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 number of assets on Marketplace-E in the first quarter, which we expect to transact in the second quarter.

Marketplace-E, with its multiple formats, including reserves, is proving to be an excellent offering in many international geographies in allowing us to overcome cultural barriers for the unreserved live auction..

Our CAT Alliance continues to gain momentum, with 80 more agreements signed. The partnership contributed to the growth of our record Orlando auction and we now have a regular cadence of live auctions in Japan.

We're also seeing the beginning of a historic new chapter in our relationships with European, African and Middle East Caterpillar dealers, who are beginning to find unique ways to collaborate with us. .

In the first quarter, we actually delivered solid year-on-year GTV growth from the alliance globally, including CAT dealers and CAT finance. We feel very good about our relationship with the CAT family. .

Now with 3 full quarters as a combined team, we are stabilizing sales force turnover. In fact, sales force turnover reduced nearly 500 bps versus the year ago quarter. The turnover we're experiencing now is more in the course of normal business operations. Also, our HR team is filling vacancies faster. .

a, we still have significant opportunity to increase penetration of addressable GTV; and b, we are now allowing customers to use their pre-approved funding outside of Ritchie Bros. auctions and channels when they are not the successful bidder. We call this program, Follow The Customer.

RBFS has an industry-leading Net Promoter Score for customer satisfaction and is a high incremental revenue flow-through model. We will continue to invest in sales people on a pay-as-you-go basis to accelerate growth. .

I'll also call out the fact that we managed to make a voluntary prepayment on our debt in the amount of $25 million on top of the $4 million of scheduled payments. .

Now let me quickly highlight some of our challenges. Clearly, the equipment supply shortage in the face of increasing demand is a very major factor, particularly in the U.S., as end users are keeping their equipment longer and rental unit utilization rates continue to remain very high and OEM new equipment backlogs remain significant.

The impact of this was pronounced on our strategic accounts business, as we are seeing significantly lower flow of equipment as the super majority of equipment with these customers was fully at work. This is a temporary phenomenon, as we expect the volumes to come back from these customers as equipment supply improves.

However, in the meantime, the sales teams are aggressively focused on offsetting the lower volumes by continuing their drive for net new business. Each strategic account manager has a specific target list of new customers to acquire. .

Sales productivity improved marginally in the first quarter of 2018 versus Q4 of 2017, which was still below prior year levels. This is primarily a U.S. issue and is due to supply constraints as well as the mix of live and online.

Legacy IP sales teams were at significantly lower sales productivity levels than their legacy RB counterparts, due to the nature of the model. Over time, we are confident that we will narrow the gap, as the combined sales teams get better at selling multichannel and secure new business. .

Looking at our first quarter auction highlights. A real notable positive in the first quarter was over 70% of our live industrial auctions in all major geographies showed year-over-year growth versus the first quarter last year. In a tight supply market, this is a very positive takeaway from the quarter.

Some notable auctions include our record-breaking Orlando auction and our Fort Worth auction, which had $57 million in GTV. While below last year's event, the auction last year had major equipment dispersal. So all in, we think it was a good showing.

Our Canadian team conducted a $47 million auction in Edmonton, where 89% of the equipment was sold locally, which is another indicator of early recovery, with equipment being put to work in Western Canada.

We also added a $37 million net new sale in Grande Prairie in March, with our Grande Prairie team pulling off the impressive feat of conducting 2 successful auctions within a month of each other. Our Toronto auction in March was the site's largest Q1 auction ever, 57% higher than any other Q1 event in Toronto's 20-year history.

And our $8 million auction in Narita, Japan showed continued revival of our auction program in that region and is driven by the strength of our alliance with Caterpillar.

Our weekly featured auctions are also gaining traction, as we launched a Big Spring event which showed good success by driving $23 million of GTV and received consignments from both the U.S. and Canada. We will be building on this outcome with successive online dedicated events in the second quarter. .

With that, let me pass it on to Sharon. .

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 of interest to investors and analysts. Zaheed will survey interest for this additional touch point over the next few weeks. .

Finally, a little later on the call, Ravi will discuss the implications of this revenue standard on our presentation of Evergreen Model metrics. .

auction calendar optimization; removal of events at our previously announced 5 closed sites; as well as the 2017 Las Vegas auction, which did not repeat this year; and our Columbus auction, which has now moved to the second quarter. .

The total revenue growth of 30% was driven by the acquisition volume, growth of our inventory deals in Canada and Europe over the prior year, plus the increased fee revenue as a result of the partial fee harmonization implemented in the first quarter. .

Our reported operating income increased 39% to $32.9 million versus the first quarter of '17.

This increase is primarily due to agency proceeds growth and lower acquisition-related cost versus a year ago, offset by higher cost of services, SG&A and depreciation and amortization expenses mostly driven by the acquisition, as we have not yet cycled over the May 31, 2017 closure date of the transaction.

I also will be providing a more detailed cost analysis before conclusion of my remarks. .

Adjusted diluted EPS attributable to shareholders was $0.16 for the quarter compared to adjusted diluted earnings per share of $0.12 in the first quarter of 2017. There are no adjusting items in this quarter, and a reminder that adjusted EPS in the first quarter of 2017 excluded an unfavorable international tax charge of $2.3 million. .

Turning to our Auctions and Marketplaces segment agency proceeds. In addition to the 36% growth in the quarter, our Auctions and Marketplaces agency proceeds rate improved 60 basis points to 13.5%.

The rate improvement was driven by the continuing strong pricing environment improving performance on guaranteed contracts, the favorable impact of the partial fee harmonization implemented in the first quarter, and solid performance in our government business.

These results are partially offset by slightly lower returns on inventory deals versus last year. The lower return on inventory contracts was the result of lapping a significant non-recurring Private Treaty deal in Canada, which had lower-than-normal cost of inventory sold. .

With the adoption of the new revenue recognition standard, we are now presenting revenue from inventory sales and cost of inventory sold on the face of the income statement. It's important to note, the net contribution from these lines represents commission revenues only.

Inventory contracts also generate other types of fee revenues such as buyer fees, seller listing fees, and could lead to additional RBFS financing and refurb revenues, all of which are presented in the service revenue lines on the income statement. .

We are pleased with our agency proceeds rate expansion in the quarter and the seamless execution by our teams on the partial rate harmonization, so are revising our previous rate guidance to add 25 basis points to the top end of the range, taking agency proceeds rate range to be between 12.25% and 13.25%. .

Turning now to our other services category. Our RBFS revenues were $4.7 million, up 43% versus the prior year, with funded volumes up 53% to $95 million in the quarter. Mascus also generated solid revenue growth in the quarter of 30% to $2.8 million, driven primarily by listings growth and an increase in subscriptions. .

Moving on to expenses. On a reported basis, the combination of cost of services and SG&A expenses increased 41% year-on-year for quarter 1. However, viewed on a like-for-like basis, these combined costs grew by 7% compared to our agency proceeds like-for-like growth of plus 10%.

This calculation is under our old definition of OpEx, which excludes the ancillary and logistical service expenses of $14.6 million in Q1 of '18 and $11.5 million in Q1 of '17, and by adding IronPlanet's Q1 reported cost of services and SG&A, as filed in our 8-K/A dated August 8, 2017. .

Cost of services, which now includes cost of ancillary and logistical services expenses as a result of the revenue recognition change, increased 51% to $36.7 million, primarily due to the acquisition and the costs associated with the inspection and appraisal activities that support our online channels.

The increase is also due to an increase in GTV volume at our live on-site auctions over the comparative period and the growth of our ancillary businesses.

On a rate basis, cost of services was 22% of total agency proceeds, which was sequentially flat to Q4 and down 200 basis points from Q3, which, as a reminder, was the first full quarter of the combined company. .

SG&A expenses increased 38% to $97.5 million, primarily due to the acquisition, investment in talent to support new business and initiatives, and higher share unit expenses, primarily due to mark-to-market cost driven by growth in the company's share price as well as incremental compensation costs resulting from a performance share unit modification on March 1.

Going forward, mark-to-market volatility is expected to reduce due to the share unit modifications we have made in the quarter. .

To add some further color to our SG&A discussion, we did project on our last quarter call that SG&A was expected to be slightly lower in dollars from the Q4 SG&A cost of $93 million. Instead, we have seen an increase of $4 million in Q1 2018 to $97 million, due to the following reasons.

First, consignor volumes for Canada and Orlando exceeded expectations and additional marketing costs to support these events were incurred in the quarter. In addition, the shift in auction calendar has caused some marketing cost to be incurred in Q1, with the revenues to be reflected for these advertised sales events occurring in Q2 of 2018.

In addition, the stronger Canadian dollar and euro versus a year ago have caused an incremental cost of approximately $3.5 million in the quarter, due to the significant office support centers in Canada and the Netherlands. Approximately half of that increase impacts the Q1 '18 versus Q4 '17 comparative cost analysis.

Also, the appreciation in our share price from year-end added an additional $2.2 million to our SG&A cost versus Q4 of '17. .

adding new sales associates in RBFS; adding logistic talent and warehouse facilities to operate our new government contract; bringing in new team members with the acquisition of Leake Auctions; adding training and travel costs to deliver continued sales training to our sales leaders on the new products; delivering the planning phases of our MARS implementation; and securing additional professional services to advise on international expansion and the complex changes related to recently announced tax laws and regulations.

.

On a rate basis, SG&A was 57% to total agency proceeds. This is up sequentially versus Q4, principally due to the lower leverage in Q1 with virtually no sales in January, yet 3 full months of employee compensation and facility costs.

As we look forward towards Q2, we would expect our SG&A rate to align closer to our Q4 2017 rate as a percent of agency proceeds, due to our second quarter being a higher volume quarter and we would expect to see a greater degree of leverage and flow-through. .

Overall, we are pleased with our progress on synergy delivery and continue to be focused on cost discipline, while still investing thoughtfully into areas which we are confident will drive future growth. .

First, the timing and increasing volumes of 2017 year-end auctions, particularly in the U.S., and the increase of inventory deals inside of quarter 1, increased cash outflows to consignors and caused the reduced source of cash from working capital during the quarter; and second, the operating cash flow metric now includes 3 full quarters post the IronPlanet transaction, with the full inclusion of related acquisition and incremental interest expenses resulting from the financing of the deal.

.

Our strong cash flow model remains intact, as evidenced by the first quarter end cash balance of $279 million and working capital of $115 million, which is in line with the working capital in first quarter of 2017, further enhanced when you consider the $29 million of debt repayments and $18 million of dividend payments inside of the quarter. .

Our agency proceeds CapEx rate of 5.6%, which we previously called CapEx intensity rate, was nicely below our Evergreen Model maximum of 8.5% of agency proceeds, and was essentially flat compared to the first quarter of '17, even with the integration initiatives in full swing.

We expect to continue allocating our capital towards investments in technology and property maintenance capital needs to run this business. .

Long-term debt at the end of the quarter was $780 million, with a weighted average annual interest rate of 4.9%. During the quarter, in addition to our scheduled debt repayments, we also executed a voluntary debt repayment of $25 million.

As a result, we are pleased with the reduction in our adjusted net debt to adjusted EBITDA ratio to 2.5x versus 2.9x in Q4. We will continue to thoughtfully consider additional debt repayment opportunities during the year and we'll update you accordingly.

Our current plan for capital allocation in future quarters remains unchanged, with focus on dividend payout ratio target of 55% to 60% and continued repayment of term loan bank debt. .

With that, I'll turn the call back over to Ravi. .

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 of the app is growing meaningfully, with 50,000-plus average users in the first quarter, up 60% from year ago and facilitated 7% of our Q1 GTV.

Further proof of customer confidence in the app is evidenced by our most recent April Edmonton auction, where a single customer purchased over $1 million of equipment with a single tap on their phone. Amazing.

We continue to invest in our application and believe it is a core part of our offering going forward and have developments in the pipeline, such as priority bidding, further integration with IronPlanet, and improved search capabilities to enhance the customer experience and grow penetration. .

Now let's turn to MARS. Our project to move to one unified live and online auction platform is well underway. When complete, we'll use MARS software for operating both online and live auctions. As we progress through the development on MARS, we're taking an approach to rigorously test capabilities at the live auctions on a regular basis.

In March, we ran a simulation at our Sacramento auction. We did a side-by-side comparison of bidder registration and were delighted to find MARS registration was significantly faster and easier to use.

And this improved performance impressed our team members, who believe once live, will translate into a smoother and faster experience, ultimately delighting our customers. We are tracking to launching MARS in 2019. .

Our adoption of the new revenue recognition standard resulted in some financial presentation changes. As a result, a few of our Evergreen metrics that previously use revenue as a denominator will now use the agency proceeds metric as the denominator.

You'll recall, we outlined earlier that agency proceeds represent our old revenue, so there are some definitional differences to be aware of. But I'm pleased to say that we've not had to change any of our Evergreen metrics resulting from the adoption of the new standard.

Specifically, our metric of revenue growth rate has now become agency proceeds growth rate. Net CapEx intensity is now agency proceeds CapEx rate. And finally, adjusted EBITDA rate is now agency proceeds adjusted EBITDA rate. .

In closing, I'd like to share some perspectives on the second quarter. We're off to a good start and delivered $456 million in April GTV, which was a 29% increase on a reported basis over the previous year. Part of this growth was driven by a very successful Edmonton auction in April, which drove CAD 207 million in GTV.

This Edmonton auction was the third-largest-ever Canadian auction and tallying the highest-ever number of sellers. This is another indicator of positive market sentiment in the Canadian marketplace. .

Our established RB base in Europe has allowed us to position us to penetrate online business more effectively. And as such, we are seeing positive online performance in Europe in April and are pleased with this progress. We converted an off-site live event in Lyon, France to a successful online featured auction and attracted 42,000 attendees.

We are excited about an upcoming major online event in June billed as a Big Summer Sale, with focus on the Nordics and Spain. .

All in all, there are a number of positives coming out of Q1, but we are still clearly operating in a tight supply environment, especially in the U.S. We do, however, see some easing of supply on the horizon and hope to see improvements late in the third quarter and in the fourth quarter of this year.

Regardless of the macro, our focus is clearly on what we can control, and that is improving our execution, focusing our teams on multichannel selling and driving growth and revenue from our new business -- from new business.

We've also modified our 2018 sales incentive program to put an intensive focus on driving multichannel and acquiring new business. Overall, we are maintaining a balanced approach to our outlook and are cautiously optimistic for second quarter in the balance of the year -- and the balance of the year. .

And with that, we'd like to open the call to questions from analysts and institutional investors.

[Operator Instructions] Operator, would you please open the line to questions?.

[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..