Good morning. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Ritchie Bros. Auctioneers First Quarter Conference Call. [Operator Instructions] I will now turn the call over to Zaheed Mawani, VP 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 first 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. 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. It is not presented in our statement of operations. Our first quarter results were made available yesterday evening after market close. We encourage you to review our earnings release and Form 10-Q, 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 two, 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 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?

Good morning, everyone, and thank you for joining our first quarter earnings call. I am pleased to report that we're off to a good start in the year, with GTV growth up 29% on a reported basis and up 4% on a combined company like-for-like basis. We've introduced a new measure, agency proceeds, this quarter, post the Topic 606 accounting change, and represents revenue as historically reported. Agency proceeds was up 36% versus prior year on a reported basis and 10% on a like-for-like basis. Adjusted diluted EPS was up 33%. These results are impressive, considering fewer auctions and selling days in the first quarter versus last year. Our agency proceeds growth was a result of strong live auction performance, robust price realization across all channels, leveraging the capabilities of the combined company to win new business, tapping into existing customers to drive multichannel and buyer fee partial harmonization. Let me review some of the first quarter highlights. First, we are encouraged to see early signs of strength within our Canadian business, with solid GTV and agency proceeds growth driven by a solid uptick in both Western and Eastern Canada in construction assets and vocational trucks. At risk volume in Western Canada had a strong bounce-back, with a marquee full equipment bankruptcy dispersal sourced in -- excuse me, Alberta. Price realization in industrial auctions all across Canada was strong. The agricultural business in Canada, however, continued to be challenged. We experienced good growth momentum in international, with strength in the U.K., Iberia, Italy; solid performance in the German agricultural business; and continued momentum in Asia, especially Japan. Australia and the Middle East experienced revenue declines in the quarter, the former due to lower level of inventory deals. We expect improved performance in both geographies in Q2. We have listed a…

Thank you, Ravi, and good morning, everyone. Before we go to our financial results for the quarter, I want to touch on the new revenue recognition accounting standard which we adopted on January 1. The big changes are that our revenue from inventory contracts are now presented on a gross basis and reported on a separate line on the income statement called revenue from inventory sales, with a new corresponding cost of inventory sold line. In addition, the revenues from ancillary services and logistical services, which were reported previously on a net basis, are also now recorded gross in the service revenues line, with corresponding cost as part of the cost of services line. Commensurate with the presentation change, we have created a new metric, a non-GAAP measure called agency proceeds. Importantly, this metric represents revenues as previously reported and lines up with how we have historically managed the business prior to the revenue recognition change being implemented and how we continue to manage our business today. We have also created a corresponding measure called Auctions and Marketplaces agency proceeds rate, which lines up with our previously reported Auctions and Marketplaces revenue rate. As a point of clarity, while we report an Auctions and Marketplaces GAAP equivalent revenue rate, the new Auctions and Marketplaces agency proceeds rate is the key metric we will focus on, as it is less susceptible to the variability from the inventory revenue fluctuations and is the basis for our current Auctions and Marketplaces rate guidance of 12.25% to 13%, which we provided in the fourth quarter of last year. As this accounting change has significant impact to the presentation of our financial statements and disclosures, we are prepared to offer up a separate call to handle specific questions related to this change, if that is…

Thank you, Sharon. We are indeed off to a good start in the first quarter. As mentioned earlier, our key growth drivers are our CAT Alliance, international and services. Canada is also returning to growth. Our GovPlanet business is off to a flying start in the first quarter with a record revenue quarter. And we now have commenced operations on the non-rolling stock contract which we were awarded late in 2017. We plan to have all our locations to service the non-rolling stock program in place by the end of the second quarter. We're also creating a small specialized sales team to systematically target state, local and municipal government accounts. I'm quite bullish about the government sector and believe it will be a strong growth driver in the next few years. Online revenues grew in the first quarter versus prior year, both on a reported and like-for-like basis. In particular, we were encouraged to see the IP featured auction grow, with close to 90% of U.S. territory managers, strategic account managers and CAT account managers listing and selling equipment in this channel in the first quarter. We are now working on getting the U.S. sales team to consign more frequently with higher volumes to the weekly auctions by targeting consignors who do not wish to move their equipment. IronPlanet evangelists are now doing advanced training for their entire U.S. sales team to more effectively utilize the channel. We also believe that the weekly featured auction growth will accelerate once supply constraints abate and the strategic accounts team, who are the biggest users of this channel, consign more. Our mobile app is a key part of our technology arsenal and a competitor differentiator in providing customers access to our massive inventory of equipment in a channel-agnostic manner. Customer adoption and use…

[Operator Instructions] Your first question comes from Craig Kennison from Baird.

It's on Caterpillar. On Slide 14, you talk about 80 dealer agreements that you've executed. Could you add color to what it means to add a dealer agreement in that way? And then as a related question, how is this CAT relationship opening doors for you outside of North America, where there seems to be a lot of opportunity?

Sure, Craig. So the [ mora ] agreement is the standard agreement that we had worked out with CAT Corporate, at least for the dealer agreements, essentially where we provide them data on who bought CAT equipment in the auction, as well as runner-ups, and we also provide telematics. And in turn, they are obligated, and we have a schedule year by year, where they provide a super majority of what they would put into auctions to us, so -- and what we are pleased is that, since this relationship in the first quarter, we actually saw growth versus prior year, and that is very pleasing to see. I think the other -- to your second question about what is it doing outside of the United States and Canada, where we've historically enjoyed very solid relationships anyway, but internationally, I think in Japan, I think that's a great case history, where Karl Werner, our President of International, has done a great job working with the local CAT dealers and who have really forged great relationships. You may recall, we had closed the Narita site; we reopened it because of the interest of CAT. And we tried it as a first auction and then which was very promising; it did $10 million. We had a recent auction, which we reported, which did $8 million. And now Karl and the team have set up a cadence of auctions, perhaps 4 a year. But with that, we are also attracting other equipment from other brands, and so I think that's just a great indication. I -- Karl and I were recently -- we just had our first kickoff European CAT dealers advisory meeting in Geneva. Very, very positive meeting, exploring new ways to work with each other. In Europe in particular, in the past, maybe there was a little bit of tension in how they viewed us. But now I think that is changing quite a bit. We are trying to figure out how we can help each other, places like Germany, et cetera, Africa. So there is a lot of give and take. So I think this is going to be very positive going forward.

Your next question comes from Derek Spronck from RBC.

With IronPlanet, have you been able to make any sort of inroads into the more rural markets in the U.S?

I didn't -- Derek, could you -- sorry, repeat, made inroads into which markets, sorry?

Into more rural...

Rural, got it. Jeff, do you want to answer that question, please?

I'm sorry, Derek, did you say rural, or?

Yes, rural.

Yes, so Derek, Jeff Jeter. One of the value propositions for IronPlanet solutions, obviously, is how do you help customers, sellers, who are not close proximity with one of our live -- one of our RB live sites, where there is high transportation costs, cost to move those assets? So the IronPlanet solution in our weekly auctions has always been -- a key part of that value proposition is how do you support those customers? You still obviously bring the global audience and great bidder and buyer and price realization, but you eliminate the need for them to have to haul that equipment. And that is a big, big part of how we sell. Obviously, if somebody is located in close proximity of that site, they may elect to move that equipment. So it is a big part how the team sells and we do approach it that way, and it does give us leverage and access to inventory in those rural markets.

I'll also add one other thing, Derek, which is in Canada, Brian and his team -- this has been really helpful for us in remote areas. As you know, Canada is a very big country, with not a lot of population in certain areas, and so we are really targeting, and IronPlanet was really almost nonexistent in Canada, so this has been a great benefit for us. And given the RBA brand is very, very strong in Canada, we're utilizing it very strategically to say, how do you utilize this to really target some of the remote areas in Canada as well.

Are you seeing a change in the competitive response at all as you launch Marketplace-E?

I think, Derek, the competitive -- competitors have all this -- there's a very fragmented market. In the U.S. alone, we have 200 competitors. So clearly, there is a lot of competitive activity always. So you have to deal with that, and -- but our whole focus is, how do we provide the best value proposition for our customers and really focus in on that. And given the strength of our brands and how the network effect we have and bringing that global audience, I think our customers see that value proposition. And the fact that in Orlando, despite the supply constraints, we had such a magnificent auction, and now the Edmonton auction in April just blew us away, is all testimony to really, it's all about delighting customers. Just go back to your first question again. We're also, for the first time, are going to be doing an online IP agricultural auction that's coming up. And that is, again, goes to this whole thing about tapping into new customers and new areas.

Your next question comes from Scott Fromson from CIBC.

I just wondered if you could give a little bit more guidance on SG&A being above what you had talked about in the Q4, whether you've kind of stabilized that cost base or should we expect that the run rate of this quarter is -- or this quarter is a run rate figure?

Scott, it's Sharon. So there are still variable elements inside of the SG&A. So as we do expect more volume in Q2, as Q2 is generally a higher quarter for auction performance, you would expect some increasing cost due to that. We also have still some costs that we are likely going to add in related to servicing the new government contract. So again, in my remarks, we commented that we do expect to see some improved flow-through, but you should be looking at the Q4 kind of percentage of revenue as kind of your target to be forecasting SG&A.

Scott, let me also add that, look, the cost investments that occurred in first quarter were deliberate, and actually a positive. So the key one being preparing for the non-rolling stock government contract. Just the fact that we were able to operationalize that sooner than we thought, because originally, we thought it would be more in Q2, the fact that we've got that going, and initially, there was some investment costs for that, and we think that it is going to be a strong agency proceeds business, and so I think that's quite positive. There's also a couple of one-off things. We had our global meeting in Mexico to bring the entire sales force from around the world. We had about 600 people because it is the launch of IronPlanet. So a few things that went into the quarter. I actually feel quite good, as does Sharon, about the control we have on SG&A. And our whole objective is to continue to get us back to the flow-through levels of RB down the road. The other thing is in the mix. As I mentioned, RBFS is a very strong flow-through business, about 50%. And the more we grow that, that also helps. Now we are investing in RBFS because it's a pay-as-you-go. Normally, it takes 3 to 4 months for a salesperson to start becoming productive. But that has just got such great capacity, we're deliberately putting more because we are seeing a lot of growth. So we don't want to miss the growth. But we know that we will -- it will start flowing through in short order. So we are not concerned overall about the SG&A trends and we do think that the flow-through will start getting back to a normalized view. So I would take Sharon's views on looking at Q4 as a good way to benchmark.

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

You guys gave a lot of numbers. So I just want to check on something. In cost of sales, you noted inspection and appraisal costs were a headwind. Can you go deeper into that? Is that like an unforeseen incremental headwind going forward, especially as you build out these rural relationships, as you mentioned, these more cars, more people? And if so, is that something that's going to be an elevated headwind, and how do we think about that going forward?

Larry, it's Sharon, I'll start with this. I think the main reason those costs went up is based on volume growth in those businesses. The logistics services relates to our European operations, where we assist with logistics travel and carriage for our equipment that is being bought and sold. As volume increases internationally, we would expect that both the revenue and the cost related to that will also kind of increase accordingly. And certainly, the inspection services, as we continue to grow our online channels and continue to use IronClad Assurance, those costs will go, but it will be more than covered off in terms of revenue.

Okay. So size your leverage on that?

Okay, can I just add one thing? And I'm sure you know this, but we do charge for the inspections. And in the main, the inspection business is, at a minimum, breakeven; we actually make money on it. So sometimes, the timing is maybe off in terms of as the pipeline builds, you may see the costs in 1 quarter and you may see the results differently, based on how long it takes, but that's not something we are concerned about.

Okay. And then just the last thing, with the inflation in material cost, and I appreciate that answer, has that changed your expectation on pricing into the second half, given that inflation might pull up used equipment pricing? Or is it still the same?

So I presume we are -- are you asking about, just to clarify, whether pricing will continue to move upwards in the second half of the year, is that the question?

Yes, if -- I'm asking if you expect it now to get better than it was maybe 3 months or 6 months ago, given the inflation we're seeing in the price increases for new equipment that are likely to occur because of the inflation in steel and tariffs?

Yes, right. So let me take a shot at it and then maybe Doug, if you've got any -- Doug Olive, our Head of Pricing, can comment as well. So this quarter, in first quarter, we actually saw significant increase in price realization. And so if you look at our numbers, even though lots were down, our GTV was up and a lot of it was really strong price realization. And it was also up versus a-year-ago quarter. So we've definitely been seeing -- and that is, right now, primarily due to supply demand considerations. And so if this demand situation continues, and we have not seen anything that would make us feel that there is a drop-off there, at a minimum, we expect pricing to continue at this level, sort of continue its upward trend. And a lot depends on whether these tariffs, are they rhetoric, is it real, so that's kind of tough to quantify. But overall, I would just say that we are in a strong pricing situation.

Your next question comes from the line of Ben Chernikovsky (sic) [ Cherniavsky ] from Raymond James.

Ravi, just maybe I can rewind the narrative a bit, as you know I like to do. Go back to your Investor Day in 2015, I think it was, and shortly after you got there. Certainly one of the things that had sort of -- one of the questions surrounding the company at the time was the U.S. performance and penetration versus the success in Canada. It's a little harder to measure how that's been coming along because as you pointed out, IronPlanet was pretty much a U.S. operation. But one of the specific examples that was often brought up was Texas and how the Ritchie Bros. business there had dramatically or significantly underperformed a place like Alberta. I think the math you guys came up with was it was 2 to 3x the market opportunity. So based on what you're doing in Alberta, you could be doing $1 billion, $1.5 billion in Texas alone. Can you just give us an update as to how the initiatives around just the Ritchie Bros. penetration of the U.S. market on an organic basis, or however you want to think about it, has been coming along?

Right. Ben, so look, now that I've had sort of almost 4 years in the company, one of the things that, at least, I've come to a view is, it's very tough to really compare Alberta to really any other place in the world because Alberta, Western Canada, there is just such a strong auction mentality and predilection, and we have not seen that anywhere else. And then secondly, given that the brand started here, the brand is very strong. So I think it is tougher to kind of replicate it. And while it would be great to say, hey, let us get everything to be Edmonton, I think that may not be as easy or even relevant. On the other hand, we have been growing Texas quite a bit. And to the extent that we are now affected a little bit by the supply constraint, it sort of masked our efforts. But we are continuing to optimize there, and now with having IronPlanet as one additional tool and Marketplace-E, we certainly are going to continue to build our business because we do think that Texas has a lot of opportunity. And there are things like -- because the opportunity in Texas is not just construction, it's also transportation, agriculture; there are so many things there. So it is just going to be a steady growth. We think it has one of the highest opportunities in the United States. And U.S. as a whole, we are very committed to this geography and think it is still our #1 opportunity. And IronPlanet was supposed to -- that was one of our big rationales for bringing it in. I think right now, the supply environment has created a little issue on that. I think it's temporary. And the fact that when we start seeing successes like Orlando, or even the Fort Worth auction that we reported in the first quarter, $57 million, I thought was actually quite good. And we're doing quite well in Houston and Dallas. So all along, I feel pretty good about our longer-term prospects.

I recall at that time, you had indicated that one of the things you sort of uncovered in evaluating the U.S. versus Canada was that Canada had done a lot more at risk business and was willing to maybe seed or nurture the business by going out and standing behind the platform maybe a little more aggressively. Is that not something that -- like, has that changed, that you would not -- at the time, I remember sort of reading into it, well, then, you would be using more at risk business in the U.S. to go after, expand the platform. Has that sort of changed now?

No, it's not changed at all. So you're absolutely right because the at risk in Texas compared to the at risk we do in Alberta. But other than this quarter, where Alberta bounced back, last year, even Alberta went down, only because of the issues in the oil patch. But there is no doubt you are absolutely right, that the at risk volume in what they drive in Texas versus Alberta is lower. We are continuing to encourage the teams to do a lot more, but not just in Texas. So we're encouraging in this tight supply market for all geographies to really aggressively drive at risk. Unfortunately, just given the tight supply environment, it's been quite difficult to persuade consignors to go through at risk. They prefer to do straight commission. So they're feeling with the strong pricing environment, we will just come out like bandits, and so they are actually preferring, and that's one of the things we've seen in the U.S. I think we've been making -- until the supply thing hit in '17, we were actually making extremely good progress in Texas on an organic basis, getting up to $600 million or so, if my memory serves me correctly. I just think right now, the supply has had an effect. But it still is very much a key priority for us to drive.

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

Ravi, I guess as we look at the QEs on the macro side, any tidbits that maybe you can share with us that gives you confidence that Q3, Q4 is really when we're going to see the inflection point in terms of equipment supply availability?

Yes, Max, I think it is really -- we don't, obviously, have insider knowledge about OEM production, and we see the public materials that the OEMs put out as much as you do, so -- but anecdotally, because we do keep in touch a lot with all the dealers of the different OEMs and also with the corporates, and we are getting the sense that there is an intensive effort to improve things. And we have heard OEM executives tell us that they think the second half will start improving, particularly for light equipment, so we are encouraged by that. But Max, to me, I just got to a point where the macro is going to be the macro because we don't control it. So rather than just getting fussed about it, we're just saying, hey, we're going to take charge of our own destiny and adapt to the new circumstances. So which is why the huge push on multichannel, the huge push on new business. So I would rather you judge us by our record, which is to say, hey, we've been now improving our growth in Q4. And now in Q1, I thought it was a fabulous revenue quarter -- or sorry, agency proceeds quarter. And when you look at the like-for-like growth of 10%, I think that's awesome. And so -- and we're only going to get better and better as execution improves. So I'm kind of, sort of compartmentalizing that. If the macro improves, it is going to be a tailwind. Right now, we are just focused on, hey, let's -- our teams, go get it out. [ Our fall ] is a very big used equipment market. Let's find every which way to unloosen that supply and bring it to us. And we are doing just that.

That's very helpful. And maybe just as a follow-up to you controlling your destiny, can you maybe expand a little bit more on the revenue rate and what enables you to bump it up a little bit versus the prior expectations?

So Max, it's Sharon. So I think we did bump up the bottom end of the range last quarter and that was due to our announcements of the partial fee harmonization. I think we were still wanting to see it execute before we took the top end of the range up. And clearly, with the performance that we saw inside of Q1, clearly, the teams managed it seamlessly and brilliantly, and so that's what gives us real confidence to take the top end of the range up now.

Your next question comes from the line of Michael Scheinberg (sic) [ Scott Schneeberger ] from Oppenheimer.

This is Daniel on for Scott. Can you please elaborate a little bit on April trends by asset categories and by end market to give us a better feel for that?

I think clearly, we had good growth. And we are seeing positive, continued positive performance in Canada. That's continuing. We are continuing to see good international performance. We're seeing the U.S. beginning to pick up and people executing on multichannel. And the take-up on the coverage that we talked about, the 9%, that's all promising. So -- and then I think in terms of categories, I think we're seeing construction and transportation continue to do okay, or do well. The only place where we are challenged in Canada is agriculture. So that's just market dynamics right now, but we're continuing to drive our on-the-farm auctions.

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

The 10% like-for-like growth is impressive in this backdrop. You also put -- you're harmonizing your fees, the A&M rate, 13.5%, is actually above your range. Just can you help us, with that type of rate and that type of growth, what type of incremental margin should we kind of expect? Because I'm just trying to understand. When I look back at like, even like 2007, 2008, 2009, like a lot of those periods, I mean, you guys were doing a rate at the time of just 10% and similar growth around there, and you guys were having like a 40% incremental margin. So should we assume that you get back to those type of margins? Just so you could kind of help us with that and flesh that out.

Yes. So Michael, yes, I think what you've seen over the last few years is continued improvement by our teams to effectively manage their at risk contracting and delivery on our expectations on rate. And so we're certainly not looking at going backwards. I think where we get the confidence in the rate guidance that we provided is that we think we have now got the channels, the customers and the sectors to kind of operate inside of that range. A couple of natural pressures that you will see as we expand into sectors like agriculture or even as we may expand some of our strategic account growth, that will have a natural downward pressure on our rate, which is why, certainly, we did not take the rate expectation up to kind of current levels. We do know that there is volatility, particularly in our at risk performance, and we want to basically protect for a competitive situation where we need to go deep or potentially some risks that may occur, particularly in markets that are subject to foreign exchange exposure or currency fluctuation.

That's helpful. And then, just with the fact that your rate number is much higher than it was historically, does that -- is there a number or a metric we should think about if -- about what type of incremental margin, operating margin, you can receive when you have -- when you get a 50 basis point increase in the rate, it should drop down to X, Y, Z. Is there any way we can try to think about that?

I think what I would say there is, look, we do -- our key is to get back to sort of prior to the acquisition levels flow-through and keep working at it. And rather than comment on one element of the rate piece and how it does, just understand that we are working hard for that. And then also to continue to get our cost growth lower than agency proceeds growth. And even in this quarter, when you dig deep, the fact that agency proceeds growth was 10% and cost growth was 7%. And despite all the investments, I still think that, that is going lower. We want to keep bringing that down so that we can flow through more. And the key is flow-through. That's what we're very focused on because that's what makes this model beautiful. And then when you look at the company as a whole, as I mentioned earlier, RBFS is a great flow-through machine, and the more we grow there, that helps. Sharon already pointed out some of the things that can negatively affect rate. But the government business is a very good business for us. That's a promising one. So all of these in the main, it comes down to, hey, if we can keep this model, it's all about revenues. And we keep driving it. And if we can get our costs lower and keep showing that discipline, and I think we'll just get better over time. And as those synergies kick in, I feel pretty good about how we are headed towards a flow-through which is what investors look for in this model.

There are no further questions at this time. Mr. Ravi Saligram, I turn the call back over to you.

Thank you very much, everybody. And we'll see you at the second quarter call. Onwards and upwards. Thank you very much.

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