adjusted net income attributable to stockholders figures.
Primarily for the same reasons noted above, diluted EPS attributable to stockholders for the first half of 2017 was 26 cents, a 60-per-cent decrease compared with 65 cents in the first half of 2016. Diluted adjusted EPS attributable to stockholders (non-GAAP measure) decreased 31 per cent to 45 cents per share in the first half of 2017 from 65 cents per share in the first half of 2016.
Foreign exchange loss and effect of exchange rate movement on income statement components
Translational impact of foreign exchange rates
Like many businesses, Ritchie's performance can be affected by changing foreign exchange rates. As a reminder, Ritchie Bros. discloses all financial figures in U.S. dollars (unless otherwise noted), yet operates in over 20 countries worldwide. Since late 2014, there has been significant weakening of the Canadian dollar and the euro relative to the U.S. dollar. This weakening has affected the company's reported operating income when non-U.S.-dollar amounts were translated into U.S. dollars for financial statement reporting purposes.
Foreign exchange rates did not have a significant impact on revenues and operating income in the second quarter of 2017.
Balance sheet analysis
As at and for the 12 months ended June 30, 2017
Working capital margin, calculated as working capital divided by revenues, decreased to 19.7 per cent during the 12 months ended June 30, 2017, from 32.8 per cent during the 12 months ended June 30, 2016. This decrease is due to a $64.2-million decrease in working capital and a $30.8-million increase in revenues period over period. The decrease in working capital is primarily the result of reduction in inventory due to decrease in underwritten contract volume. Working capital intensity (non-GAAP measure) decreased 1,280 basis points, to minus 32.6 per cent during the 12 months ended June 30, 2017, from minus 19.8 per cent during the 12 months ended June 30, 2016.
Return on average invested capital is calculated as net income attributable to stockholders divided by average invested capital. The company measures average invested capital over a trailing 12-month period by adding the average long-term debt over that period to the average stockholders' equity over that period. Return on average invested capital decreased 1,270 basis points to 4.3 per cent during the 12 months ended June 30, 2017, from 17.0 per cent during the 12 months ended June 30, 2016. This decrease is primarily due to a $364.7-million or a 45-per-cent increase in average invested capital period over period, which was primarily the result of the issuance of the $500.0-million of senior unsecured notes in the fourth quarter of 2016 and the delayed draw term loans borrowed in the second quarter of 2017.
Also contributing to the decrease in return on average invested capital over this comparative period was an $85.8-million or 63-per-cent decrease in net income attributable to stockholders. Return on invested capital (ROIC) (non-GAAP measure) decreased 630 basis points to 8.8 per cent during the 12 months ended June 30, 2017, from 15.1 per cent during the 12 months ended June 30, 2016.
Dividend information
Quarterly dividend
The company declares a quarterly cash dividend of 17 cents per common share payable on Sept. 15, 2017, to shareholders of record on Aug. 25, 2017.
Operational review
On-line statistics
During the second quarter of 2017, the company attracted record second quarter on-line bidder registrations as a percentage of total bidder registrations. Approximately $686.6-million of equipment, trucks and other assets were sold to on-line auction bidders and on-line marketplace customers, representing a 6-per-cent increase compared with the $649.6-million of assets sold on-line during the second quarter of 2016, primarily due to the merger which contributed $76.8-million to this increase.
EquipmentOne activity
During the second quarter of 2017, EquipmentOne sold more than $55.3-million of equipment and other assets on behalf of customers and saw an 18-per-cent increase in revenues compared with the second quarter of 2016.
Auction activity
During the second quarter of 2017, Ritchie Bros. conducted 70 unreserved industrial auctions throughout North America, Europe, the Middle East, Australia and Asia. Auction highlights during the quarter include:
-
The April 25 to April 28, 2017,
Edmonton, Alta., auction -- where more than $184-million (Canadian) ($134-million) of equipment and other assets were sold;
-
The record May 10 to May 11, 2017,
Toronto, Ont., auction -- where more than $45-million (Canadian) ($32-million) equipment and other assets were sold;
-
The May 17 to May 18, 2017, Fort Worth, Tex., auction -- where more than $41-million of equipment and other assets were sold;
-
The June 13 to June 14, 2017, Edmonton, Alta., auction -- where more than $72-million (Canadian) ($54-million) of equipment and other assets were sold;
-
The June 21 to June 22, 2017, Houston, Tex., auction -- where more than $46-million of equipment and other assets were sold;
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87 agricultural auctions, including 32 auctions held under the Kramer Auctions brand (a business acquired in November, 2016).
There are currently 96 unreserved auctions on the Ritchie Bros. auction calendar, including auctions in North America, Europe, the Middle East and Australia.
Second quarter 2017 earnings conference call
Ritchie Bros. is hosting a conference call to discuss its financial results for the quarter ended June 30, 2017, at 8 a.m. Pacific Time/11 a.m. Eastern Time/4 p.m. Greenwich Mean Time on Aug. 8, 2017. A replay will be available shortly after the call.
Supplementary information
On June 2, 2017, the company filed a current report on Form 8-K with the U.S. Securities and Exchange Commission (SEC) to report the completion of the merger and other related matters. On Aug. 8, 2017, the company filed an amendment to the initial 8-K to provide historical financial information, pro forma financial information and other related information pursuant to SEC requirements.
About Ritchie Bros. Auctioneers Inc.
Established in 1958, Ritchie Bros. is a global asset management and disposition company, offering customers end-to-end solutions for buying and selling used heavy equipment, trucks and other assets. Operating in a multitude of sectors, including construction, transportation, agriculture, energy, oil and gas, mining, and forestry, the company's selling channels include: Ritchie Bros. Auctioneers, the world's largest industrial auctioneer offers live auction events with on-line bidding; IronPlanet, an on-line marketplace with featured weekly auctions and providing its exclusive IronClad Assurance equipment condition certification; EquipmentOne, an on-line auction marketplace; Mascus, a leading European on-line equipment listing service; and Ritchie Bros. Private Treaty, offering privately negotiated sales. The company also offers sector-specific solutions, including GovPlanet, TruckPlanet and Kruse Energy Auctioneers, plus equipment financing and leasing through Ritchie Bros. Financial Services.
GAP AND CONDENSED CONSOLIDATED INCOME STATEMENTS -- SECOND QUARTER
(expressed in thousands of dollars, except share and per-share amounts)
Three months ended June 30
2017 2016
Gross auction proceeds $1,257,430 $1,275,682
--------- ---------
Revenues 166,186 158,805
Costs of services, excluding depreciation and amortization 21,591 19,758
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144,595 139,047
Selling, general and administrative expenses 74,377 73,992
Acquisition-related costs 22,948 603
Depreciation and amortization expenses 11,872 10,284
(Gain) on disposition of property, plant and equipment (308) (201)
Impairment loss 8,911 -
Foreign exchange loss (gain) (93) 734
--------- ---------
Operating income 26,888 53,635
--------- ---------
Other income (expense)
Interest income 987 487
interest (expense) (8,620) (1,060)
Equity income 4 477
Other, net 2,479 269
--------- ---------
(5,150) 173
--------- ---------
Income before income taxes 21,738 53,808
Income tax expense 4,025 13,217
--------- ---------
Net income 17,713 40,591
========= =========
Net income attributable to
stockholders 17,635 39,710
Net income attributable to
non-controlling interests 78 881
--------- ---------
17,713 40,591
--------- ---------
EPS attributable to stockholders
Basic 0.16 0.37
Diluted 0.16 0.37
GAP AND CONDENSED CONSOLIDATED INCOME STATEMENTS -- YEAR TO DATE
(expressed in thousands of dollars, except share and per-share amounts)
Six months ended June 30
2017 2016
Gross auction proceeds $2,156,840 $2,295,604
--------- ---------
Revenues 290,685 290,750
Costs of services, excluding depreciation and amortization 34,404 35,071
--------- ---------
256,281 255,679
Selling, general and administrative expenses 144,952 141,102
Acquisition-related costs 31,575 1,800
Depreciation and amortization expenses 22,210 20,364
(Gain) on disposition of property, plant and equipment (1,029) (447)
Impairment loss 8,911 -
Foreign exchange loss (gain) (823) 51
--------- ---------
Operating income 50,485 92,809
--------- ---------
Other income (expense)
Interest income 1,942 985
interest (expense) (16,753) (2,423)
Equity income (loss) (49) 996
Other, net 3,861 967
--------- ---------
(10,999) 525
--------- ---------
Income before income taxes 39,486 93,334
Income tax expense 11,340 22,749
--------- ---------
Net income 28,146 70,585
========= =========
Net income attributable to
stockholders 28,012 69,116
Net income attributable to
non-controlling interests 134 1,469
--------- ---------
28,146 70,585
--------- ---------
EPS attributable to stockholders
Basic 0.26 0.65
Diluted 0.26 0.65
We seek Safe Harbor.
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