Q3 2021 Ritchie Bros Auctioneers Inc Earnings Call
Good morning, My name is Pam and I'll be your conference operator today at this time I would like to welcome everyone to Ritchie Brothers third quarter Conference call.
Lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad, if you'd like to withdraw. Your question. Please press Star then the number to you. Thank you I will now turn the conference over to Mr. Samir THAAD.
President of Investor Relations and market intelligence to open the conference call. Mr. <unk> you may begin your call.
Hello, and good morning, and thank you for joining us today's call to discuss third quarter 2021 results. Joining me today are our Chief Executive Officer, Sharon Driscoll, our Chief Financial Officer as well as other members of the management team who will be available for the Q&A portion of this call.
Following discussion will include forward looking statements or comments that are not a statement of fact, including projections of future earnings revenue gross transaction value and other items are considered forward looking and involve risks and uncertainties the risks and uncertainties that could cause our actual operating results.
To differ significantly from our forward looking statements are detailed in our FTC and Canadian Securities filings available at our website Investor Doc Ritchie Bros. Dot Com, we encourage you to review.
The 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. The most directly comparable GAAP financial measures and a reconciliation between the two.
Our earnings release and Form 10-Q.
Presentation slides accompany our commentary today. These slides can be viewed through the life of recorded webcast or downloaded from our website.
All figures discussed today will be in U S dollars unless otherwise noted I will now turn the call over to Ann fantasy.
Thank you Samir and good morning to everyone for joining our call today.
First I would like to start the call by thanking our outstanding employees, who continue to manage through this unprecedented environment.
Deliver the highest level of service to our customers.
We continue to prioritize health and safety of our customers and team members by implementing best practices and updating our COVID-19 protocols based on regional recommendations and our best judgment.
In the third quarter, we had hope to welcome back customers to our auction theaters. However, given the surge in the Delta variant, we delayed our plans.
We are excited to announce that the first event, where customers are coming back and that will.
It will be our flagship Orlando will bank in February of 2022.
This will be an amazing way to welcome customers back we are all very excited for Orlando.
Our omni channel platform is delivering strong outcomes for our customers with bids per lot and used equipment pricing remaining very strong.
Year on year comparisons of our financial metrics masked the underlying strength of our business.
As the quarterly cadence of 2020 was abnormally impacted by hydro COVID-19 related disruptions, most notably in the third quarter.
We believe the best U to the business trajectory is a two year stack view versus the pre pandemic 2019.
Despite ongoing supply chain headwinds, we have grown our GTD and non-GAAP adjusted operating income, 17% and 48% respectively compared to the pre pandemic baseline of Q3 2019.
This is a strong outcome given the environment we are in.
We see the unprecedented environment of tight equipment supply caused by low inventory levels exacerbated by supply chain issues hampering oem's production.
As a point in time event and consider it outside of our control.
By focusing on building developing and growing the fastest of our business that we can control we will be in a strong position to disproportionately capitalize on improvements in the broader environment.
I will cover how we are doing this with new products, new satellite yard locations and a more robust sales coverage model here shortly.
We are also spending our time focused on strategic M&A, giving a step changes and execution of our strategy.
At our Investor Day last December we laid out our vision for transforming from an auction yard to a global trusted marketplace for insights services and transaction solutions.
We highlighted how our inventory management system will serve as a gateway to that marketplace.
And will help us unlock not only 300 billion in annual GTD.
But also provide us an entry into other services.
Ours or those are key partners that we can monetize around the used equipment market.
Since that date, we have been busy putting pieces of that strategy in place whether organically building capabilities to a test and learn approach or M&A as is the case with Rouse Euro auctions.
And our recently announced acquisition of smart equipment.
To that end, we identified facilitating parts and service transactions on behalf of our dealer and OEM partners.
As an integral part of our marketplace vision and our acquisition of Smart equipped provides the foundation of that capability.
Smart equip has spent 20 years building critical connections between equipment owners and dealer and OEM partners.
The parts buying experience seamless.
On this slide we captured all the ways in which this acquisition strengthens each of our strategic pillars.
Smart equipped is a SaaS based business that is the industry standard for complete equipment parts electronic procurement catalog and E Commerce technology.
In the industrial segment worldwide.
It offers a single platform for end to end parts procurement on behalf of our dealer and OEM partners.
And supports over $1 billion of transaction volumes annually.
In the intermediate future, we are planning on running it as a standalone business.
However over time, we will use smart equipped technology and supplier relationships.
The power of parts and service offering on our marketplace.
Enabling our dealer and OEM partners to connect quickly and efficiently with our equipment.
We officially launched Ritchie list last month, which is our north American listing services, we see this as an on ramp into the Ritchie brothers ecosystem that will accelerate IMS adoption and our marketplace vision.
Richie list will help customers sell equipment on their own and give them the ability to leverage all of Ritchie brothers tools and services they need to be successful such as used equipment valuations market trends purchased safe inspections and so forth.
At the end of the day, we know many customers want to sell equipment themselves.
And Richie list allows them a way to engage in our ecosystem and provide us avenues of monetization that we previously didn't have.
Richie list allows for customers to workflow equipment into one of our channels, if they end up choosing not to sell it themselves.
We are also offering customers functionality to promote their listings and unlike other services in the industry with paid advertisement obligations. We are simplifying the engagement by offering unlimited listing.
For only $99 a month.
Moving to our inventory management system or IMS, what we view is the gateway into the market.
We continue to make strong progress with 141% growth sequentially compared to last quarter and the cumulative number of organizations that are activated.
We are slowly migrating our transactional workflow into iron us providing for a better customer experience.
We are very pleased and excited about the journey, we are on both with our customers and our partners.
We also continue to scale, our satellite yard strategy with the opening of eight new locations in the quarter.
And this slide you can see phase one and phase two.
As one of the sites located internationally that we use to test our growth hypothesis in 2020 and phase two was everything we have done this year to begin to scale.
We are very encouraged by the results from the sites. We opened in the last 12 months and see satellite yards as a key component of our organic growth plans.
We also spent 2021 testing and learning from our new sales coverage model in Texas.
Throughout the year, we learned a lot.
Iterate quickly and I am happy to report that we now have implemented a new structure that is delivering strong results are.
Our new sales coverage model will enable more touch points with customers and allow a higher level of engagement with a wider array of new customers, while still supporting our existing customers. Although we are seeing very encouraging results on our kpis around sales attainment average contract size.
Forward sales pipeline.
We are most excited by the engagement, we're seeing with new customers that haven't previously participated in the Ritchie brothers ecosystem with our first touch coming through our inside territory managers.
Everything we are doing here is about making it easier for our customers to interact with us the new sales coverage model is also a key element of Ritchie brothers organic growth. It is a journey for us and one we will continue to hold as we scale it beyond Texas.
After Sharon discusses our financials I will talk about how we are executing against our strategic pillars and outlook and then we will move to Q&A.
And now over to Sharon.
Thank you Anne and good morning to everyone on the call.
As Anne noted the year on year comparisons this quarter masked the underlying strengths of our business given the impact Covid had on our 2000 Twenty's financial results as backdrop. The company posted a 22% increase in G. T V. In the third quarter of 2020 as Covid research.
Frictions began to ease.
And with that as context, our current quarter G. T V decreased 4%.
With puts and takes across auction shift headwinds.
The negative used equipment mix.
Slightly offset by FX tailwind.
We see this level of GTA V. As a strong result, given two factors.
First the difficult comparison from last year as just described and second the extremely tight supply market due to global supply chain challenges impacting all new equipment manufacturing sectors.
As Ed noted in her remarks, using a two year stack as a more indicative measure.
This is a 17% increase in G T V compared to third quarter of 2019.
Total reported revenue declined 1% compared to last year with total service revenue declining 4%.
Like G. T V. Our revenue is cycling over difficult comparisons from 2020 and compared to 2019 total service revenue has now increased 19%.
Giving us confidence that we are executing against our evergreen model despite being in this difficult supply environment.
Our other service revenue saw relative strengths with the contribution from Roche of $6 $6 million in the third quarter and a 55% increase in the revenue at Ritchie brothers financial services to $11 $3 million.
Recall that we have highlighted the investments we've been making at Rbf S. And we are now beginning to see these returns.
This quarter, we updated our non-GAAP measures and I encourage everyone to look at the reconciliation tables.
We updated these measures at this time as we have entered a period of significant acquisition activity and have now aligned our presentation to be more comparable with peer companies and allow us to better highlight the underlying business trends our non-GAAP adjusted operating income declined 11%.
Compared to the third quarter 2020, however is up 47% compared to third quarter 2019.
I would note that compared to 2019 the growth in non-GAAP adjusted operating income has far exceeded the pace of growth in our service revenue, which is in line with what we communicated when we rolled out our new evergreen model last year.
Although auction and marketplace service revenue declined 6% A&M service revenue as a percentage of total G. T V came in at a robust 14% for the quarter.
Inventory sales tend to be lumpy and they increased 6% driven by strength in our international region and our government sector.
Marginally offset by some weakness in the U S and Canada.
Inventory returns came in at 10, 8%, which is down compared to 2020, resulting primarily from the mix impact of our amended government contracts.
Overall, we are pleased with our revenue rate performance as both profit on inventory sales and service revenues improved versus prior year.
Cost of services, plus SG&A was down approximately 5% compared to last year.
And excluding share based payments from both periods. This measure was down approximately 3%.
We broadly see this as a good result, and in line with the decline of service revenue, 4%, particularly in a smaller volume quarter.
While we don't break out FX impacts by line item. It is important to note that we are naturally hedged given our geographically distributed operational structure for both revenue and costs.
And overall FX had a neutral impact on the bottom line in the quarter.
Cost of services declined 16%, despite operating with a higher number of sales days easing COVID-19 protocols and FX pressure.
And mentioned that we are welcoming back customers, starting with Orlando and expect our cost of services to increase to reflect that in coming quarters.
Although the key message here is that even with these add backs, we do expect a permanent level of cost savings going forward.
I would highlight the cost of services plus SG&A is up only approximately 9% since the third quarter of 2019.
Which is helping the growth in non-GAAP adjusted operating income in the same timeframe.
This is a good result, given that we continue to make investments to drive revenue growth. Most notably the addition of <unk> services team and continued investment in Ritchie brothers financial services and other organic growth efforts, some of which and has just covered.
I would like to note that we expect our core SG&A run rate, excluding share based payments as well as any impact of the smart equipped acquisition.
To be up mid single digits compared to the fourth quarter of last year.
Our cash flow remains very robust with trailing 12 months operating free cash flow of $253 million, which is 115% of our non-GAAP adjusted net income.
At the end of the quarter, our balance sheet and liquidity remain in a very strong position, providing an excellent foundation to support our growth initiatives.
And with that let me pass it back over to Ann.
Thanks, Sharon I am very pleased with the quarter as we made excellent progress in accelerating our strategy.
Becoming the trusted global marketplace for insight services and transaction solutions for commercial assets.
On this slide you can see we've been busy working on many initiatives the biggest of which I covered in my discussion earlier.
Now turning to current trends and outlook. There is no change in argue here we.
We still see the environment is dynamic.
Why chain labor shortages and logistics issues continue to not only play bar industry, but more pervasive really across the broader economy.
Specifically, we continue to see equipment tightness, you're in the fourth quarter.
Let me reiterate that we see the current environment is a point in time.
We know for certain that while inventory sits out there. It continues to age and will ultimately require a disposition solution.
Most exciting is that we are using this time to structurally evolved this business for the longer term.
To deliver on our strategy and our marketplace vision.
With that operator, please open the line for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone, you'll hear three type prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by <unk>.
And if you're using a speaker phone. Please lift your handset before pressing any keys one moment for your first question.
Your first question comes from Craig Kennison with R. W.
Baird. Please go ahead.
Hey, good morning, and thank you for taking my questions. Congratulations on all the strategic progress in the quarter as well I was hoping you would help us understand the revenue model for Richie list and smart equipped.
Yeah, Hi, Craig and here. Thank you very much yeah. The supply environment is challenging, but we are very very proud.
Of the.
The progress that we're making so let me let me start with smart equipped cover which he looked a little bit and then turn that over to Matt <unk>, Our chief marketing officer.
So smart equipped really the way to think about it is for the we'll call. It short to midterm it will be a completely standalone entity as we build out our marketplace functionality.
And just as a reminder, here's what smart equipped dogs. They spent 20 years.
Velo Ping, an architecture that seamlessly clubs into dealers and Oems.
Parts offerings to make it really easy for end consumers to look up a part they need be a catalog order it seamlessly transact that easily.
All across our dealers and Oems.
Incredible platform that team has built they'll continue to run that business that business monetize as primarily a SaaS basis, we love that team, they're staying Umm.
Alex the founder for the CEO, Brian the chair there they are staying in and driving that team for Worksite. It.
As we evolve our marketplace. We will then use that architecture that they bleed think of those tight to be able to offer that same conversion to Ritchie brothers and buyers and I'm going to steal a line from our Chief strategy Officer, Kevin Geismar is it the ultimate vision is a do you want fries with that so.
You have an auction that takes place.
A buyer of wins an excavator.
At checkout imagine where today when they check out just kind of paying for the transaction that they won it then says listen we've inspected that piece of equipment and we believe it requires these parts and.
And a service contract on behalf of the dealer in their area. So whatever the brand is and where the dealer is and that pipe has already been created by smart equip such that the customer can just click to add that to the shopping cart ideally AD that you went to their financing preferred method and kind of checkout seamlessly.
The vision, we are think of that as kind of an intermediate term for the short run we don't we don't have that capability built yeah. That's what we're building in the marketplace. So.
But that's that's where we're headed with smart equipped.
And then on Ritchie list and I'm about to turn it over to Matt. The vision is our customers continue overwhelmingly you guys know the $300 billion marketplace. The biggest chunk is just customer selling their own equipment theyre going to continue to do that we wanted to offer a listing service that they can do that with us as well.
L a but ultimately really be the gateway into the IMS the inventory management system such that they can then partake of any other services ours, where third parties are that exist all the way through kind of waterfall ing, if they're not successful in selling a piece of equipment waterfall ing. It.
Through the various channels within Ritchie brothers, but let me pause and turn it over to Matt. This was his brainchild all along and I'm thrilled that we could all put it in place those quickly.
Yes sure so.
Any listing service right. There there are core revenue streams, which tend to be the advertising nature. So sellers PE.
C. A monthly fee for unlimited listings or they can purchase.
And add on a one off basis. Additionally, there are advertising mechanisms to be able to promote your listing as well as straight banner advertising, but we don't really look at that is the core the core revenue stream here as Anne pointed out the second order is the ability to sell.
Services into these transactions, whether that'd be inspections shipping financing. These are core services, we we offer with our core offering and now we can bundle them and offered them as part of these private transactions. So that's an additional revenue stream and then as Anne pointed out.
There are these you know what we like to call it network effects to the ecosystem.
The stickiness, we obtained with the IMS and with the listings sellers haven't easy option to flow that inventory down to our marketplaces, where we make our traditional commission. So that's the way we think about the revenue streams associated with rituals.
That's so helpful. Thank you.
Your next question comes from Michelle Linn Radbourne with TD Securities. Please go ahead.
Thanks, very much and good morning.
So and in terms of new equipment supply and the knock on impact on used equipment supply can you just update us on your current thinking on the duration of the supply chain issues that are constraining new equipment production.
Yes, Hello Sherlin.
No.
The World you guys have now gotten to know me, it's been I can't even believe it since we started this journey together.
Knocking on the door of two years here are you know we view the world is in our control out of our control what I normally say those words.
The out of our control is the smaller part of it in our control is the larger part and as you saw with the initiatives. That's clearly the case with without workload.
But in terms of the backdrop. It is unquestionably, having a very significant impact and I'll just bring you guys to kind of the journey. We've been through you are monitoring it as close as we are so you. So you understand when all of this kind of we'll call it hit.
We started feeling it at the end of 2020, all the talk from the Oems was about Oh, we should be caught up in the first half of 2021 and candidly we built our plans accordingly.
And then the chip shortages were exacerbated and now they're shipping well I mean, you know.
This situation unquestionably is getting worse not better Oem's came forward and said, okay. First half is not going to happen. It's most likely going to be the second half and now as you know we're very closely watching announcements of the Oems. They are clearly, saying, it's not going to be this year.
It's going to be next year.
Things actually get better and what we're seeing in the fourth quarter or is that a tightening is actually getting worse not better.
As expected.
We're very buoyed by knowing look the equipment continues to age right. This isn't the case, but.
If you don't buy a coffee cup of coffee today Youre going to buy two cups of coffee Tomorrow. You know you don't buy a cup of coffee today, you never catch that revenue up that's not the case in our industry right that equipment continues to sit out there. It continues to age it will ultimately need could transact and we are obviously a transaction engine. We will benefit the question is when.
And as we look at Q4 and with the announcements that are getting made unquestionably will take longer and Q4 for sure not getting better but going the other way.
Okay I appreciate those comments.
And then for Sharon on the New non-GAAP earnings metrics can you speak to the justification for adding back share based payments to calculate earnings is that not a cost of doing business.
Yes, Cheryl and thanks, Yeah. So we certainly looked at what other peer companies. We are doing in this space and again the goal was to be as helpful to the users of the statements as possible.
The GAAP measures are always there so in our core reporting.
The share based comp is included in that.
I think what what we are recognizing them and we you would have seen it with the <unk> acquisition and.
We will see it with smart.
Smart equipment as well.
As you bring on new acquisitions, the costs related to those which sometimes include a portion of the proceeds going into share based compensation.
Just unfortunately continued to dilute your performance.
And so we made the decision that we would be consistent with how other peer companies were reporting this.
And our analysis indicated that this was the common approach. So that was how we landed there and clearly we understand that.
Certain analysts and certain investors.
We'll look through that as they had done with our previous adjustments.
But our goal is to give the best visibility possible to the underlying operating health of the organization.
And if I could just.
Ask a quick follow up.
How should we think about the share based payments add back and how to model that in Q4 and going forward, obviously, it's going to increase.
Yeah. So I think we will continue to give disclosure.
Certainly past trends would be indicative and it really is going to be.
Newer acquisitions that that caused that to wrap up.
You know I I don't know what additional guidance that we can provide other than a commitment for continued transparency on that line.
Yeah, and if I can just add Hum sharron answered it very well understand we take actions are as a management team to ensure the health and wellness.
Those business. So for example, when we acquired Raul.
We asked for a meaningful portion of the proceeds to be rolled.
Into a Ritchie brothers stock, both as a retention and candidly as a combined bet on the comm of being.
Being aligned with our shareholders and what we're acquiring this company to do and build together. That's the same on Mel M. O. We took with <unk>.
Smart equipped to Sharon's point any future acquisitions. So we didn't want is those decisions that are kind of for the long run benefit of the business, but have a short term accounting implication to mask the underlying health of the business. That's the intent there is no no other intent behind it.
Okay I'll pass it over thanks.
Your next question comes from Lawrence de Maria with William Blair <unk> Company. Please go ahead.
Thanks, Good morning.
As far as the IMF.
You gave some numbers around the growth sequentially can you talk about the engagement in terms of transaction volume.
<unk> services revenue.
Organizations are using and the type of customers who are signing up in other words is it dealers or is it.
Such as fleece. Thank you.
Hi, Larry and Sandoz, a year again, I'll I'll take that question. So.
You know I I O obviously, the trajectory of the of the IMS penetration has been a.
Really.
<unk> I'm going to say, we're very excited about it we again, we had a point of view right. Our point of view was you make it easy for customers you provide them data and analytics and they're going to want to participate and obviously built the indications we're having still early or that in fact that is very very positive.
The page we showed is really our focus so our focus right. Now is you know think about kind of the network effect and how that starts going it starts with the number of organizations for US right. Just can we get people in can we get them perusing around the data and analytics.
Can we can we get them excited.
The next phase will be all about when that steady state. So before I talk about the next phase that has been almost entirely focused on kind of regional customers. If you will not large strategic accounts and dealer is a big big equities again. The reason we did that is we didn't want any false sensor.
Security with just big numbers right. So if we turned our attention to people with a lot of assets.
Loaded those assets in but in large part they transact them themselves, we already get a whole bunch of those anyway. You know it would give us this kind of feel good about <unk>, but at the end won't really met.
The huge lever that we think this will be for our business. So right now we're focused on organization a lot of those are regional dealers as well are coming in a rental company.
Folks are coming in but we're really counting kind of by the numbers and carry Taylor's organization as the Chief revenue officer has really been focusing on making sure that that happens. The next phase once we feel like okay. We have a robust steady state process. Okay. All cultures test alert.
So we've been testing we've been learning once we feel like that's robust, we'll turn our attention to okay now that theyre interacting with it how are they doing with loading assets right.
Is it that flywheel is starting to look like got it let's test and learn is it happening naturally do we need to do something to make that happen and then kind of the next cascade will be okay. Now they're loading assets what services are they partaking of transaction services, yes, but also you know this is where over time the monetization.
And data other connection points.
With getting financing inspection you know all of the others and those of third parties. We are very very excited to again be a smart equip as an example facilitates parking service transactions on behalf of dealers and OEM partners. So not even our own will be monitoring those as well and that ultimately that will translate to our revenue growth. So.
I said a lot it's a journey.
We're excited but we also want to methodically build the solid not give ourselves a false sense of security get the flywheel really turning on the organizational side. Once we feel good about that focus on assets feel good about that focus on services, our own and third parties and then the revenue will be the outcome that is how we are.
Looking at it and how we're measuring it.
Okay, well that was a lot, but it was a good answer. Thank you Ed and then secondly, if I could just follow up.
The new adjustments.
[noise] apply that acquisitions are not one offs right.
Sure.
Some of that back so should we expect this pace to keep up.
What does the pipeline look like for M&A or heavier.
A year back.
Focusing on the quarter. Thanks.
Yeah, I'll start and then I'll turn it over to Sharon. So you know when we laid out our vision it was really the work.
So you know we laid out a very very clear vision of transforming to this trusted global marketplace for for insight services and transaction solutions.
And then we put the pillars underneath it as you've seen from US now you know, we're very consistent it's about the experience of our buyers and sellers. It's about our employees. It's about a modern architecture, it's about the IMS and it's about growth.
You know in our core business.
And you know that.
That's the what and I think what you heard from Sharon I'm going to turn it over to her was we would stay very open to the how and the how will come in the form of organic initiatives.
Like the go to market model in Texas like the yards.
The Richie you know these kinds of things that we're doing in our own but if we find opportunities to step change either the impact of these things.
As in the case of the Euro acquisition or the time to market of these things as in the case of the Rouse acquisition or smart equipped we would take into Ebony lens.
That's how we look at the World. So you know we have we have a robust pipeline of organic initiatives, we have a robust pipeline of M&A, but we look at it through the lens of [noise].
Does it give us a step change to.
Getting to the vision.
Sharon anything to add.
Yeah, I I would also add we've already announced significant acquisition activity and.
Just thinking of a euro auction. This metric will now also include the acquisition integration related costs associated with that which we do expect to run over a longer period of time. So I think that decision timeline was both.
Not only what we had announced and how to get better visibility for the underlying health of the organization going forward, but also anticipating that as the team further develops their strategy of how to bring our strategic pillars and strategic initiatives to life.
This metric would also enable additional either acquisitions partnerships as Anne said or accommodate additional organic growth.
I think it's a it's a good model to go forward based on where we are at the moment and what we see.
Okay. So I'll go back at the cost of the integration at all okay. Thank you.
Your next question comes from Michael Feniger with Bank of America.
Please.
Yes, thanks for taking my question.
Im curious what youre hearing on the ground.
With customers given the rise in oil price and its potential infrastructure Bill on one hand, it's probably good for.
Demand for used equipment.
Can't get their hands on new equipment like you said with the production issues and supply yet on the other hand I think historically.
Rising oil infrastructure could keep co signers kind of holding on to their fleet, maybe less dispersal I'm. Just curious if you see this dynamic as a net net a drag into Q4 and early Q1 or is it actually infrastructure Bill is this actually going to reunite.
GTD growth going forward.
Yeah, Michael So yeah, we're hearing everything youre hearing and we're watching it we're watching it very very carefully.
I think the way we are looking at it is short term is something very different than possibly mid and long term. So let me just take kind of the two bookends. So I'm short term really the single biggest macro factor is the supply chain.
It is the single biggest it is so overwhelmingly and again, it's not you know we wish it was just chip shortage the chip shortage of shipping.
Ports getting back well I mean, it's just everything everything everything under the Sun.
And so regardless of that push and pull exactly as you describe it which is beautifully described right oil prices are up people need their equipment, but wait a minute the demand for used equipment is up the prices that would naturally be a balancing act here. The backdrop of the environment is Ah is overwhelmingly causing a drop in equipment.
<unk> and again as we look at kind of that Q4 as.
As we as we're living it now and looking out at the very short term that is not getting better that is getting worse.
Again out of our control we are using the time to drive our initiatives, but for sure. Ben If you look at the book and the other way long term right sooner or later supply chain has to catch up.
Her you know these boys will be behind US that's for sure we know that sooner or later as this equipment. That's out there and this is the nuance here it will age and have to transact.
And we're going to be here for that so we largely see kind of the infrastructure of our plans as being kind of a net positive for us, but again, that's really if you think of the long run and intermediate is anybody's guess, where that where that tipping point comes.
Okay makes sense and just the timeline of.
For the CFO succession plan.
Curious what we can kind of expect there given you guys have M&A integration I think you are trying to close your auction I would imagine.
Later this year early 2022.
Is it search more external or are we looking for somewhat.
On the equipment side of the industry or maybe more of a tech type background. Given what you guys are kind of building with the platform.
Yeah, so well the first headline is this is why you Sharon disclosed her plan. So early to give us plenty of time to find the right person. So first of all.
For those of you where we're not on video we're not a person Sharon 60, but she looks decades younger.
You know Aman and starting to make plans with her family as she should but given everything on our plate. Michael She has given us a gift of saying look I'm not running anywhere I'm not going anywhere I just want to make sure you guys know two years from now I no longer want to be here.
In heart, yet, but they are in.
Body, no AR and so we've kicked off the search it's early days I would say we are looking.
Looking for the best athlete.
We have laid out the strategy it is an external search because.
Because we are this transformation to a marketplace the organic growth we're driving you know it's.
It's a complex business and it's big and it's getting more complex and it's getting better and so to that end we've kicked off a search we feel no gun to the head there's no fire drill here, we will take the time it takes to find the right person, even when we find the right person sharing.
Has of course graciously agreed.
To them do the right things with our transition, but then also support.
You know all of the integration and all of the pieces, we have on our plate. So the intention is for her.
You know add value for that entire time period, and never leave us high and dry so I feel no pressure here at all I feel very confident with where we're going and I feel like we will have the time to find.
The perfect person for us for the future.
Your next question comes from Brian <unk> with Raymond James. Please go ahead.
Thanks, and good morning, just one question for myself, but.
I'm just looking if you could elaborate on what gave you confidence to expand the satellite your model and maybe what costs are associated with bringing these online.
Yeah. So let me start and then I'm going to turn it over to Jim Kessler, Our President and Chief operating Officer.
We are a test and learn culture. So we had a point of view and that point of view said Ah you know.
What sellers want they're there they're.
Clearly asking for the most money in their pocket that is what they want right when they come to Ritchie brothers B B.
Here you go for a piece of equipment, we want the most money in our pocket. We had a point of view that said if we can put yards are closer to those sellers, we will both make it easier to do business with us, but really drive the transportation costs down.
That was the hypothesis that we set up a whole set of kpis around it to test and learn and.
And then gain confidence so let me pause there and then turn it over to Jim on what all of that was.
Yes, no perfect. Thanks, Ann and similar to what we talked about last quarter.
In the satellite yards in the pilot that we have seen new customers from a seller standpoint greater than our existing yards and then also the flow through that we can see for the satellite yards and kind of think about five acres of land.
Very few people less than five.
Not a lot of investment that's needed besides setting up systems and some very basic stuff so very high flow through.
So when you look at <unk> per square foot dramatically better than our larger yards that we have so those two metrics were the main ones that we looked at that we wanted to continue our pilot, which we're continuum was really our original thesis to get up to the number of yards that we thought were good enough to really find the answer.
To this question so its still early days, especially here in the U S and our European business has a little bit more time behind it where we're seeing some very exciting numbers, but very early here in the U S to come up with an answer but we're right at the point, where we consider we have a full pilot in place right now to be able to answer.
All these questions, but early indications were very excited about.
Okay. That's it for me thanks.
Ladies and gentlemen, as a reminder, should you have any questions. Please press star. One. Your next question comes from <unk> Khan with RBC capital markets. Please go ahead.
Great. Thanks, and good morning, just following up on the comments on the satellite side. So I guess with the addition of those are you considering any cycle maybe legacy sites over the next few years or is that still under consideration.
Yeah, well the white cap.
Got it.
No I was about to just start and then turn it over to Jim. So I just as a reminder, that our point of view on the satellite yards are very very different view of all of our.
Larger yards, so kind of again historically when we were live auction yours, and then I'm turning it over to Jim right. It was more about the auditorium and about sale day and about.
That kind of point of view obviously.
Been transitioning our business to <unk>.
Our model we are it's obviously all of the transactions online because of Covid, but what we want is kind of that blend of allowing customers the ability to you know.
Well, obviously give us care custody and control of their equipment. They no longer want it they don't need it we can take that good marketed we split that up we inspect we do all of that stuff.
But we really see kind of a hybrid model going forward.
And a kind of a use of those legacy sites.
And the new satellite yards, just kind of I'm going to steal Jim's words, and I'm going to turn it over to him was kind of a hub and spoke.
<unk> approach of how we're going to go to market, but would that Jim sorry, I interrupted back over to you.
Perfect and I was just going to add I'm, just I'm sure like a lot of companies we have.
A robust process of how do we evaluate sites and where do we need new sites is there a site that we should be thinking about that we need to move on from them. So.
So we have a robust process that we go through quarterly between.
The sales team the operational team to make that evaluation and right. Now we are very happy with all of our open sites and we have decided as part of the sound like test to reopen one of the yards that we closed in Raleigh.
And that's part of our satellite yard, but we have a process that we look at and making sure that profit profitability and the returns that we expect to get from our network.
But we have a process and that includes as their new state, where we should have a hub and creative spoke model is there a new country international but that's something that we kind of do quarterly.
Yeah.
Okay, Great and then just a second one on there's a lot of discussion earlier on the IMS and you've provided some good color on the different phases that you are thinking about.
That ramps up I guess do you have from timelines or even internally. How you are thinking about how long it might take for each phase to kind of build up is it sort of a number of unit customers just trying to get an idea of how we should think about that platform I sort of fully ramping up.
Over the next few years.
Yeah, we haven't it's a great question, we haven't communicated timeline, so to speak but the way to think about it is it is a multiyear journey by the time, we get there and so you know I would I would kind of look at the history.
And even the page that we showed.
We have a point of view, whether it's IMS sort of listings or or anything else.
Art with or even satellite yards to go to market model, we have a point of view we.
We form a strong thesis around it and we develop the kpis before we ever typical go switch. We then say okay. What are the leading indicators.
And test and learn some things are.
Much quicker.
If you take a look at the satellite yard page and what Jim's organization is doing there we started getting a lot of confidence quickly on the kpis.
The efficiency of those sites are the the new seller.
Sellers that it was attracting new buyers and it gave us enough learnings quickly, but we could start filling things out, but as Jim said, it's still the past, but pulling things out more around the globe look at the other side a bit where we had a the Texas initiative with a go to market model, we laid that out at the same time and it's taken us longer to learn.
Course, because it's a complex business and.
Skill sets capabilities all of those kinds of things and now we're here we're scaling it that's the way to think about IMS. So the timeline is driven less there is a timeline to kind of the us building out the modern architecture on the technology to really allow it to fulfill its full ambition you know that.
As you know every quarter, we have more functionality, but these you know you don't move to a modern architecture overnight it takes time.
Fully.
But really the way to think about the gating factor is when we feel confident in the learnings and the task to then move into the next one we do it on a quarterly basis, we have a huge sense of urgency.
I'm not holding back information literally when we feel like the organizational lift is.
On a good flywheel.
We'll move our sites for the assets and then when we feel like the assets are in a good place we'll move our sites of service.
Adoption and the kind of the conversion and share of wallet.
So it's less about an external timeline and more about when we feel like we've learned then we can scale, that's what we're going to go.
Great. Thanks, very much for the color.
Yeah.
Your next question comes from Cherilyn Radbourne with TD Securities. Please go ahead.
Thanks, just a follow up on M&A, which you seem to be clearly signaling there will be more of.
Can you tell us what your strategic priorities are in that regard and what you think your capacity is given the leverage that will result, following your auctions and smart equipped.
Yeah. So let me start and then and then I'll you know always the how and pass the word over to Sharon Charlotte. We don't we are hopefully the signal you guys are getting from US is that where as it was you know December seven 2020, we are open to any and all what.
Solutions to fulfill the how vision. So our vision is clear it is this marketplace.
The pillars underneath are crystal clear about first and foremost, making ourselves become easier to do business with and add value to our customers.
You know employees I, just keep beating the drum because this is it right. There's no. There's no other the architecture of the IMS and then the growth pillars. When we say we have a robust M&A pipeline. It's just like a robust test and learn pipeline we have for organic please don't mistake. It both are robust.
Literally the kpis around when and if we do M&A when and if we invest in something organically when and if we partner with someone is all about the kpis of.
Speed efficiency.
Efficiency are and kind of driving this vision forward.
So that is how we evaluate everything but that's that's a you know we're looking at but again the prioritization is around getting to that marketplace and then fulfilling division of each of those colors.
That is our focus.
Sharon do you want to add anything on the house.
Sure. So you know I think cherilyn the way to think about how we've gotten them. How we released the information around our intention to finance euro auction.
That plan really still holds and those leverage models that we indicated at the time, we announced euro.
Good actually anticipate enough room for some additional acquisitions.
And did because we were fairly far along in our thinking of smart equipped we had made sure that in our discussions with <unk>.
Our banks as well as the credit rating agencies that our intentions on that acquisition and.
Potential acquisitions going forward, we're already incorporated into our leverage thinking.
So you know certainly once we put the bonds in place for Euro once the euro transaction completes.
We will be re prioritizing some debt repayment strategies to be able to get that.
Debt level back down to a more comfortable leverage range.
And but in that modeling we have already anticipated.
Not large scale acquisitions, but certainly some smaller potential house, we've been incorporating that into our thinking I.
I think for the right acquisition you know.
You know, we we may be open to some as we talked about with Roush.
Not just debt funding, but some additional equity to be able to secure management teams to be able to.
Security operational models going forward. So those kind of equity plays are always in our thinking as pertaining to best outcome in terms of how the companies integrate with us.
And so that's kind of our thinking today, where we're very conservative in our views and so with our projections I think what we've already.
Related to the street in terms of the leverage model on closure of Euro.
The view on that has not changed and we will embark on some debt repayment strategies are again to be able to keep what we'd see as our current our.
Our current ratings structures with the agencies to keep them in line.
So can you just remind us what sort of leverage target you had before you would sort of embark on using the balance sheet.
More aggressively.
Well, we called out that we would at closure of Euro V. Just I think just under the four four.
Four times level, you know again each acquisition that we were considering has its own different parameters.
You know and we're currently kind of double B rated with our current bond you know those are the types of things that we will keep in mind and each acquisition. We will look at and consider you know how that fits into those principles.
That's it for me thanks.
That is all the time, we have for questions. Today. Please proceed Ms <unk>.
Thank you so much I'm, just going to take a little minute less than a minute to really thank everyone. On this call I'm going to start with actually thinking our team members, many of whom listen and thinking our partners.
And thinking all of you for taking the time again as we take a look at the future. Hopefully you guys picked up the message that we are very excited we're bullish about where we're headed.
But the reality of the marketplace, we find ourselves and what we are facing in two for Israel. It's a point in time, but it is real and something that you know when we are dealing with as is the rest of the marketplace.
But with that thank you again for joining us and hopefully everybody has a wonderful and safe weekend.
Bye bye.
Okay.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.