Welcome to the Liquidity Services Incorporated Second Quarter of Fiscal Year 2023 Financial Results Conference Call. My name is Therese, and I will be your operator for today's call. Please note that this conference call is being recorded. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. On the call today are Bill Angrick, Liquidity Services' Chairman and Chief Executive Officer; and Jorge Celaya, its Executive Vice President and Chief Financial Officer. They will be available for questions after their prepared remarks. The following discussion and responses to your questions reflect Liquidity Services management's views as of today, May 4, 2023, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact the financial results is included in today's press release and in filings with the SEC, including the most recent annual report on Form 10-K. As you listen to today's call, please have the press release in front of you, which includes Liquidity Services' financial results, as well as metrics and commentary on the quarter. During this call, Liquidity Services management will discuss certain non-GAAP financial measures. In its press release and filings with the SEC, each of which is posted on its website, you will find additional disclosures regarding these non-GAAP measures, including the reconciliations of these measures with the comparable GAAP measures that are available. Liquidity Services management also uses certain supplemental operating data as a measure of certain components of operating performance, which they also believe is useful for management and investors. This supplemental operating data includes gross merchandise volume and should not be considered a substitute for or superior to GAAP results. At this time, I will turn the presentation over to Liquidity Services Chairman and CEO, Bill Angrick.

Good morning and welcome to our Q2 earnings call. I'll review our Q2 performance and the progress of our business segments. Next, Jorge Celaya will provide more details on the quarter. We continue to deliver strong value for our customers and shareholders in Q2 as we expanded our market share, while delivering adjusted EBITDA and EPS above our guidance range and GMV near the high end of our guidance range. Despite some persistent macro headwinds, we continued to expand the reach and relevance of our marketplaces with improving vehicle metrics and continued strong buyer demand. Our resilient business model continues to deliver strong free cash flow and we have continued to repurchase shares as we see opportunity in our long-term prospects. Let's take a closer look at our individual segments. Our retail segment GMV grew 24% organically to $73.3 million, an all-time quarterly record driven by our flexible offerings, reliability, and high level of service to customers. Direct profit growth was flat year-over-year as retail consumers have traded down to lower-value merchandise to save money in an inflationary environment versus the prior year period. We continue to drive innovation in our retail segment to deliver value and convenience to our customers. In this regard, Liquidity Services was named a 2023 Innovation Solutions Partner Award winner by the Reverse Logistics Association for our automated Sell in Place solution, which uses technology that delivers our customers measurable improvements on efficiency and return on investment. This is just one example of how our culture of continuous improvement uniquely benefits the customers of Liquidity Services. We've also continued to expand our direct-to-consumer channel by opening a second AllSurplus Deals location in Cincinnati, Ohio, giving consumers in this market access to exciting online auctions of unique or hard-to-find retail products at compelling values that can be picked up by the winning bidder from our new distribution center location. This direct-to-consumer channel has allowed us to deliver higher recovery to our sellers and expand our reach to a new set of buyers resulting in a win-win outcome. Our GovDeals segment GMV decreased 7% year-over-year to $167.9 million, reflecting sharply lower results in our acquired bid-for-assets real estate marketplace versus the prior year period due to a delay in the rollout of new contracts and lower mortgage and tax sales this year compared to the prior year period. Excluding bid-for-assets, our core GovDeals GMV grew 7% organically. We continue to see long-term upside in the secular growth of online real estate sales in the government market, as they increase participation, deliver superior value to homeowners and communities, and are easier to administer compared to in-person courthouse sales. We are currently piloting new government real estate programs in a number of regions in the United States, which will ultimately drive long-term growth in our real estate vertical. Direct profit in our GovDeals segment grew at a higher 3% rate organically over the prior year period, as we continue to deliver economies of scale in our core GovDeals marketplace, which has driven strong results for our sellers in a broad range of asset categories, helping us grow the number of new accounts and assets listed by double-digit percentages organically during Q2. Our CAG segment GMV grew 11% organically to $41.5 million and direct profit grew 15% organically, as we successfully executed numerous high-value transactions during the quarter for our clients across the globe. We remain the most trusted market maker for industrial capital assets with strong interest in several sectors including biopharma, energy, consumer packaged goods, and aerospace manufacturing. The conversion of leads to execute transactions has been slower than normal as many of our enterprise clients continue to assess their plans amidst changes in the global economic climate. Our CAG heavy equipment fleet category continues to make progress, growing China contracts, new sellers, transacted opportunities, and net new revenue at a healthy clip. Recent wins include several national accounts, with strong upside potential. Finally, our Machinio segment continues to grow its revenue and direct profit in the low teens organically, with enhanced lead traffic and more equipment categories, continuing growth of our storefront product, and financing services with third parties. We believe that our Machinio platform offers business customers cost savings and convenience that are superior to other solutions and are ideally suited to a recessionary environment. In conclusion, we are focused on executing multiple drivers to create value for our shareholders over time. We continue to make multi-year investments in growing our market share, technology platform, and brand awareness to deliver long-term growth. Our results will benefit from the normalization of supply chains and our leverage of the fixed investments we've made in operational capacity. Our capital-efficient business, with strong operating cash flow of $101 million in cash and zero financial debt, provides us ample financial flexibility to execute our plans. In closing, we thank all of our team members across Liquidity Services for their dedication to our mission to power the circular economy, benefiting sellers, buyers, and the planet. I'll now turn it over to Jorge for more details on the quarter.

Thank you, Bill, and good morning. We completed the second quarter of fiscal year 2023 with $282.7 million in GMV, up 2%, and $81.5 million in revenue, up 19% from $276.9 million and $68.3 million in the same quarter last year, respectively. Our results reinforce the power of our business model to drive cash flow. We generated $33 million from operating cash flows during the quarter and used $9.8 million to reduce our net shares outstanding by repurchasing approximately 750,000 shares. We hold $101.2 million in cash, cash equivalents, and short-term investments. We have zero debt and $25 million of available borrowing capacity under our credit facility. Specifically, comparing segment results for this second quarter to the same quarter last year, our GovDeals segment showed volume increases in its major categories, including vehicles, with the exception of foreclosed real estate, which was down versus last year, resulting in the overall GovDeals segment being down 7% on total GMV. GovDeals revenue was up 4% and up 3% on segment direct profit, as the volume increases in key categories combined with pricing improvements benefited results. Our retail RSCG segment was up 24% on GMV, setting a new quarterly GMV record, up 28% on revenue, and flat on segment direct profit reflecting lower direct profit margins arising from a mix of products, where lower-value purchase products and related sales prices were at a high volume coming off their seasonal peak post-holiday period. Our CAG segment was up 11% on GMV, 5% on revenue, and 15% on segment direct profit led by its energy and heavy equipment categories. Machinio revenue was up 13% and its segment direct profit was also up 13%. GAAP net income for the second quarter was $4.2 million, resulting in diluted GAAP earnings per share of $0.13, down from $0.35 in the same quarter last year as a result of the $0.25 per share nonrecurring gain from the bid-for-assets earn-out, fair value adjustment last year. Non-GAAP adjusted EPS for the second quarter was $0.20, up from $0.17 in the same quarter last year. Non-GAAP adjusted EBITDA was $9.9 million, up from $9.2 million in the same quarter last year, partly reflecting the higher GMV and revenue, partially offset by product mix, operational costs, and sales expenses to support market share expansion and longer-term growth. Our expertise in diverse sectors, a strong buyer base across numerous asset categories, and global reach are continuing to provide advantages to our clients navigating economic change and looking to us for valuable solutions. Our fiscal third quarter 2023 GMV range is forecast consistent with the same period last year, reflecting expected growth in all our segments except GovDeals, which continues to face headwinds in its newer real estate category, despite growth in its more traditional key categories. While RSCG will be coming off its fiscal second quarter seasonal peak, its segment direct profit margin, as a percentage of revenue, is expected to improve sequentially into the fiscal third quarter, driven by changes in the mix of products expected to be available for sale. The CAG segment is expected to deliver year-over-year growth, led by heavy equipment, industrial sales, and projects in EMEA, many of which have been delayed from prior quarters. We also currently anticipate our consolidated revenue, as a percentage of GMV, to be closer to the mid-20% range, reflecting our mix of business, type of pricing model mix, and products sold. Our segment's direct profit range, in total, as a percentage of total revenue, is anticipated to be similar to the same quarter last year. We anticipate continuing to invest in our business to position ourselves for long-term growth, including in sales and technology initiatives. Management's guidance for the third quarter of fiscal year '23 is as follows. We expect GMV to range from $300 million to $330 million. GAAP net income is expected in the range of $3 million to $5.5 million, with a corresponding GAAP diluted earnings per share ranging from $0.09 to $0.16 per share. We estimate non-GAAP adjusted EBITDA to range from $10 million to $13 million. Non-GAAP adjusted diluted earnings per share is estimated in the range of $0.16 to $0.24 per share. The GAAP and non-GAAP EPS guidance assumes that we have 33.5 million fully diluted weighted average shares outstanding for the third quarter of fiscal year 2023. Thank you, and we'll now take your questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from George Sutton from Craig-Hallum. Your line is open. My apologies. Our first question comes from Gary Prestopino. Mr. Prestopino, your line is open.

Yes. Could you guys hear me?

Yes, Gary. Good morning.

Good morning. Jorge, could you share what you expect the revenue-to-GMV percentage to be for the upcoming quarter?

In the mid-20s, this past quarter was primarily driven by the retail mix of purchase and consignment, which increased that percentage. We expect it to return to the mid-20s.

I didn't quite understand that. Bill, it seems the GMV increased significantly in the retail segment, and revenue also rose. However, your segment's direct profit only increased by $100,000. Can you explain what is happening that results in such a discrepancy between profit and the growth in revenue and GMV?

Thanks for the question. The retail consumer has shifted the basket of goods they're buying in this current year to a broader number of lower-value items versus fewer higher-value items. And so we're seeing that play out both in the results reported by many of the omni-channel leaders in their comparable store sales and then in the returns flow that ultimately hit our marketplace. So some lower-margin goods, which represent kind of where the sentiment of consumers are. And in some cases, we've provided our facilities to receive, sort, and sell those items, which are a higher touch flow of goods this year versus the prior year period. Now we're counteracting that Gary with some of our new programs. We were given an award for a Sell in Place solution, as a tech-enabled solution to allow our retail partners to lot and sell on our Liquidation.com marketplace directly from their facilities. So we don't even touch the goods and that's growing very nicely. That's an area that we think has potential because it reduces the total supply chain cost and the total shipping cost across the entire value chain. In another instance, we're looking to grow our margins by taking certain higher-value goods that we can identify and break out to sell to a consumer audience. We're doing that in our Phoenix and now Cincinnati, AllSurplus Deals locations. This allows us to capture a larger audience of consumer end-user buyers who pay meaningfully more for the items that we offer for sale. The sale still occurs in an online auction format. The winning bidder picks the item up curbside from our fulfillment center. We're not involved in shipping the item to the consumer.

Thank you for that. Looking at some of the key performance indicators and metrics, it seems that your gross merchandise volume per transaction processed increased by nearly 20 to 25%. However, it appears that the largest ticket item, which is real estate, likely decreased due to the current environment. Could you please elaborate on that?

Sure. I think you're astute in noting that we've had a mix of goods that includes more heavy equipment; our fleet business, which is another sell-in-place model, has continued to grow much faster than the overall growth of the company, and that's a higher-ticket item. We're starting to see some normalization in the vehicle supply chain, so we're handling more vehicles. And we're not all the way back yet, but those tend to improve the value. And the other thing we had to do in our retail business, we grouped a lot of the lower-value retail returns into pallets and that boosted the average order value up a bit versus the prior year period. So those are things that have resulted in that plus 20% year-over-year average transaction value.

Okay. And then just one last question. Could you just briefly again since it's kind of a new business for you just explain what's going on in the foreclosed real estate market that is impacting bid for assets?

Yes, there are several factors at play. Firstly, it's notable that the foreclosure rate across the country is at its lowest levels in almost a decade for both mortgage and tax foreclosures. This is largely due to various policy measures aimed at preventing foreclosures. If we see a return to more typical levels, you could potentially see a 50% to 75% increase in foreclosures. This means moving from about 1.5% to 2% up to around 3%. This situation has constrained the availability of assets needing to be processed and sold in the real estate market. On the tax lien side, local governments have implemented policies to delay the liquidation of liens to allow for tax payment, which was a consumer-friendly move following the pandemic. However, these policies are expected to phase out, likely leading to a normalization in the number of properties available for sale, as these agencies will need to collect taxes to support government operations. Additionally, we are collaborating with various jurisdictions to promote legislation that would clarify online sales as both legal and potentially a recommended practice, which we believe will enhance the overall market size and the volume of assets we process in the bidding marketplace.

Okay. Thank you very much.

Thank you. Our next question comes from Craig Hallum. Your line is open.

Hey, everyone. It's George. I apologize for the confusion. I just want to clarify the last question. Bill, I want to confirm that the idea of bidding for assets presents a significant long-term opportunity. There are some challenges, mainly due to COVID, which caused us to miss some of these opportunities and logical moves. However, this long-term trend is definitely in motion, and your belief aligns with that. Is that correct?

That's correct. And we have been asked to present to staffers and state legislatures highlighting case studies on what we've been doing from California to Pennsylvania because I think there are a lot of people that are interested. Why are they interested in online sales? One, it's easier to administer for the government employee; two, it does improve home values, and the increase in home values ripples through a community in terms of real estate appraisals; everybody's assets benefit when things sell for more money and they are harmed if assets are given away in a fire sale. The other thing to note is the borrower or homeowner keeps the upside above any lien when they sell the asset for more money. So that's another key factor driving the broad secular opportunity. And then finally, ease of access. Maybe at the margin there's some voice in a rural location that says we don't have access to broadband or Internet, but that's very rare. Most of our high-quality opportunities are in more densely populated large metro areas, and being able to log in by your phone or from your laptop is far more convenient than getting in your car and driving to a county courthouse. We think accessibility is greatly enhanced for the bidder population by having a convenient online sales channel and marketplace. So any time you have a disruptive technology, there are incumbents who don't like it. There are people that have benefited from the old-school way, whether they be certain lawyers making money on preparing physical tax lien documentation or a few local auctioneer players. That's normal. We've seen that in the history of other marketplaces going online. But I think over time, clearly this is the most efficacious way to deal with the real estate asset class.

That's great. And Bill, the most often asked question, particularly recently from clients is around the macro. And you've been through a couple of these cycles already. Can you talk about how the macro influences the demand side of your equation and also the supply side and what's the net dynamic? And I understand it's complicated because of the different pieces of the business. But I think it would be helpful on a call to address that because it's the most asked question.

Sure. This marketplace that we manage, this circular second-hand market, is extremely resilient and interesting for businesses, particularly small businesses and consumer buyers during a recession. People are trading down to save money and get more value for their dollar, and we make that happen. We can give our clients access to a range of operating equipment, vehicles, and retail consumer goods at a better price as a trusted longstanding marketplace. People don't feel that they will be exposed to waste, fraud, or abuse, and that's a big concern in a recession. They see all kinds of fraudulent messages and lose money by clicking on the wrong offer. The fact that we're a transparent public reporting company with a strong 20-plus year track record is very important for both the small business buyer and consumer buyers. So they're looking to save money. They're online, and they can be more efficient rather than driving around looking for deals. They can get online and see the whole marketplace in a one-stop shop. The buyer base has been very resilient. We've not seen any liquidity issues at all with, let's say, a banking crisis or potential crisis affecting the buyer side. We've seen very strong liquidity. We've had record sales results for a number of the assets that we've sold, including high-ticket items in our capital assets group business. We see very strong buyer liquidity, which probably continues to grow in a slow growth or recessionary environment. On the seller side, well, you look at any balance sheet and people want liquidity. If you don't have a strong business case for using your assets, you're going to sell those assets to free up idle assets and raise cash. We’re a market maker for the industrial, community, government, and retail supply chain community. Our business's velocity is critical; we can cover 500-plus asset categories with a single solution, which is very helpful for our clients. I think they're all looking to be liquid as we move into a leaner, lower growth environment. We're having many conversations with allowing clients to sell directly on our marketplace and use our marketplace for a broader array of assets, which is helping us improve our market share.

Great perspective. Thanks for taking the questions.

Yes. Thank you.

We have no further questions at this time. Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating and you may now disconnect.