Ritchie Bros. Auctioneers (RBA) Ravichandra K. Saligram on Q2 2016 Results - Earnings Call Transcript

| About: Ritchie Bros. (RBA)

Ritchie Bros. Auctioneers, Inc. (NYSE:RBA)

Q2 2016 Earnings Call

August 09, 2016 11:00 am ET

Executives

Jamie Kokoska - Director-Investor Relations

Ravichandra K. Saligram - Chief Executive Officer & Director

Sharon Ruth Driscoll - Chief Financial Officer

Douglas William Olive - Senior Vice President - Pricing

Randall J. Wall - President, Canada

Analysts

Nate J. Brochmann - William Blair & Co. LLC

Scott Schneeberger - Oppenheimer & Co., Inc. (Broker)

Sara O'Brien - RBC Dominion Securities, Inc.

Bert Powell - BMO Capital Markets (Canada)

Cherilyn Radbourne - TD Securities, Inc.

Ben Cherniavsky - Raymond James Ltd. (Broker)

John D'Angelo - Macquarie Capital (NYSE:USA), Inc.

John Healy - Northcoast Research Partners LLC

Operator

Good morning. My name is Mike, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Ritchie Bros. Auctioneers Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

I will now turn the call over to Jamie Kokoska, Director of IR. You may begin your conference.

Jamie Kokoska - Director-Investor Relations

Thank you, Mike. Good morning, everyone, and thanks for joining us on our fiscal second quarter 2016 results conference call. Discussing Ritchie Bros.' performance today are Ravi Saligram, Chief Executive Officer; and Sharon Driscoll, Chief Financial Officer. Joining them for the Q&A session following the formal remarks will be Jim Barr, Group President; Randy Wall, President of Canada; then Terry Dolan, President of U.S. and Latin America; as well as Doug Olive, SVP, Pricing and Valuations (sic) [SVP, Pricing].

The following discussion will include forward-looking statements as defined by 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 auction proceeds may differ from those used by other participants in our industry. It is not a measure of financial performance, liquidity or revenue, and is not presented in our statement of operations. Our second quarter 2016 results were made available yesterday after market close. We encourage you to review our earnings release and Form 10-Q interim report, 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 measures 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 discussed on today's call are in U.S. dollars unless otherwise indicated. While we may use million or billion dollar figures for brevity in today's discussion, all percent changes have been calculated using full and rounded figures.

I will now turn the call over to Ravi Saligram, Chief Executive Officer.

Ravichandra K. Saligram - Chief Executive Officer & Director

Thank you, Jamie, and thanks to everyone for joining us on our earnings call today. Our second quarter was marked by modest GAP and revenue growth, but higher expenses than we recorded in the same quarter last year, which unfavorably affected operating profits and EPS. Notwithstanding this quarter's shortfalls, we remain absolutely committed to achieving our evergreen model in the long-term. I will outline some key actions we'll be undertaking in the second half of the year to improve performance towards the end of today's call. I'll review some of the high level performance figures and then I will discuss our operations and market environment.

GAP for the second quarter increased 1% relative to Q2 last year, but as with recent quarters, foreign exchange translation muted some of this growth. On a constant currency basis, using the same foreign exchange rates as this period last year, GAP would have grown 3%. Revenue for the quarter increased 2% or 4% on a constant currency basis. Revenue increased more than GAP as a result of our higher revenue rate than the year ago period. As we discussed last quarter, our growing fee-based revenue streams, which are not associated with GAP are now supplementing our revenue rate.

Expense growth during the quarter outpaced revenue growth causing margin compression and ultimately led to a 15% lower operating income year-over-year, or a 13% decline on a constant currency basis. Much of this quarter's expense increase was related for running a larger platform, important new strategic hires, a larger stock base to prepare us for scaling the business, and new operating expenses related to recent acquisitions. While we're not pleased with the expense growth we experienced during the third quarter, we believe cost investments were needed to better prepare our business for further growth and growing competitive intensity.

Had our underwritten business performed as we expected and straight commission shoot prices had not been affected by the precipitous decline in equipment pricing in June, we believe our revenue would have been better aligned with this cost base. Operating free cash flow during the quarter also declined, but importantly, much of this decrease was simply due to auction timing and inventory contracts we have strategically entered into.

Return on net assets and ROIC, which are calculated on a 12-month trailing basis improved meaningfully year-over-year, increasing 260 basis points and 60 basis points respectively. The growth of our gross auction proceeds this quarter was impacted by ongoing foreign exchange headwinds, the mix of what we sold and overall equipment pricing declines relative to the same quarter last year. While total auction volumes increased a meaningful 14%, GAP grew only 1%.

Used equipment values in the second quarter and June in particular, were impacted by supply-demand dynamics that ultimately led to an overall decline in pricing. The sharp pricing correction in June did take us by surprise, and unfavorably affected the performance of our underwritten contracts in that month. While all categories of equipment saw some decline, not all categories were affected equally. Construction assets specifically saw declines around 6% on average, compared to equipment values in the second quarter last year. Transportation and agricultural assets saw further pricing erosion.

In terms of specific equipment, motor graders and motor scrapers, articulated trucks, large excavators and over-the-road trucks saw the most significant declines during the quarter, while smaller construction assets such as skid steers, loader backhoes and small excavators continued to generate solid pricing. As you can expect, assets related specifically to the oil and gas and mining sectors continued to experience pricing weakness. The supply demand dynamic is one that we are acutely aware off and is one of the underlying reasons we've stepped up our marketing effort significantly in the last few months. While our sales team does a good job of sourcing equipment, our marketing efforts drive bidders and buyers to our auctions in other sales platforms. So, the growth in marketing spend during the quarter was a deliberate increase to help generate some pricing support for our equipment selling customers during this period of pricing volatility.

Operationally, our auction volumes continued to demonstrate strong growth. Industrial auction lot volumes increased 15% and our core auction revenue rate improved four basis points relative to Q2 last year. Much of this revenue strength can be attributed to a growing proportion of lower value assets sold at our auctions this year. As a reminder, our buyers fee structure is capped, which ultimately means that assets sold for less than $38,000 generate incrementally more buyers fee revenue per dollar sold than assets sold over this amount and any lot sold for less than $2,500 generates a 10% buyers fee.

To help demonstrate the increase in lower value lots, during the second quarter, 53.4% of the lot sold had a value less than $2,500 in local currency. This compares to 50.7% in the same quarter of 2015 and 49.8% in the second quarter 2014. We are not proactively trying to grow our low value lots, but it's been a trend for the last several quarters and a consequence of full and partial dispersals, interest in our Timed Auction lot offering and a way of introducing first-time sellers to the unreserved auction. While low value lots do generate more revenue per dollar sold in GAP – in buyers fees, they also generate higher costs associated per dollar sold for sale processing and labor.

Underwritten transactions during the second quarter comprised nearly 26% of GAP sold, which was lower than the 29% of GAP in the second quarter last year. While many of the underwritten contracts we entered to in the quarter performed well, the sudden pricing erosion experienced in June did detract from our underwritten rate, which ultimately declined 177 basis points compared to the quarter two last year, when equipment trends surprised us on the upside, I'm talking about last year. Our revenue growth would have been far stronger had we been able to maintain the same underwritten rate as we achieved in Q2 last year. As mentioned, lot volumes grew 14% and 15% specifically in industrial auctions to generate record second quarter auction volumes. Much of the improvement is attributable to volume from customers in the transportation sector, where we experienced a 56% increase relative to the same quarter last year of 3,100 more lots.

Equipment consigned from customers in the sales, leasing and rental channels saw 14% increase in auction volumes, and customers in the light-construction sector, such as home builders, saw a 31% increase. Equipment consigned from oil and gas customers increased 11% during the quarter, contributing just 290 incremental more lots for our auctions than in Q2 last year. All other auction operational metrics improved meaningfully during the quarter as well with record second quarter figures for number of consignors, registered bidders and buyers as well. Equipment consignors increased 11% compared to the same quarter last year, while registered bidders and buyers grew 5% and 11%, respectively.

We're particularly proud of the bidder and buyer number improvements, which reflect the strong marketing efforts we drove during the quarter, to better balance the increased supply of equipment being sold at our auctions. There were several notable auctions that occurred during the second quarter, including a record breaking five-day auction held in Edmonton in April where CAD 240 million of assets sold. This makes it the largest auction we've ever held in Canada and attracted 16,700 registered bidders from 55 countries. More than 10,000 lots sold at this auction in just five days, which demonstrates operational and logistic expertise of our Edmonton and online auction operations team.

Importantly, 86% of the assets sold went to Canadian buyers, including 46% sold to buyers in Alberta, revealing that equipment demand in Canada is still quite robust. During the quarter, we also held our largest ever Toronto auction in May where CAD 36 million of equipment was sold, an indication that the efforts of our sales teams in Ontario are generating results.

We also hit a new significant milestone in the second quarter that demonstrates the importance of our digital and multi-channel strategy. For the very first time in our company's history, more than half of our GAP was generated through online transactions, including through live online bidding at our auctions and through EquipmentOne. In addition to the record 51% of GAP being generated through online transactions, 54% of the total number of buyers were online, a 400-basis-point leap from just last quarter. While smaller value assets are more likely to be purchased by online buyers, we did see increases in online purchase activity across nearly all values of equipment sold, including assets sold over $100,000. It's a telling and notable trend that we believe underscores the importance of the investments we are making to enhance the online experience we provide our customers.

Our purchase of a 75% stake in Xcira, our online live auction simulcast technology provider, the launch of the Ritchie Bros. app to provide bidding ability from smartphones and ongoing improvements to the EquipmentOne website to enhance the user experience are all examples of how we are bringing our digital capabilities to the forefront of our business. The Ritchie Bros. app which was soft launched during the first quarter, and formally launched on app stores in July, has already generated some early but positive results for us. Early reviews of the app shows strong user endorsements and we are planning on more aggressively promoting the app in the coming months. Since the initial creation of the app, bidding through app users has already generated 68 successful winning bids, worth approximately $1.35 million in GAP.

And as just one example of how our EquipmentOne solution is better catering to the needs of its customer base, we recently launched an enterprise sales solution that provides an end-to-end solution to companies that provides better asset management control. The product includes data integration, automated process workflows, remarketing solutions, disposition channels and detailed reporting. The portal has already generated new business for EquipmentOne including one of the world's largest transportation OEMs and energy companies.

EquipmentOne and Mascus which both fall under our other business segment in our financial reporting, continued to perform well, with the segment producing $6.3 million in revenue during the second quarter and generating positive EBITDA. As we noted last quarter, depreciation and amortization does continue to weigh on the overall EBIT performance of EquipmentOne.

As we announced last month, we completed our acquisition of the remaining 49% stake in Ritchie Bros. Financial Services on July 12, which means shareholders will start receiving the full benefit of RBFS growth and earnings beginning in the third quarter. But for context, full ownership of RBFS during the second quarter would've contributed another $0.01 to diluted earnings per share for stockholders. Operationally, the business continues to demonstrate solid growth.

Credit applications grew 28% relative to the same quarter last year and funded volume grew 26%, providing $91 million of loans to RBFS customers. Market penetration of addressable GAP improved 18 basis points to 11.37% compared to the year ago period. We define addressable GAP as assets greater than $10,000 that are eligible for financing and purchased by end-users in a country where financing is available.

And with that operational overview, I'll now pass the call on to Sharon for a detailed review of our financial performance.

Sharon Ruth Driscoll - Chief Financial Officer

Thank you, Ravi, and good morning, everyone. As Ravi mentioned briefly at the start of today's call, our second quarter was marked with modest GAP and revenue growth, but increases to our overall cost base negatively impacted operating income with our operating income margin contracting 660 basis points to 33.8% during the quarter. Ultimately, this led to a 13% decline in EBITDA and a 12% decline in diluted earnings per share with diluted EPS of $0.37.

Our revenue rate during the second quarter improved 13 basis points relative to the same quarter last year with the year-over-year improvement driven by fee-based revenue streams, not associated with GAP. In fact, 25 basis points of the quarter's revenue rate was generated by Mascus and Xcira, two businesses that were not on our platform a year ago.

Weakness in equipment pricing in June did translate into lower than expected GAP growth and weaker performance on June's underwritten contracts, negatively impacting revenue rate and the resultant revenue growth for the quarter. We continued to believe that our core auction business will generate a revenue rate between 11% and 12% on an annual basis, and that our group revenue rate, including EquipmentOne and all fee-based revenue streams, to generate a revenue rate in excess of 12%.

As with prior quarters, foreign exchange changes relative to the same period last year muted our reported growth. Sales volume increases led to 3% revenue growth, while rate improvements provided another percent, leading to 4% revenue growth on a constant currency basis. Factoring in the impact of translational foreign exchange, revenue growth fell to just 2% during the quarter. These foreign exchange impacts also contributed to a slightly larger proportion of revenue being generated from our U.S. operations, compared to Q2 last year. 43% of revenue was generated by our U.S. teams this quarter, compared to 41% in the second quarter of 2015. On a local currency basis, without factoring in any foreign exchange impacts, the U.S, Canada and other regional segments all generated revenue growth, while Europe continues to contend with a depressed market environment.

Turning to expenses, both our cost of services and SG&A expenses increased relative to the same quarter last year, as a result of newly acquired businesses, increased head count to support our strategic initiatives and growth in volume. Total operating expenses, including depreciation and amortization were 13% higher than Q2 of last year. More specifically, new businesses, Xcira and Mascus, added $3.5 million of additional cost of services and SG&A expenses to our cost base. The other $8.6 million of higher operating expenses were largely weighted to higher staffing levels to support our strategic initiatives and growing business volumes, as well as higher marketing and advertising costs, associated with driving demand for equipment and awareness of our sales channels.

Cost of services also rose in our core auction business, which is a reflection of handling more auction volume and holding more offsite auction. You'll recall, lot volumes, including both industrial and ag auctions increased 14% over the same period last year, as it takes more temporary staff, fuel and security cost to handle that incremental lot growth. Core auction SG&A expenses, excluding Xcira, increased by $6.4 million primarily due to higher staffing levels, including a fully staffed executive team that was not in place this time last year.

The increase in our share price during the quarter, with the primary driver of $3.4 million increase in share-based employee compensation payment, but that was mostly offset by a $3 million reduction in incentive compensation accrual due to a change in the bonus accrual methodology to better reflect quarterly performance. IT software costs related to CRM license fees in 2016, not in 2015, as well as an increase in the leasing of yard equipment and company cars which were previously capitalized, also added $1 million in additional expenses during the quarter. That being said, our operating cost growth has significantly outpaced our revenue growth during this quarter and the full first half of the year. The actions being taken to address and change this trend will be discussed by Ravi later on this call.

Given revenues grew 2% during the quarter, while total expenses, including depreciation and amortization rose 13%, our net income attributable to shareholders declined 12% for the same period last year to $39.7 million. I also want to acknowledge that we are cycling a very strong second quarter performance in 2015 where revenue was up 10% and operating income was up 21%. In addition to affecting GAP and revenue, translational foreign exchange also affected reported expenses and operating income. On a constant currency basis, operating expenses rose 16%, but FX positively impacted this line item, given that many head office expenses are in Canadian dollars, leading to a 13% overall increase in cost. Operating income declined 13% on a constant currency basis, but was negatively affected by FX, which added another 2% decline for a total decline of 15%.

Turning to our balance sheet and cash flow metrics, you may note that some metrics on our balance sheet scorecard are no longer included in our earnings release. This change is only a result of SEC's new interpretations of the use of non-GAAP financial measures which would need us to add significantly more tables and reconciliations to our news release. As this information is already discussed at length in our Quarterly Report, we encourage you to view your balance sheet metrics in our 10-Q Quarterly Report filings available in EDGAR and our website going forward.

Our balance sheet and cash flow metrics remain strong, although we have seen some temporary regression in working capital and operating free cash flow performance. I will provide more color on the drivers of the first half performance on these metrics shortly. Return on net assets and ROIC both 12-month trailing June 30 figures, improved to 25.4% and 15.1% respectively, with RONA improving 10 basis points from the year ago period and ROIC improving 60 basis points. Excluding the term loan reclassification that was booked in Q2 of 2015, RONA improved 260 basis points.

Cash flow was negatively impacted by lower operating income, auction timing and an increase in inventory, and I'll discuss this in more detail now. Changes in working capital resulted in a use of cash of $53 million in the first half of 2016, verses being a source of cash of $44 million in 2015, or $97 million negative change to cash flow year-on-year. 39% or $37 million of this decline is due to an increase in inventory purchases and advances, somewhat impacted by sector specific bankruptcy cycles in mining and oil and gas. 29% or $28 million of this decline is due to an increase in restricted cash, offset by the increase in auction payables, proceeds payables. This is primarily due to timing with large auctions held near the end of the quarter in regions requiring restricted cash, specifically Alberta and Texas. For more details regarding the changes in working capital, please refer to our note 11 supplemental cash flow information in our 10-Q.

We will continue to focus on the basics of cash management and our cash management principles have not changed. We will continue to use our strong balance sheet as a competitive advantage when pursuing underwritten transactions. The company remains a very strong cash generator. As a reminder, our capital allocation priorities remain unchanged, with first priority is being growing our dividend payout in line with earnings. Our second priority, to hold our share count flat and our third being acquisitions.

As announced yesterday in our earnings release, our board of directors has improved a 6.3% increase or an increase of $0.01 to our quarterly cash dividend, bringing our dividend to $0.17. We know our shareholders value our dividend and believe this increase appropriately aligns our dividend payout in line with our trailing 12 months adjusted income attributable to shareholders growth of 2%. It also brings us at the high end of the stated 55% to 60% payout range disclosed in our evergreen model on a trailing 12-month basis.

As many of you know, we do have a solid balance sheet and one that we regularly leverage as a competitive advantage for underwritten transactions. But we've also taken great strides in the last few months to best deploy capital in both strategic growth initiatives and for shareholder returns. In fact, in the first half of 2016, we've already returned nearly $71 million to shareholders in the form of dividends and share repurchases, which obviously does not capture yesterday's announced dividend increase.

We also deployed more than $28 million towards acquisitions in the first half, for a total of $99.3 million to supplement growth initiatives and shareholder returns. It's also worth while noting that since June 30, we have announced an additional $48 million deployed for M&A activity that is close so far in the third quarter, which Ravi will discuss shortly. The strength of our balance sheet is what allows us to pursue strategic growth initiatives when they arrive, and it is something we believe will be advantageous to us as we explore further M&A opportunities.

And with that financial overview, I'll now pass the call back to Ravi for some closing remarks.

Ravichandra K. Saligram - Chief Executive Officer & Director

Thank you, Sharon.

We continue to stay focused on M&A as a way to accelerate growth in the long-term. Most recently, we announced the acquisition of Petrowsky Auctioneers on August 2, a business we believe will meaningfully grow our market presence in the Northeast United States, a region we have not historically been a market leader. We are pleased to welcome Sammy Piotrkowski and his entire team to Ritchie Bros. In 2015, Petrowsky Auctioneers built on their foundation of strong customer relationships, generated $50 million of gross auction proceeds. We believe that with the additional support the Ritchie Bros. platform will provide, the GAP contribution from this business could grow considerably.

Subsequent to the end of second quarter, we also announced completion of our acquisition of the 49% minority interest in Ritchie Bros. Financial Services. While the operating results of this business were already fully consolidated within our financial results, we believe shareholders will now fully benefit from the earnings and growth potential of this business.

In the last two years, we have diligently executed against our strategy to build a stronger platform for future growth. A multichannel approach and investments in digital initiatives are proving valuable to customers, with many large packages of equipment now being dispersed among sales channels to best suit the needs of equipment sellers.

Our second quarter results clearly affected our first half performance, especially given how much large our second quarter is, seasonally compared to the first. GAP during the first half of the year grew 4%, relative to the first half of 2015, or 6% on a constant currency basis. And revenue grew 7% or 10% on a constant currency basis. Operating income declined 3% from the same period last year, or 2% removing the impact of foreign exchange. However diluted EPS attributable to shareholders grew 2%. While our second quarter results were not what we hoped to achieve, we're already encouraged by the transfer seen so far in the third quarter. Pricing appears to be stabilizing. Our auction volumes, bidders and buyers continue to grow, and we have secured several large consignments for the second half of the year.

As you may have seen in our monthly auction metrics disclosure on Friday, our July GAP was up 7.8% compared to July last year, or 9% on a constant currency basis. This growth is due largely to better auction performance of comparable sales relative to last year. We also added four new auctions to the calendar in July, further bolstering GAP. And while we held fewer agricultural auctions during the month, the ones that were held were significantly larger than those held a year ago. Overall, I'm pleased to see GAP up 4% year-to-date through July in 2016, or 6.1% higher on a constant currency basis.

Although we had a tough second quarter and we're not pleased with the results, one quarter does not make a trend. We acknowledge the sudden pricing erosion in June surprised us, and we got caught in an environment where supply far exceeded demand. And it negatively affected our underwritten business, as well as our straight commission business.

Net our revenue growth was far lower than what we had expected or the cost base was supposed to support. Of course growth in small lots exacerbated an increase in operational expenses. I would like to reassure our investors that the operating leverage model of our core auction business in EquipmentOne is still intact. We do acknowledge that our service businesses, including Xcira, Mascus and refurb and paint have a different cost structure model and not in the high level of operating leverage as the core business. Having said this, our primary focus is growing our core business. Specifically RBA won an RBFS; Xcira and Mascus are strong strategic enablers of growth, while providing predictable fee-based revenue streams.

In order to ensure operating income growth and achievement of the evergreen model, we're undertaking several actions to contain costs and accelerate revenue growth. Let me outline a few specific actions. First, we will enforce very strict discipline on SG&A costs with a strong focus on overtime reduction, travel expenditures, tradeshow participation and professional services. Second, we've already implemented a partial hiring freeze and will be very strict about creating new or adding Director and VP positions and above unless absolutely critical to the business.

We will however continue to allow hiring of TMs in the field, especially replacements. Our Head of HR, Todd Wohler, is now personally overseeing and approving any new hires above the manager level. We will proactively look for procurement efficiencies. Fourth, we've started our program to address inefficient sites that do not have critical mass and will not our meet our growth targets in the foreseeable future. As a first step, we've decided not to renew our lease in Beijing, China.

We're in the process of evaluating other inefficient sites in all of our geographies and will make the appropriate decisions during the next six to nine months. Fifth, We are re-emphasizing being disciplined in our underwritten contracts, especially in sectors with oversupply. For example, transportation assets, we will also be more judicious in choosing underwritten deals in geographies with volatile fair pricing and oversupply, for instance, in the Middle East and parts of Europe. As a reminder, we already stopped doing most underwritten contracts in Mexico.

Finally, we're working on incorporating more forward-looking indicators versus relying largely on history in our at-risk modeling. Sixth, we are strongly encouraging our sales force to be disciplined about small lots and instead focus on higher value items. Seventh, we are re-launching our cash is king program to reignite awareness of cash flow. We will also enforce stronger control on inventory deals.

And finally, we are restoring focus on our core construction sector. Although, we are pleased with the gains we have made in transportation, we want to make sure that we do not lose sight of the most important construction sector.

I am confident that over the next six months, we will start to regain the proper balance between revenue growth and cost growth. My management team and I are fully committed to this.

And with that, we would like to welcome questions from analysts and institutional investors. Given the level of participation on today's call, we would ask that you please limit yourself to one question before re-queuing to provide time for others on today's call. Operator?

Question-and-Answer Session

Operator

Your first question is from Nate Brochmann from William Blair.

Nate J. Brochmann - William Blair & Co. LLC

Good morning, everyone, and thanks for taking the question.

Ravichandra K. Saligram - Chief Executive Officer & Director

Sure, Nate. Thank you. Good morning. How are you?

Nate J. Brochmann - William Blair & Co. LLC

I am doing well. Thanks. So, Ravi, so, I mean clearly, this is, you know, a trait of the business where sometimes you get caught with pricing swings, and that's kind of always happened. And clearly you are taking the actions to kind of realign the SG&A after getting caught by surprise with that. But how do you think of the business kind of long-term in terms of doing the right things, in terms of doing all the investment and positioning the business with all the new channels versus kind of managing through these swings in the proper notion, because they're probably always going to come up over the course of history. And just wondering how we balance that a little bit? Thanks

Ravichandra K. Saligram - Chief Executive Officer & Director

Nate, great question and very perceptive comment. Look, this is a lumpy business. And I've said over and over again, this is a business for long-term investors than very short-term investors. The lumpiness sometimes goes your way and you have like it did in first quarter where there was jubilation, and second quarter where there's lot of disappointment.

But I think we've to work through it and not sort of lose sight on the long-term, because in the long-term I very firmly believe, a; we have a fantastic operating model with great leverage, now that leverage works backwards too when you get it wrong. Two, I think, there is still a lot of growth prospects with the multiple channel. So we don't want to throw the baby out with the bath water, just because of a poor quarter. However, there is learnings from this quarter, which is that you do have to be careful of the investments you make – and our evergreen model, we were very committed to say grow operating expenses lower than revenue growth. So – and you can't always hope for revenue growth.

So what we want to do over the next six months and it will take us some time to get our cost base right is, what are the things that we can live without, what are the things we absolutely have to live with. Some of the strategic investments we made, like getting a world-class CMO, a world-class CIO, those are all very important for the long-term health of the business.

So, I think, it is just achieving the balance. And so first quarter we were surprised positively with the revenue growth. This time we've been negatively surprised by the cost. I think, over time we'll just get some more balance in, but I firmly believe that our strategic plan is intact. The moves we're making are absolutely right and we just need to stay focused on the long-term, while not just, sort of – we should take – this was a little bit of a wakeup call and we'll take the necessary actions.

Nate J. Brochmann - William Blair & Co. LLC

Okay, great. Thanks. I think that's my one.

Ravichandra K. Saligram - Chief Executive Officer & Director

Thank you, Nick.

Operator

The next question is from Scott Schneeberger from Oppenheimer.

Scott Schneeberger - Oppenheimer & Co., Inc. (Broker)

Thanks, Ravi. Could you elaborate on – you mentioned changing on – looking at the underwritten business, moving more towards forward indicator versus historical indicators? And just as a second part of the question, what were the asset classes most affected in the June pricing change impact? Thanks.

Ravichandra K. Saligram - Chief Executive Officer & Director

So I'll answer the first question, and I'll let Doug Olive answer the second. The quick thing is, our – we've got a lot of pricing history over 50 years and more recent 10 years. We have a real good sense. But most of the times when markets suddenly turn on you, and if we've made the deals a few months in advance, it can really cause some pain. So we're trying to work on trying to understand – and it's not easy in this business, but trying to get metrics which are more predictive about the future.

So we've got analytics work underway that tie some factors so that we can get some – so whether it's in construction housing starts, non-res construction, et cetera, a whole model and we've got Frank Roth, who heads our strategic initiatives to do some work on that. So we're looking at some big data modeling to help us with it. It's going to be – it's not something that easy. Especially in volatile environments, but it's one way for us to at least better predict where sectors are going. I'll let Doug answer where some of the sectors we got affected on at risk in second quarter.

Douglas William Olive - Senior Vice President - Pricing

Thank you, Ravi. Good morning, Scott. Just to comment and just to add to some of the dialogue that's been said already. I mean, we did see an overall decline of pricing in the construction assets alone of about 6% in Q2. And on top of that, Scott, we did see quite an erosion of transportation assets, as there continues to be a glut of trucks entering the market. And so it's been transportation, construction, and we're still seeing a decline of pricing on oil and gas related equipment. And also anything tied to mining as well, Scott, we've also seen a further erosion. So it was a changing environment, a changing landscape. And we're aware of it, and we're watching it, and we're confident now, we're watching some pricing already into July, into Q3 already, where we've seen some stabilization of pricing, so we're confident moving forward.

Ravichandra K. Saligram - Chief Executive Officer & Director

I think Scott's question was which sector do we have at-risk deals, where we got hit. So...

Douglas William Olive - Senior Vice President - Pricing

Sure. Oil and gas sector and transportation sectors.

Ravichandra K. Saligram - Chief Executive Officer & Director

I think, the two, Scott, was really transportation, and one of the reasons transportation can be volatile is because if you have too many assets of the same type, so if you have 100 trucks, and the volume, and people know that there's 100, if the pricing starts falling, it can really have a boomerang effect on the whole portfolio. So one of the learnings for us, is we're learning more about the transportation sector is, you can't treat at-risk deals in transportation the same way you treat them in construction, where they're more unique assets in any particular portfolio. Whereas there's too many like assets in transportation, so we're learning from that and being more careful and judicious as we go forward. So this as we've been pushing transportation, perhaps there was just maybe too aggressive a push in portfolios on that.

Scott Schneeberger - Oppenheimer & Co., Inc. (Broker)

Okay. Thanks for the color, guys.

Operator

The next question is from Sara O'Brien from RBC Capital Markets.

Sara O'Brien - RBC Dominion Securities, Inc.

Hi, good morning.

Ravichandra K. Saligram - Chief Executive Officer & Director

Hi, Sara.

Sara O'Brien - RBC Dominion Securities, Inc.

Ravi, just noticed in terms of the SG&A increase and cost of goods sale – cost of goods sold increase, a lot of it came from employee compensation, and not just related to the employee numbers, but actual comp per employee went up significantly. I'm just wondering if there was a change in the way base pay or overall pay is looked at from Ritchie's perspective, or were these sort of one offs related to signing bonuses for senior employees?

Ravichandra K. Saligram - Chief Executive Officer & Director

Sharon, do you have any view on that?

Sharon Ruth Driscoll - Chief Financial Officer

Yeah. There would have been some small sign-on components, but not material, Sara. The – I think, this is more reflective of having the full executive management team in place, and some of the regional management support teams, which would take some of the costs per employee up.

Sara O'Brien - RBC Dominion Securities, Inc.

Okay. So...

Ravichandra K. Saligram - Chief Executive Officer & Director

So, Sara, there was several exec positions not there last quarter, last year's quarter or even the first quarter, which was President of the U.S. We did not have CMO, did not have CIO, et cetera. So that's partially reflective of it. We've not changed fundamentally, if anything, the changes we've made on comp levels are more performance-driven. So, I don't know, Sharon, if any of the mark-to-market affected that.

Sharon Ruth Driscoll - Chief Financial Officer

Yeah. So we did call it that mark-to-market was an impact of about $3.4 million on the quarter. That is a combination. It's primarily driven by the change in the stock price. Slightly, also just kind of added number of people that are on the LTI programs to better align our executives with shareholder interest. Those were somewhat offset because of the performance on the short-term incentive bonuses.

Sara O'Brien - RBC Dominion Securities, Inc.

Okay. And maybe just related to that, if you can comment on employee turnovers, is that an issue that's causing additional cost, or are you – is it pretty in line with historical trends?

Ravichandra K. Saligram - Chief Executive Officer & Director

Yeah. I think the employee turnover is pretty much stable. I don't know if Todd is on the line, but I think, it's been around 15%, 16%, and we've not seen any sharp increase in it. So – and TM turnover actually is now stabilizing. It's come down. So that's not occurring.

Sara O'Brien - RBC Dominion Securities, Inc.

Okay. Thanks.

Operator

The next question is from Bert Powell from BMO.

Bert Powell - BMO Capital Markets (Canada)

Thanks. Good morning. Ravi, just want to stay on the cost focus a little bit here. So you did indicate that there was a step-up in efforts to support some of the pricing volatility that you saw in the quarter, and there was a pretty big jump in your promo line, and I'm assuming with the transactions you did the quarter – in the quarter that the professional fees were also up there as well. So just wondering if you could give us a sense of how those behave going forward. Just trying to think about the operating leverage in the business heading into the end of the year. Can we get – and redefined operating leverage is kind of your EBITDA margin for lack of a better way to do it, can you get back to or above where you exited the year last year?

Ravichandra K. Saligram - Chief Executive Officer & Director

So, I'll take a shot at it, and then maybe Sharon can add to that. So if – we've got to separate out our core auctions versus things like Mascus and Xcira because those two have a – they're more fee streams, more stable, more predictable and there's a reason we've brought them on, so that one they're strategic enablers, the fact like Mascus gives you a lot of buyer base.

So I think in our core auction business, I don't think anything has fundamentally changed on operating leverage. And what you're seeing is, we did – the company had been starved of the right type of management teams at a different levels. We've been going about upgrading the teams, and we also started decentralizing a bit. I think, what we're now is at an inflection point, where, hey, the wake-up call here is making sure that we've not gone too far on the investment side. And making sure that we protect ourselves when things – when the revenue growth doesn't come in.

So – and we're going to undertake a very thorough review, in the meanwhile we've put the actions we have. But I fundamentally and very strongly believe that the operating leverage of this business is very much intact, and that's the beauty of the model. And what we need to do is tweaks on the cost front, and I think, we'll take some short-term actions just to make sure it doesn't accelerate from here.

As far as the marketing is concerned, we're also within the marketing group looking for efficiencies, and saying, where do you redeploy cost to support the auction volumes directly, where are we spending, what is effective? So this is where some of the work that Becky and her team are doing on, how do you drive more digital marketing as opposed to your regular brochure oriented historic stuff?

So I think, we'll find the right balance for that, I think, we went through – the other part of it is second quarter being the volume it is, and we had a lot of volume and we went out of the way to make sure we marketed to it. But the net of it is that I don't believe that there is anything fundamentally changed about the operating leverage of our model and what we need to do as a management team and we are fully committed to doing is to get that cost base back on track. And the investments are necessary for the long-term. So we want to be a bit careful of going too far. On the other hand, I think, we do want to get it back because we don't want inadvertently to give the wrong messages about the leverage of this very compelling model.

Sharon Ruth Driscoll - Chief Financial Officer

I think, Bert, I'll just add a couple of things. First, we're very encouraged with the pipeline that we are seeing on a few deals that we've secured for Q3 in particular, and so we will be marketing to be able to ensure there is sufficient demand for some of those critical packages that we will be selling in Q3.

I'll also point out that in Q4 we did have a fairly significant surprise in the cost base last year related to the bonus plans, our change in bonus accrual methodology is attempted to – is an attempt to mitigate that and so we think that will be perhaps an easier cycling of costs for Q4.

Bert Powell - BMO Capital Markets (Canada)

Okay. That's very helpful. And just to be clear, when you talk about the package you're really talking about a mix shift away from small to larger to drive more efficiency, or just sort of relatively lower cost as a percentage of the GAP that you talk – you're referring to or just better at-risk pricing going into this quarter.

Ravichandra K. Saligram - Chief Executive Officer & Director

So, let me address that, and Doug can also maybe add to it. We're talking about – when we say larger packages, we talk about value – higher value dollars of the overall, doesn't mean it will not have a small set, because if it's a full dispersal. So, we secure a very large bankruptcy package which was an inventory deal which we've got slated for Columbus Ohio, it will be one of our very large at-risk deals and not as big as Wyoming, but really big.

And we won that in a very strong competitive environment, but we made sure all the way from Terry, Doug, myself, all of us had really got into the deal. And so that's a sort of deal if it goes well can really hit the ball out of the park.

Now, it can also go the other way. So I'm not saying that there's some out there, but we're confident we've done enough homework, and we're going to market that. So that's what Sharon meant by – and we've got similar to that, other things that in different parts of the globe we're working on. Maybe not to that size, but certainly for us, when we say large packages, anything, Doug would say, more than $5 million packages and so on. So – and that's the sweet spot of Ritchie Brothers. Doug, anything you want to comment on it?

Douglas William Olive - Senior Vice President - Pricing

I would agree, Ravi, just anything over $5 million in a mixed portfolio of assets that you know, they're not like assets. A mixed portfolio is a backing in the marketplace where you're going to sell a bunch of assets where there is some demand and you create demand by selling the amount of those types of assets in a certain marketplace.

Bert Powell - BMO Capital Markets (Canada)

Okay. That's very helpful.

Ravichandra K. Saligram - Chief Executive Officer & Director

Does that help?

Bert Powell - BMO Capital Markets (Canada)

It does. Yeah. It kind of – for sure it does, Ravi, absolutely. Thanks?

Operator

The next question is from Cherilyn Radbourne from TD Securities.

Ravichandra K. Saligram - Chief Executive Officer & Director

Hi, Cherilyn.

Cherilyn Radbourne - TD Securities, Inc.

Thanks very much and good morning. Wanted to ask you a question on used equipment pricing. You comment that it declined suddenly in June, just curious was that post-Brexit or can you just elaborate a little bit more on what you think caused that?

Ravichandra K. Saligram - Chief Executive Officer & Director

It was not – because post-Brexit, it was June 23rd. And so – and while Brexit probably had a little bit of an impact on our Moerdijk auction, I think this was really more what we saw throughout the globe. It was an interesting one. It was not just contained to any particular country. Part of it, we ourselves had a lot of volume out there, and so we are market makers, so we put a lot of supply out there.

And but it was pretty much – and one of the things that really took us a bit by surprise, our at-risk is very strong in Canada, in Australia, and even those countries, who are stalwarts at this took a bit of a beating. So this was global that we saw this and it was especially notable in the transportation side, where one, we had a lot of supply, but also the imbalance – there was a huge imbalance that suddenly got created. And sometimes you see that in this business. And it doesn't mean it's permanent. This is not one that we would describe as a permanent trend, because we have been very encouraged seeing things back up in July again, in most places. Doug or Randy, do you want to comment?

Randall J. Wall - President, Canada

A bit of a Canadian perspective. We also got hit by the transportation swing, and you've got a large amount of assets that were pumped out into the marketplace after 2008, 2019, 2010, the OEMs were producing a record amount of trucks in 2011, 2012 and 2013. And those were the assets that are now starting to hit the used marketplace.

And so there's a – there's still ample demand, however, supply has swung significantly higher than demand. So some of that was a little bit beyond where our pricing predictions were. A little bit of the remaining exuberance in Western Canada on the construction sector ran out of gas, where the amount of supply available on the market has now exceeded the amount of pricing and demand that we had seen in the past.

So I think there's a bit of a catch-up issue going on even in the construction circles. That was tempered by relative strength in the eastern half of the country, however. And agriculture was – some ups and some downs, it was traditionally lumpy but actually it held its own relatively well in that space.

Ravichandra K. Saligram - Chief Executive Officer & Director

And Randy, I think just in the quarter, you had two big Edmonton auctions, one which was a record, so it – really towards June, when you had the June Edmonton auction, after such a record in the end of April. That also had some issues.

Randall J. Wall - President, Canada

I mean, we had $350 million between two auctions alone in Edmonton, plus more in other areas within Alberta. And there was a sharp change in pricing experienced in June than there was just at the end of April. So it was quite a change.

Cherilyn Radbourne - TD Securities, Inc.

Great. That's helpful color. Thank you.

Operator

The next question is from Ben Cherniavsky from Raymond James.

Ben Cherniavsky - Raymond James Ltd. (Broker)

Good morning, guys.

Ravichandra K. Saligram - Chief Executive Officer & Director

Hi, Ben.

Ben Cherniavsky - Raymond James Ltd. (Broker)

I know that it's not a big acquisition with Petrowsky, but it does strike me as somewhat unique in that these guys are on a reserved model. And that in your press release, you said you were going to run this as a separate brand. Can you talk about the rationale for acquiring a reserve platform, how you integrate that into your model, how you might scale it if it's a separate service, and how it doesn't conflict with the secret sauce of Ritchie being unreserved?

Ravichandra K. Saligram - Chief Executive Officer & Director

Good question, Ben. So, the rationale for buying Petrowsky was not because it was a reserved auction, and frankly the reserved portion based on due diligence is actually fairly small, and somewhere between 10% and 15% or so, and even that, we're going to make sure that it will be very transparent to customers. Because the reserve, we did not want that integrated, because for us, for the RBA, for RBA Ritchie Bros. auction brand, the unreserved model is absolutely sacrosanct and we will not let anything pollute that or change it because that's the heritage of this brand.

What we wanted – the prime reason for us to get Petrowsky was that historically we have been weak in the New England area and in the Northeast and Sammy Petrowsky has done a very good job of wooing customers and building relationships. He has got a good brand equity with people, and so for us we felt that that would help bolster for us those – get those relationships, et cetera. We're going to study how, whether over time – because this has not been uncommon where we do buy a regional player, and then once it's fully unreserved, to really bring them into the fold.

So we're going to study it to see how that will be and what's the appropriate time, whether the brand gets absorbed into RBA. But if it is, it has to be 100% unreserved. Until such time, we want to leave that. We want to understand what works in that region. But the key reason was not because they're running it, so it's very different from a Mascus, which is more part of our digital side or EquipmentOne. This is really about geographic thing for the core auction business and to leverage the relationships Sammy brings with customers.

Ben Cherniavsky - Raymond James Ltd. (Broker)

So you're not contemplating building out a reserve platform as a separate kind of a service or auction channel?

Ravichandra K. Saligram - Chief Executive Officer & Director

Yes, that was not the strategy here, Ben. As we understand it better, we'll think about that. But that is really – that is not the rationale or the strategy. We believe that with the scale we have with RBA that for the live auction model, the unreserved works. So at this time – we'll better understand it if there is an opportunity. Clearly, we'll look into it, but that is not the prime reason for doing this.

Ben Cherniavsky - Raymond James Ltd. (Broker)

But, I guess, it might be a poor metaphor, but if you take a sales guy, who has been selling Fords his whole life and then ask him to sell Mercedes, does that work? Like, is there a risk that the Petrowsky model had some strength in the region because it offered a reserved option, and when you or if you try to convert these guys who have been participating in that auction into the unreserved channel, they go elsewhere.

Ravichandra K. Saligram - Chief Executive Officer & Director

Yeah. Now, that's a great point, and that would have been a huge risk had 50% or more of their volume been from the reserves. Our due diligence indicates that's not the case. And in fact, Sammy is fully prepared to and confident that – and look, this is where the Ritchie Bros. infrastructure and our buyers, et cetera, will help provide. So I don't believe that to be an issue.

And long-term, our view and our hope would be that we could convert this to the right unreserved model, if that's what we believe for the live auctions is the appropriate point. We're going to take our time and not do anything drastic overnight. But as I said, I'll just reiterate, I'm sorry I'm being a broken record, but we did not buy it for the reserved model, it was really because of the strength of relationships in a region where historically we've been weak.

Ben Cherniavsky - Raymond James Ltd. (Broker)

Great. Thank you so much, Ravi.

Ravichandra K. Saligram - Chief Executive Officer & Director

Thank you, Ben. One more question, Jamie?

Operator

And...

Ravichandra K. Saligram - Chief Executive Officer & Director

We can do two more.

Operator

Okay. The next question is from John D'Angelo from Macquarie.

John D'Angelo - Macquarie Capital (USA), Inc.

Hey, guys, good morning and thanks for taking my questions.

Ravichandra K. Saligram - Chief Executive Officer & Director

Sure, John.

John D'Angelo - Macquarie Capital (USA), Inc.

So the underwritten business, a little bit of trouble in the quarter. Can you guys share with us how you guys priced that business? Is it whatever the seller agrees to or do you guys look at the level of used equipment values in pricing the stuff or do you guys look at the trend? Any color there would be appreciated.

Ravichandra K. Saligram - Chief Executive Officer & Director

Yeah, clearly, I'll just give a quick view of it. And then Doug can supplement it, or Randy. But this is our secret sauce. So, John, understanding that we don't want to reveal all of our trade secrets because this is one of our most important weapons, we do somewhere between $800 million to $1 billion a year, and this is something we are very good at. Yes, we had a difficult quarter, but we've also had now four quarters or five quarters where we have had huge improvements. But generally speaking, we have performance guarantees, which is the mainstay, as well as some inventory deals, our strong preference is for performance guarantees.

And basically, we appraised the equipment, our people appraised because we are pretty good at equipment pricing and our sales people do it. But we have valuators under Doug's group who then provide their own view. Then we look at our models to see historically how it is. Then there's a negotiation with the seller because the seller wants to do it at a certain level, we want to do it at a certain level. We get to the right place in the middle. And assuming that we have good margins built-in for us, appropriate with the risk and that's how we go to market.

A piece of color to say is that in the last 10 years, in aggregate, we have never ever lost money overall in our at-risk business and even in this quarter, while we suffered a little shortfall, our rate went down, clearly we still made money on the business. So, what we are always trying to do is minimize the losses. You will always have a few contracts that will lose, because if you don't, that means you didn't try to bring in enough. That's part of the game. So, we look at things called loss-to-win ratios, et cetera.

Typically in good sound environments, this is a very attractive thing. Occasionally, you get caught out, when you didn't anticipate that the market would turn very sharply and even when we are conservative in our pricing, sometimes you can be caught out, which is what happened in the second quarter. Randy or Doug, do you think there's any other thing you want to add to what I've said?

Douglas William Olive - Senior Vice President - Pricing

I'd agree fully, Ravi. As we alluded to, some of the assets this quarter that we were surprised with were some of the transportation assets, where we had older packages that were stale inventory and when the market or pricing changes that quickly, that's – when you have like units, that's when you can see a quick erosion of value or revenues on packages such as that. This cycle, we certainly saw it as Randy also alluded to, it was worldwide effect. So it wasn't just regionalized to certain areas. It was everywhere, so it quickly turned. We've seen these cycles before, and we watch it very closely. And we're on top of it, and we're already as Ravi alluded to as well, we're already happy with the prices and returns we've seen in July and we've seen a more stable pricing environment so far.

Ravichandra K. Saligram - Chief Executive Officer & Director

Okay. One last question.

John D'Angelo - Macquarie Capital (USA), Inc.

Okay, great.

Ravichandra K. Saligram - Chief Executive Officer & Director

Thank you, John.

Operator

Thank you, guys. The last question is from John Healy from Northcoast Research.

John Healy - Northcoast Research Partners LLC

Thank you.

Ravichandra K. Saligram - Chief Executive Officer & Director

Hello, John.

John Healy - Northcoast Research Partners LLC

Ravi, I just wanted to maybe delve in a little bit on some of the competitive trends that you talked about, and maybe a little pick up there, is that from traditional competitors, is that from new channels? And kind of how is the form of that taking place, and I'm kind of trying to understand how you're responding there a little bit?

Ravichandra K. Saligram - Chief Executive Officer & Director

Sure, I think, look, we have competitors, regional competitors, national competitors, and then ones that we compete with overseas, so there's a plethora of competitors in this business. Some of them, the regional ones could be live auction competitors, then you have online competitors, a number of them that you'd be familiar with.

And clearly, the online side is beginning – just the same trends we are seeing, it's gaining strength. And so there is for sure more competitive intensity, as well as for at risk contracts, et cetera. But definitely, different models where you don't have to move equipment versus our traditional side, which is why sometimes we're doing more offside auctions, et cetera, to respond to what we're seeing in the marketplace.

John Healy - Northcoast Research Partners LLC

Thank you.

Ravichandra K. Saligram - Chief Executive Officer & Director

Okay. Let me conclude by saying, look, we were not happy, and we are disappointed with the second quarter results, but we are looking forward and not back. I don't want to let one quarter say it's a trend and that the model is broken. We in fact very much want to reassure investors that we are very confident of the model.

My management team and I are very committed to get this back on track, and so hang in there with us. The results in July are a positive note. And we will start working on the cost issues. And I very firmly believe that the evergreen model was not just an academic piece of paper, but one that we're very committed to, and over time, we will get back on track. Thank you.

Operator

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

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