Q2 2022 Ritchie Bros Auctioneers Inc Earnings Call
Good morning, My name is Pam and I will be your operator today at this time I would like to welcome everyone to a Ritchie brothers Auctioneers second quarter conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press star followed by two.
I would now like to turn the conference call over to Mr. Sameer Rethought, Vice President of Investor Relations and market intelligence to open up the conference call. Mr. Thought you may begin Hello, and good morning, and thank you for joining us on today's call to discuss our second quarter 2022 results. Joining me today are Ann <unk>, our chief Exec.
<unk> officer, and Erik Jacobs, our new Chief Financial Officer. The following discussion will include forward looking statements comments that are not as steepen effect, including projections of future performance are considered forward looking and involve risks and uncertainties the risks and uncertainties that could cause our actual operating results to differ.
<unk> significantly from our forward looking statements are detailed in our SEC and Canadian Securities filings available at our Investor Relations website at Investor that Ritchie Bros. Dot com as well as Edgar and SEDAR identification.
The identification of discuss non-GAAP financial measures the most directly comparable GAAP financial measures and a reconciliation between the two see our presentation slides earnings release and Form 10-K, all available on our website I would like to now introduce Tim tenders.
Thank you Samir and good morning to everyone joining our call today.
I am delighted to introduce our new CFO , Erik Jacobs, who has hit the ground running in his role.
I'll introduce Eric more formally when I turn the call over to him to discuss our financial results.
Let's get started with.
We continue to execute and drive impressive results in the second quarter with 10% GTD growth, 13% service revenue growth, 11% adjusted EBITDA growth and 10% adjusted EPS growth.
The team is energized as we continue to build momentum on the topline and we believe our growth initiatives are working to help us drive these results.
As a strong signal of our continued confidence we are increasing our quarterly dividend approximately 8% from 25 cents to <unk> 27 per quarter.
Our customers remain our true north and we continue to focus our efforts on improving their experience by working on things that we control in this unprecedented macro environment.
We are demonstrating that we can grow <unk> and revenue in a tight supply environment and regardless of whether we end up in a recession or not our strategic efforts should position us to capitalize on that in a meaningful way.
While we are still in early days in building our marketplace technology, we launched our first pilot to allow buyers to purchase an inspection on an asset.
In the next phase of our thin wedge technology evolution approach, we will enable the purchase of an inventory asset through the buy it now functionality.
The plan is to have a series of thin wedges completed between now and the end of the year scaling functionality of the marketplace with each which.
We also continue to learn from our investments in local yards and new sales coverage model.
Both initiatives are working well and we will continue to scale them through the remainder of 2022 and into 2023.
After our success in Texas.
We have plans to rollout the new coverage model and upwards of 10 markets around the globe, starting with California, and North Carolina in the U S.
Like many other companies. However, we continue to face challenges in finding and Onboarding, new talent, which we are working for us.
Better sales coverage local yards and our marketplace technology are designed to reduce the friction for our customers and allow the flywheel spin faster.
All of this is to make it easier to do business with us and Ritchie brothers to create shareholder value for you regardless of what is happening in the macro environment.
As most of you know when times are good Ritchie brothers tends to do well is there was a lot of activity for our customers and equipment is naturally churn.
Likewise when times are tough, we also tend to benefit from increased supply, albeit at lower prices.
But however has brought us an unprecedented environment because despite the robust end markets over the past several quarters. The supply chain has not been able to keep our customers have not been able to buy new equipment to replace their aging equipment, which has resulted in a tough equipment supply environment for us.
Since we are seeing the pricing of used equipment come off their all time highs set in February we are hopeful that supply and demand may start to come back into balance.
We will talk more about this later.
What we expect for sure is that our customers will need us more than ever if we experience a downturn.
When times are tough people need liquidity and they need to quickly.
We expect Ritchie brothers to be at or near the top of their list.
We have an omnichannel platform that will cater to all different types of disposition needs our customers will happen.
Ultimately this should allow us to highlight the historic counter cyclicality of our business.
Moving to our inventory management system or IMS we.
We had another strong quarter, it was 50% sequential growth compared to the first quarter.
We define an activation on IMS is an organization that has signed an annual contract to allow equipment to be workflow digitally.
What is critical here is that the annual contracted dramatically reduces friction for our customers as it eliminates the need to have contracts for each consignment throughout the year.
The Kpis, we continue to focus on is the number of organizations.
Think of organizations as the number of pipe being connected into our ecosystem.
Right now without the digital marketplace fully running there is not a lot of water flowing through those pipes.
We are fine with that.
As the marketplace technology starts coming together to work thin wedge approach, we can quickly turn the tap on and adjust inventory at scale.
This is why you're laying the pipe city with annual contracts is so important.
Before I formally introduce our new Chief Financial Officer, Eric Jacobs, Let me take a moment to thank our outgoing CFO Sharon Driscoll.
Over the past seven years, Sharon has been instrumental in the company's success and has been an excellent stewards of capital.
She provided Ritchie brothers, the financial flexibility to navigate not only large acquisitions such as iron planet.
But also the craziness of Covid.
Though she is no longer in the CFO role Sharon remains an executive Vice President and a personal advisor to me.
On behalf of the entire team here at Ritchie brothers, the board of directors and our shareholders I want to thank Sharon for her contribution to Ritchie brothers.
Now, let me embarrassed Eric for a minute.
When Sharon came to me and said we should start planning for her retirement, she gave us the luxury of time too.
Two years to ensure a smooth transition to find and recruit the perfect CFO for Ritchie brothers.
I had a purpose built spec I wanted a highly experienced public company CFO .
Who have digital marketplace experience.
Someone who has helped scale businesses, while transforming them from analog to digital.
Someone who wants to win.
Basically someone who has been there and done that.
Oh, and Europes need not apply.
When the recruiter called and said the search was over and I connected with Ara I knew very quickly that he would be a phenomenal addition to our team.
He will certainly accelerate our strategic vision to become the trusted global marketplace for insights services and transaction solutions for commercial assets.
Let me hand, it over to Eric who will take a few minutes to introduce himself and then talk about our second quarter results Eric.
Over to you.
Thanks, Dan let.
Let me add my welcome to everyone on the call today and a huge thank you to the entire team at Ritchie brothers, everyone has been so welcoming and helpful.
<unk> volumes about the strong family like culture. The company has built.
A lot to Dave Ritchie.
Let me spend a few minutes on my background as a public company CFO you get a lot of calls and quite frankly, I wasn't looking for a change.
One a recruiter told me it was for a large global marketplace.
The analog to digital transformation that was wildly profitable and generating a ton of cash flow definitely peaked my interest.
Then I met Anne and the team and heard about the strategic vision of being the trusted global marketplace for insight services and transaction solutions for commercial assets.
It was hard to contain my excitement about the opportunity.
It was part of something very similar in the auto space and it was transformational to that industry, a wildly successful as well.
So let me start my background in reverse.
I was recruited from wheels up a public company and an industry leading marketplace for private aviation.
Through organic growth and targeted M&A. The company has grown revenue from a run rate of $250 million to over $1 $5 billion in four short years.
And then also went public.
Before I was at <unk> technologies and Cox automotive.
Deal attract also grew revenue from $250 million to over $1 billion, while it was a public company CFO for almost eight years.
What we saw to Cox automotive in a transaction valued at over $4 billion.
Deal attract like wheels up was also an analog to digital transformation.
It's truly amazing the number of similarities between what Ritchie brothers will do for commercial assets and what do you attract and Cox did for auto.
<unk> inventory management system for auto dealers talks also had businesses in auctions inspections lean entitle administration financial services parts and service listings and data and analytics.
Including colleague Blue book these.
These capabilities were transformational to the auto industry and ultimately I believe is successful inventory management and analytics platform like Arby's Rouse will be transformational to our industry.
I also have M&A experience benefiting my career as a corporate lawyer.
I've been involved in over 40 acquisitions with many of them technology, driven or international where I focus much of my time is on integration getting deals done is nice, but being able to fully integrate quickly and driving revenue and cost synergies is what helps make transaction successful.
Each of my prior companies have had a large and growing international business and a dual track I was also the president of the Canadian business and spent almost three days a week in Canada for several years.
So Richie brothers is a natural extension of all my professional experience.
Lastly, I've long believed that innovation plus execution equal success and.
And since my prior industry experience tells me that Ritchie brothers' strategy and playbook is spot on from an innovation perspective, it's about.
<unk>, which is where I believe I can help the team excel.
Now, let's turn to our financial results.
In the second quarter, GTD increased 10% or 13% on a constant currency basis.
But as the strongest growth coming from Canada with solid contributions from the U S and international regions as well.
We had a few G television records this quarter, and we're particularly proud of them.
Canada, and Australia, the largest quarters ever in terms of GTA V.
Congratulations to those teams.
Canada was up 14% compared to last year.
Driven by our leveraging of our timed auction lot technology or Tao to hold more auctions more frequently.
<unk> our investments in local yards enabled that market to hold their first national event, which greatly boosted their performance.
Overall, we continue to see strong contributions from our regional sales teams, partially offset by the softness in our strategic accounts group something that leadership team has spoken about in the past due to limited equipment supply.
Although year on year mix adjusted prices of equipment continued to be positive we have been seeing sequential declines in the pricing of substantially all asset categories for most transportation assets.
This was expected as it was not likely that used equipment pricing would be sustainable at these levels as Anne discussed, we see lower prices as a longer term positive because it is a sign that supply and demand are starting to come back into balance.
And as and as also stated in the past, we will take volume over price almost any day, given our ability to attach other services to volume.
So overall, we're very pleased with our second quarter growth given the very low levels of use of equipment in the market and the FX headwinds to GTD due to the strong dollar.
Total service revenue increased 13% compared to last year.
On an organic basis, excluding the impact of smart equip total service revenue increased approximately 11%.
Total service revenue continues to exceed total GTD growth in line with the Evergreen model laid out at the 2020 Investor day.
Other service revenue continued to grow nicely, increasing 29% in the quarter and up approximately 16% on an organic basis, excluding smart equipped revenue of approximately $5 million.
Ritchie brothers financial services put up another amazing quarter growing its revenue 69%.
This growth was partially offset by lower ancillary revenue from logistics refurbishment and repair due to lower unit volumes in the overall mix of equipment.
With regards to earnings our adjusted EBITDA increased 11% on strong revenue performance, even with the impact of higher SG&A costs, which was expected as we continually to prudently invest in our growth initiatives marketplace pressure.
Also non-GAAP adjusted earnings per share increased 10% to 74 sets.
In the second quarter, the effective tax rate, excluding the impacts of adjusted items was approximately 26% slightly higher than the 25% in the same quarter last year.
We expect the effective tax rate, excluding the impact of adjusted items to be between 25% to 27% for the full year corresponding to a GAAP tax rate of 22% to 24%.
Turning now to our auction and marketplace segment A&M services revenue increased 11%.
And our <unk> take rate or A&M service revenue as a percentage of total G. T V.
Came in at a robust 14% for the quarter.
Up approximately 10 basis points compared to last year.
The increase was primarily driven by an uplift in the biopsy.
Moving to a an EMS inventory sales.
Sharon noted in the past and as I expect to continue to note in the future inventory sales tend to be lumpy.
And driven by some sign of preferences.
In the second quarter inventory sales increased 38% with strong growth contributed from all regions, particularly Canada.
For the quarter inventory rate increased approximately 220 basis points year over year to 11%.
Which reflects excellent performance.
Cost of service for selling general and administrative expenses were up 25%.
Note that SG&A expenses exclusive of share based payments of nonrecurring charges was approximately $128 million for the quarter. This was at the low end of the range given last quarter.
We continue our prudent investments in our strategic growth initiatives, leveraging this period of higher selling prices in the market to position ourselves for success in driving incremental unit volumes, which will be required to sustain our GTP growth as market pricing momentum slows.
Also in 2022, we added smart equipped to our portfolio, which was not in our prior year results.
The increase in SG&A expenses exclusive of nonrecurring and share based payments was also driven by our strong financial performance, which is resulting in higher incentive based compensation compared to prior year.
Additionally, like many companies, we're seeing inflationary pressures on our operating costs as it relates to labor durable goods consumables and travel.
The team is working hard to offset these increases through improved productivity and we will remain diligent in managing our cost within an acceptable range.
For the third quarter of 2022, we expect our SG&A expenses exclusive of share based payments and nonrecurring expenses to be between $128 million and $133 million.
Turning to cash flow and liquidity, our cash flow remains very robust with trailing 12 months operating free cash flow of $428 million, which is up 179% of our non-GAAP adjusted net income.
Delivering well above our stated evergreen model targets.
At the end of the quarter, our adjusted net debt to TTM non-GAAP adjusted EBITDA ratio was 0.7 acts.
As Dan also mentioned, we are very pleased to announce an 8% increase in our quarterly dividend to <unk> 27.
Delivering on our stated capital allocation priorities of growing dividends as we grow earnings.
Recall that in April we abandoned our acquisition of Euro options and while we are currently below our desired leverage ratio our capital allocation priorities have not changed.
We want maximum flexibility to be able to accelerate our strategic vision, either through M&A or investing a technology or organic growth initiatives.
For modeling purposes, we currently project interest expense of 10 million to $12 million in the third quarter.
Overall, a very strong quarter across all financial dimensions.
Thank you all for your support of Ritchie brothers, and with that I will turn it back to Ann.
Thank you Eric before we take questions, let me reiterate what the operating environment is today.
While we are committed to driving results continuously up and to the right.
And have clearly demonstrated that commitments with strong double digit growth the past two quarters the equipment supply chain continues to be stretched.
This coupled with the fact that GTT in the third quarter is typically seasonally lower than the second quarter, and we will be cycling over the $100 million aerial deal from last year's third quarter, we would expect our GTD growth rate to be less than the growth rate for the second quarter of this year.
In the broader market utilization levels of equipment are high and customers are busy.
The equipment is being used and it continues to age.
We see this as non Destructable demand is almost all of this equipment will need disposition services in the future.
Should a recession take hold we have historically seen this translate to higher unit volumes lower pricing and an improvement in mix as younger clip and comes into our channel.
In short it should continue to translate in up into the right performance.
Until that time, we are focused on growth in todays constrained environment by focusing on what we can control.
Our teams are focused on providing the best solutions for our customers continuing to test learn and invest in growth initiatives and executing on our vision to becoming the global trusted marketplace for insight services and transaction solutions with that operator. Please open the line for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session. If you have a question. Please press star followed by one on your Touchtone phone, you'll hear three ton prompt acknowledging your request and your questions will be pulled in the order that they are received if you wish to climb from the polling process. Please press star followed by two and if you're using a speaker.
Your phone please lift your handset before pressing any keys one moment for your first question.
Your first question comes from Michael <unk> with Scotiabank. Please go ahead.
Hey, Ann and welcome Eric.
Thank you.
Compared with construction, which has generated a lot more GTD growth this quarter and I guess since 2019 of the transportation sector.
I noted the two large inventory contracts in Canada this quarter, but any color that describes.
What looks to be outsized success in that end market in the last couple of quarters.
Okay.
Hi, Michael.
I'll start and then actually turn it over to Kerry.
Our chief revenue officer to take us to think about so we have had as.
As a reminder, we have had.
Richie Brothers is an incredible business you guys know.
And has been incredible cash flow model cyclical counter cyclical all of those things really if we had an achilles' heel historically, it's been the growth rate a very anemic low single digits.
When we when this seeking set forward our at.
Our new strategic plan in 2020 about become indeed global trusted marketplace.
For insight services and transaction solutions. The commitment we made in the evergreen model was to take that growth rate.
Go from low single digits to mid single digits to high single digits to low double digits, you know that kind of thing and how we got there and how we're continuing to get there is a test and learn model and we put a lot of those tests and in 2020 early 'twenty one.
Sales coverage model satellite yards, so on and so forth and what Youre seeing in GTD again in the areas that we control.
Is kind of the fruits of that labor and it's going to be you know it's never completely smooth we learn we reassess we move on but it's just been an incredible performance. The team is highly energized driving growth. Despite the backdrop that we're seeing from for example.
Rental companies recently announcing that they're going to be down in used equipment sales significant double digits. Despite all of that we're putting up double digit growth numbers are so we're super proud of the team and that Gary would you like to add something.
Yeah, I wouldn't say strong execution on the Canadian front to call out the Canadian team in particular, but we also called out the Australian team and we had double digits pretty much across the board globally and the regional team and.
And when we talk about conversion, we also talk about customer focus and its no question. Some markets are moving faster than others Unwinds team Avi.
An uptick in focused in one market versus another and we're watching utilization rates, but we are very focused to make sure every customers consistently touched and where their first call.
That's great color, thanks, and I guess, hoping to SG&A.
Ex stock comp and nonrecurring items that was up high 20 percentage in the quarter at the midpoint, you're guiding for slightly higher in Q3 as a percentage increase I wonder if you can break.
Down the expected increase in terms of what you would consider quote unquote pure inflation versus investments for growth.
Yeah. So let me start and then I'll turn it over I'll turn it over to Eric So the way, we think about SG&A again coincides with the commitments, we're making for growth and here's how that look I'm going to use Ritchie brothers financial services. As an example, so again, we have a very strong point of view.
In the growth ability of this business given the fact that we're in a 300 billion dollar industry and today, we're kind of in that $6 billion, Bob GTD till a long way to go Rbis is a great example, we started doing some tests in 2020.
About different models.
To grow Rbis, Ritchie brothers financial services, and we saw it just incredible ROI is coming off of those costs.
So we started putting the pedal to the metal in the beginning or at the end of 2020, beginning of 'twenty, one adding resources. Those have had incredible returns obviously as we're seeing Ritchie brothers financial services growth.
70% I mean, just incredible numbers.
Similarly, with satellite yard coverage model all of the things that we're doing we continue to test and learn and what we see.
<unk> return.
Or a prudent growth and incredible returns. We then start investing now in the backdrop of the supply environment Youre seeing some of those results incredible as they are you know double digit again.
[noise] dampened by the supply environment, but we're we're very very good.
Very proud of that.
Eric anything to add on the SG&A side.
Not that much and I think you kind of hit it I think look ultimately the growth in SG&A is really tied to the investments as well as the over performance in Pic CTV driving sales comp and incentive comp I mean that.
The comparison versus prior year sales comp.
And incentive comp were down.
As we look forward.
It's difficult to quantify the exact dollars of inflation, but we are traveling more or we are seeing fuel cost increase and such we're doing that we're offsetting that by managing prudently on our costs, but now it's we can't really quantify the exact dollars for you.
Okay. That's helpful. Thanks, very much guys.
Thank you our next.
Your next question comes from Michael Feniger with Bank of America. Please go ahead.
Hey, everyone. Thanks for taking my question I understand Youre, saying Youre trying to control what you can control the.
The market is trying to figure out this this spike in SG&A.
Ported <unk> of 10% EBITDA growth was up 11, so the operating Leverages was limited we recognize everyone recognizes youre doing these initiatives I guess the question is going into 2023.
Are we still scaling up.
This type of SG&A level. So if you in 2023 grow GPP, 10% whats the SG&A quotes level going to be kind of looking like that's where I think there is just some concern on this growth initiatives, how thats going to be scaling into next year.
Yeah, Michael It's Dan I know completely completely understand the question. So the first thing to note is if you take a look at our year on year basis, and I think this is where Eric was headed at the back half of his answer to the previous question. If you take a look at year on year, we had oh.
Fairly dampened outlook in Q2 of last year much lower accruals.
A bunch of noise, if you compare year on year, if you actually compare Q1 of this year to Q2 of this year the flow through.
All of the increased growth quarter on quarter was actually quite impressive.
Quite impressive so let me just tell you how we're thinking about SG&A out we do not invest.
In new initiatives, unless we are very confident about that region. That's number one number two we prudently control the underlying cost kind of a steady state cost of this business.
No question, we're not immune like anybody else to the inflation pressure resolved employee cost travel those kinds of things we tried to very much offset them with anything in our control. So we are head down focused on you know we invest when there's a positive ROI, we prudently controlled our costs.
That exists and laying the foundation and this is the key we know that sooner or later the tight.
By environment.
We're actually incredibly proud of the fact that all of the investments we've made actually are having.
Very high returns and again you see it in the sequential flow through if you take a look at Q1 versus Q2.
Sooner or later the supply will turn this equipment continues to age and the things that we've put in place we are super proud of a well.
Well, you know will come will come to us.
The one commitment we have first and foremost to ourselves and our employees our board of directors and of course to the investors is that when we see the returns slowing down forget stopping we stop the investments we pivot we learn.
So on and so forth. So that's how we're looking at 2023, that's how we're looking at 2020 two.
You're seeing the kinds of numbers, we're putting up despite the backdrop of what you're hearing from everybody else, which is down double digits.
Used equipment sales.
And just to follow up on that.
You touched on the relationship between volumes items versus used values.
<unk> lockout does gradually pick up.
How does that drive your service revenue growth and if service revenue growth starts to really outpace GDP growth. This is just a longer term question, what does that mean for the profitability and margins.
Forward for the business. Thank you Yeah, no Michael you hit the nail on the head and Eric covered this a little bit in the prepared remarks, but let me just reiterate.
We are naturally hedged, it's an incredible business right when times are tough and equipment is high prices go great when times are booths and equipment.
Equipment come to us prices go down we are naturally hedged however, in no way shape or form.
The pricing ever offset the volume for us because of the services you hit the nail on the head services because we can attach if we only have one piece of equipment to sell in its prices up we cant attach multiple services to that piece of equipment. The other benefit of services is that the those are largely.
Purely purely.
Incredible flow through almost pure margin in terms of the vast majority of our services. So yes. We are very very bullish on the profile of the business that is the inventory comes up and again don't forget the investments, we're making sales coverage satellite yard. These are all that when the equipment comes we are able to disproportionately benefit from the underlying.
Equipment that comes with two incredible goodness is one obviously GTD growth and revenue growth. The other is the ability.
To attach services is just really magical and an incredible profit profile for this business. So you hit it exactly on that.
Your next question comes from Gary Prest, Patino with Barrington Research. Please go ahead.
Good morning, and Hello, Eric welcome.
Welcome.
Thank you.
And you talked a little bit about.
Some kind of a pilot you were doing to buy equipment I didn't quite catch it and then talked about adding wages throughout could you just go through that again please.
Yes, Gary So let me start and then I'm going to turn it over to Jim Kessler, Our President and Chief operating Officer.
Let me just talk a little bit about this the.
The marketplace that we're building in Dallas and the marketplace technology that we're putting in place. So we've talked about this for a couple of quarters, we obviously covered it at all.
Our recent Investor day, but we are transforming this business can.
To make it much more seamless and much easier for customers to do business with so.
We can grow <unk> TV as we were proving with or without kind of the marketplace fully operational we can attach services those kinds of things. We just wanted to do with smoother, we want to do it faster and we want to have a higher penetration that's what the technology marketplace is all about.
And the way we're building it don't think about it as an ERP, where I think a lot of good.
Lot of questions I get is like when is it going to be done it's never going to be done right. This is a constant evolution, we're constantly going to keep bringing new features new model, but the approach. We're taking are these thin wedge edits, where we pick off a product or service and I'm going to use. The example of the one we picked off we bring it to life, but by bringing it to life.
We put in place the foundation of the digital marketplaces. This technology evolution that are critical for other services as well. So the one we launched and don't think of it as kind of a huge impact to the bottom line, but think of it as a set of capabilities that were put in place and ultimately a new revenue stream that will come from it.
We have never traditionally we do inspection reports.
And and we have iron clad inspections for iron planet and we have you know.
Kind of a much more limited inspections, if you will when somebody dropped the piece of equipment at our yard historically, because they come to life sales and they're able to check out the equipment themselves, but now less and less people are doing that obviously since that during COVID-19.
What we've put in place with the ability for a buyer to ask for a hugely granular level of understanding about their equipment and an ability to pay for it.
And so think about once you do that all of the pieces that has to get put in place in the digital marketplace. The connection to the physical auction the connection to the lives of equipment. The connection for the customer all the stuff you don't see and again, it's about putting these wedges in place, but really then ultimately an ability for buyers to click through.
By an inspection report so think about almost like a card backed model.
<unk> gained more and more confidence about the equipment that they are buying and then pay us for it. So that's why it was more about building the capability on a potentially new revenue stream, we love, we love that but yeah.
It was really about.
Kind of washing out this technology platform and getting those pieces up and running.
But let me let me stop there and then turn it over to Jim to talk about kind of the broader context of how we're approaching all of it.
No and thank you and Gary Great question, and as Anne mentioned with the inspection report and be there being able to monetize new revenue, but the ability to have a platform that you can invoice across all of our platforms. It's super important and as you can imagine we're constantly looking at.
What are the ways that we can monetize and gained share in our ecosystem of services and and that goes for auction and regular services. So a big part of what we look at are what are those areas that have a big upside side that are incremental to our business that we have been.
Participated in in the past so thinking about models of if we are going to buy inventory, there's a whole broker business that we don't play in today and the real reason, we don't play into it today is because of speed, but at this point with the Brown acquisition the data that <unk> has.
We have a unique opportunity with data to make very quick decisions and very profitable decisions for Richie brothers and how do we start to bring all that together. So when we think about buying inventory play in in markets that we haven't played in how do we gain market share and these are all the things we're starting to pilot.
And look at and really it all comes down to what are the big spaces that we don't play in what's incremental to our business and is.
Is the flow through in profitability is something that we want to attack. So those are the things we're kind of piloting in this process.
Okay. Thank you.
Your next question comes from Sabiha Kahn with RBC capital markets. Please go ahead.
Great Thanks, and good morning.
I think events comment earlier around if you've seen the returns or the opportunity with some of these investments decrease you will pull back on investment just thinking I guess, how do you think about it as a certain IRR or ROI ex that youre using that thresholds that can just share some color on how you make those decisions.
Yeah, No that's a great question.
No.
Sure.
But one thing I can say for the team the thread that cuts across us we are wildly analytical.
And so we.
<unk> got we are looking for historically.
<unk> has made a commitment to kind of a return of 15%.
Healthy healthy returns on investment we look at similar kinds of numbers. So we have not forgotten and are very very proud of.
Our prowess to drive those level of return.
And so when I say pull back I mean kind of the so one obviously in an absolutely when we're launching a new initiative, but as Jim said in a much different way using our technology, we look at the returns but.
What I meant is that if we're not seeing them or not seen and put the same level. We pull back we reassess I mean it it allows us an ability to move very very quickly and here. Let me just use an example of satellite yards. So we've said we said from the beginning that the magic of this business is that in some ways.
It's huge 300 billion of potential GTD also very very straightforward right. If you were a seller what youre looking for is liquidity and what that means is you want the most money in your pocket.
And if you're a buyer you want selection you want confidence in the acquisition and you want a very very intuitive simple process.
So what we need to do is straightforward.
Delight yards as an example, the thinking there was hey, we put a yard closer to a seller.
Inspiration costs are lower for them.
Hard themselves are effectively just kind of parking lots that we run.
So very very low cost for us and do we make it easier for sellers to do business with us and a lower cost model for them and the Kpis. We're measuring is include metallic.
How we look at that.
A R b.
These yard.
Short term leases.
So that we can continue to test and learn if we say hey, you know.
This is this is just not the right area or what hearing that consumers wanted here and not they are we're able to pivot and ebb and flow kind of continuously across the models in the coverage model that that we launched in Texas that are now going to be scaling across the globe.
The same kind of thing is how do how should we look at territory, what about the long tail and the inside sales team. The nice thing is that those people can work remotely so but it's not this region that region. We can still cover it. So we look at the returns absolutely. We look at also flexibility and we looked at our ability to be able to pivot on the data.
And as Jim said, more and more using technology to be able to get that data and pivot much quicker and find new revenue streams bigger revenue stream as we move along.
Alright, Thanks for that and then I guess I forgot the SG&A commentary.
In terms of the different initiatives that you're working on in the press release it seems to be.
Quite a quite a few things that are going on I guess from your perspective.
Or are you looking to draw capital kind of what are the big buckets spending items that we should expect over the next.
Four to six quarters in terms of whether it's investments specific capabilities or other functional others hiring so I can get some perspective on that.
Yeah, So I'm going to start and then turn it over to Eric So I think our I think our headline is for our capital structure and our capital deployment flexibility to drive them incredible return into this business and so the way we think about capital deployment is obviously returns and being.
Very very flexible whether they are organic.
Growth initiatives like the yard like the.
Sales coverage model like Ritchie brothers financial services, and I can keep going on and on like the technology investments that we're making to ensure that the digital marketplace is robust healthy allows us to be even.
Lower the friction in doing business with our customers, but then as Jim said open up new revenue streams for us and then obviously the flexibility of M&A.
As Erik said, where we're below our.
<unk> kind of leverage ratio. If you will when we are when the euro deal Youre auction deal didn't happen, but we remain very.
Bullish on the ability for this business to scale through either M&A organic core technology investments. So that's how we're going to continue to look at the world Eric anything anything to add.
Yes. Thanks, So look we don't expect a step function in cost over the next couple of quarters here I think we're continuing to make the investments that we're seeing.
Thank that.
Capital perspective, Youll, probably see more capitalized software on the technology side as we build out these thin wedges and then.
And gain more experience there so that would step up a little bit but like you saw the strong growth from <unk> in the quarter almost 70% we want to continue to invest in that business and grow it and so but nothing of a step function, where you're going to see a dramatically increase I mean, we've been adding some costs of the business. We're in Kurt occurring additional costs due to inflation.
<unk>.
So that there's not a step drop in the short term either but we don't see a significant change.
Okay, and then just last one for me I guess around the comments around capital allocation I guess, just what the market is volatile as it is.
Actively aggressively or are you considering M&A.
Actually like your options be possibly even over the next 12 to 24 months and then on M&A kind of what are the specific things that you are looking for at this point and while Theres some market cycle or just in terms of the strategy.
Yeah, so absolutely market volatility, but we are focused on the long term market Volatilities come and go we are focused on kind of you know.
We've had the first 60 years with Ritchie brothers were focused on the next 10, 20, and 60 year kind of cycle. So the way we look at M&A is as we've said.
Kpis for our M&A is three things one we look for incredible businesses in their own right.
Two we look at very strong management team that can continue to drive it and then three we look at that change for the underlying Ritchie brothers ecosystem that these acquisitions can bring and so whether it's <unk>.
Something like a euro auction, we are it just gave us almost overnight a significantly enhanced coverage model in which we can then sell services all of these kinds of things that that business.
It wasn't doing.
Or whether it's Ralph.
Incredible data business, allowing us to leverage the footprint of Ritchie brothers to be able to help that business grow but then also.
Leverage route.
In kind of helping our own understanding of the industry as we do with deals or anything else.
Or a smart equipped.
That allows us to tap into the.
Parts and service ecosystem by actually making it better for our dealer partners to attach a card at the time of purchase gambling market places up and running we ensure that when we look at M&A all three of those things.
And so that's the same focus we have today as we've always had which is we have a very full M&A pipeline and when we see businesses that fit those rebuilds.
We will act.
Until that time, we will not and are.
Balance sheet, certainly gives us the flexibility.
To do all of that bulk.
Thanks very much.
Ladies and gentlemen, as a reminder, if you do have any questions. Please press star one.
Your next question comes from Brian <unk> with Raymond James. Please go ahead.
Yes, good morning, and welcome Eric.
Just on IMS, while the growth metrics I guess I appreciate it could you give us some more color on what youre seeing when it comes to early adoption by those customers.
Are you seeing examples of increased transactions through the Ritchie, probably four months they adopted the system.
Yeah, So where I'm going to turn this over to carry in a minute.
She and her team have been really driving.
Driving this initiative.
The way to think about I am Matt.
Again, we covered it is really laying the foundation and the pace of the digital marketplace and this is where we are now with a single kpis the number of organizations and that's what we're focused on with an ability. So when you think about our pipe today, it's kind of a trickle going through that pipe and then tomorrow stream and then a guy should lead.
Whatever analogy or whatever analogy you want to use but.
We're really very very proud of what the organization is driving in laying that foundation for the future.
And really carry our chief revenue officer and her team are at the helm of that Gary you want to chat a little bit more about it.
Yeah. Thanks Ann.
Before I hand that.
Literally every transaction a customer with us were signed deal by deal, which means contracted deal by deal.
First real big step of Unpacking, where we bang starting to move customers to annual contracts.
We first started by customers, who can sign with us multiple times a year and now we're targeting step by step, but wanted to get many of our customers on here. So it's business as usual.
Our focus has been the number of organization. So we can build that.
And just like and you can't get the digital marketplace, unless theres enough types out there.
So what I get excited right now is hey, how do we value the team quarter over quarter.
How do we add what's needed and then as more capabilities are within the digital marketplace and confident that we'll be able to add share of wallet scale.
Okay. Thanks, and then.
And you saw a sizable jump in revenue from our financial services could you just go into a bit more detail on the drivers there and maybe the sustainability of those levels.
Yeah, Let me start and then I'm going to turn it over to Jim We were very proud of the revenue growth obviously in the quarter, which competes right continue up into the right is our message.
And.
Our focus on the evergreen commitment of taking or if there is an achilles' heel in this business historically, it's been the growth rate, taking that higher and higher so kind of from that anemic very low single digits to mid single digits to high to low double digit and how those pieces come together is by the various.
Pieces.
That are all under Jim's purview.
As President I think Ritchie brothers financial services is the perfect example of how they're thinking about the world So Jim over to you.
Okay. Thanks, and the Great thing with Ritchie Brothers financial services, what gives us confidence is not only when you look at the leads we get for our transactions. It also allows anyone who wants to finance equipment to bring it with them if they can't find it with Ritchie brothers. So.
Taken full advantage of our current transactions is great and we still have plenty of upside inside of Ritchie brothers of the buyers who win.
To store optimize our financial services, but what's also great about it is if you're the second third bidder in any of our auctions and you still need to go out find that equipment, because you have a job coming up their ability to use Ritchie brothers financial services in that transaction.
As we've been going through this tough supply time, we're seeing a lot more of that taken place. So we feel really confident that there's still tremendous upside in the business on both.
Richie brothers transactions and also outside of us.
Participating in those transactions in the future.
I love, it and Eric anything to add.
Yes. Thanks, So look the number of deals is going up the average size of the deals is going up and because of the way. We're structured we can address all different credit spectrum. So it's a great business when I look back at my history and talks and what they had in terms of their ability to help dealers fine.
That's either wholesale or otherwise.
There is great opportunity here for us It was super exciting to me when I came on board.
Okay. Thanks, I appreciate the color.
There are no further questions at this time. Please proceed.
Thank you so much so let me just close with that thinking everybody for joining our call on behalf of the team. We are very proud of the performance that we continue to drive and specifically drove last quarter.
You know again.
Delivering on the commitments made in the evergreen model, making prudent investments and setting us up for success success in the future.
For many many years to come so thank you to everybody joining our call and out with that have a wonderful rest of your day.
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.