RB Global, Inc.

Good morning, my name is Pam and I'll be your conference operator today. At this time, I'd like to welcome everyone to Ritchie Brothers' third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 two. Thank you. I will now turn the conference over to Mr. Sameer Rathod, Vice President of Investor Relations and Market Intelligence, to open the conference call. Mr. Rathod, 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 Ann Pandozzi, our Chief Executive Officer, Sharon Driscoll, our Chief Financial Officer, as well as other members of the management team, will be available for the Q&A portion of this call. The following discussion will include forward-looking statements. 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 and operating results to differ significantly from our forward-looking statements are detailed in our SEC and Canadian securities filing, available at our website, investor.richiebrose.com. We encourage you to review the earnings release and Form 10-Q, which are available on our website, as well as Edgar and Cedar. 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, see our earnings release in Form 10-Q. Presentation slides accompany our commentary today. These slides can be viewed through the live or recorded webcast or downloaded from our website. All figures discussed today will be in U.S. dollars unless otherwise noted. I will now turn the call over to Anne Fanduzzi.

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 protocols based on regional recommendations and our best judgment. In the third quarter, we had hoped to welcome back customers to our auction theaters. However, given the surge in the Delta variant, we delayed our plan. We are excited to announce that the first event where customers are coming back en masse will be our flagship Orlando event in February of 2022. This will be an amazing way to welcome customers back. We are all very excited for Orlando. Our on-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 higher COVID-related disruptions, most notably in the third quarter. We believe the best view to the business trajectory is a two-year stacked view versus the pre-pandemic 2019. Despite ongoing supply chain headwinds, we have grown our GTVs 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 OEMs production as a point in time event and consider it outside of our control. By focusing on building, developing, and growing the facets 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&As giving us step changes in the execution of our strategy. At our investor day last December, we laid out our vision for transforming from an auctioneer to a global trusted marketplace for insight 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 of key partners that we can monetize around the used equipment market. Since that day, we have been busy putting pieces of that strategy in place, whether organically building capabilities through a test and learn approach or M&A, as is the case with Rouse, Euro auctions, and our recently announced acquisition of SmartEquip. 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 SmartEquip provides the foundation of that capability. SmartEquip has spent 20 years building critical connections between equipment owners and dealer and OEM partners to make the parts buying experience seamless. On this slide, we captured all the ways in which this acquisition strengthens each of our strategic pillars. SmartEquip is a SaaS-based business that is the industry standard for complete equipment parts, electronic procurement, catalog, and 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 to power a parts and service offering on our marketplace, enabling our dealer and OEM partners to connect quickly and efficiently with our equipment owners. We officially launched RichieList last month, which is our North American listing service. We see this as an on-ramp into the Richie 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 Richie Brothers' tools and services they need to be successful, such as used equipment valuations and market trends, purchase 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 and monetization that we previously didn't have. RichieList 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 listings for only $99 a month. Moving to our inventory management system or IMS, what we view as the gateway into the marketplace. We continue to make strong progress with 141% growth sequentially compared to last quarter in the cumulative number of organizations that are activated. We are slowly migrating our transactional workflow into IMS 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. On this slide, you can see phase one and phase two. Phase one are the sites located internationally that we use to test our growth hypothesis in 2020, and phase two is 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 plan. We also spent 2021 testing and learning from our new sales coverage model in Texas. Throughout the year, we learned a lot, iterated quickly, and I am happy to report that we now have implemented a new structure that is delivering strong results. 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, and forward sales pipeline, we are most excited by the engagement we are seeing with new customers that haven't previously participated in the Ritchie Brothers ecosystem. with a 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 hone 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 2020 financial results. As backdrop, the company posted a 22% increase in GTV in the third quarter of 2020. as COVID restrictions began to ease. And with that as context, our current quarter GTV decreased 4% with puts and takes across auction shift headwinds, the negative used equipment mix, slightly offset by FX tailwinds. We see this level of GTV as a strong result given two factors. 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 Ann noted in her remarks, using a two-year stack as a more indicative measure, this is a 17% increase in GTV compared to third quarter of 2019. Total reported revenue declined 1% compared to last year, with total service revenue declining 4%. Much like GTV, 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 strength with the contribution from Rouse 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 RBFS 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 GTV came in at a robust 14% for the quarter. Inventory sales tend to be lumpy, and they increase 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 mixed 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 of 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 protocols and FX pressure. Anne 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 the REV services team and continued investments in Ritchie Brothers Financial Services and other organic growth efforts, some of which Anne 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 SmartEquip acquisition, to be up mid-single digits compared to the fourth quarter of last year. Our cash flow remains very robust, with trailing 12-month 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 Anne.

Thanks, Sharon. I am very pleased with the quarter as we made excellent progress in accelerating our strategy of 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 our view here. We still see the environment as dynamic as supply chain, labor shortages, and logistics issues continue to not only plague our industry, but more pervasively across the broader economy. Specifically, We continue to see equipment tightness here in the fourth quarter. Let me reiterate that we see the current environment as 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 evolve 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 will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star followed by two. And if you're using a speakerphone, please lift your hands up before pressing any keys. One moment for your first question. Your first question comes from Craig Kennison with RW 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 SmartEquip.

Yeah. Hi, Craig. Anne here. Thank you very much. The supply environment is challenging, but we are very, very proud of the progress that we're making. So let me start with SmartEquip, cover Richie List a little bit, and then turn that over to Matt, our Chief Marketing Officer. So SmartEquip, really the way to think about it is for the, we'll call it short to mid-term It will be a completely standalone entity as we build out our marketplace functionality. And just as a reminder, here's what SmartEquip does. They spent 20 years developing an architecture that seamlessly plugs into dealers and OEMs parts offerings to make it really easy for end consumers to look up a part they need via catalog, order it seamlessly, transact it easily. you know, across dealers and OEMs. Just an incredible platform that team has built. They'll continue to run that business. That business monetizes primarily on a SaaS basis. We love that team. They're staying. You know, Alex, the founder, Fern, the CEO, Brian, the chair, they're staying and driving that team forward. We're excited. As we evolve our marketplace, we will then use that architecture that they've laid. Think of those pipes. to be able to offer that same conversion to Richie Brothers and buyers. And I'm going to steal a line from our chief strategy officer, Kevin Geisner. The ultimate vision is a do you want fries with that? So you have an auction that takes place, a buyer wins an excavator at checkout. Imagine where today when they check out, you know, it's 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 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 SmartEquip such that the customer can just click to add that to the shopping cart, ideally add that even to their financing preferred method, and kind of check out seamlessly. That's the vision. We think of that as kind of an intermediate term For the short run, we don't have that capability built yet. That's what we're building in the marketplace. But that's where we're headed with SmartEquip. And then on RichieList, and I'm about to turn it over to Matt, the vision is, you know, customers continue overwhelmingly. You guys know the $300 billion marketplace, the biggest chunk is just customers selling their own equipment. They're going to continue to do that. We wanted to offer a listing service that they can do that with us as well in but ultimately really be the gateway into the IMS, the inventory management system, such that they can then partake of any other services, ours or third parties, that exist all the way through kind of waterfalling, if they're not successful in selling a piece of equipment, waterfalling 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 put it in place this quickly.

Yeah, sure. So, you know, as with any listing service, right, there are core revenue streams, which tend to be of the advertising nature. So sellers pay a fee, a monthly fee for unlimited listings, or they can purchase an ad on a one-off basis. Additionally, there are advertising mechanisms, you know, to be able to promote your listing as well as, you know, straight banner advertising. But we don't really look at that as the core, eventually the core revenue stream here. As Ann pointed out, the second order is the ability to sell services into these transactions, whether that be inspections, shipping, financing. These are core services we offer with our core offering, and now we can unbundle them and offer them as part of these private transactions. So that's an additional revenue stream. And then as Ann pointed out, you know, there are these, you know, what we like to call network effects to the ecosystem. You know, the stickiness we obtain with the IMS and with the listings, you know, sellers have an easy option to flow that inventory down to our marketplaces where we make our traditional commissions. So that's the way we think about the revenue streams associated with Ritual.

That's so helpful. Thank you.

Your next question comes from Sherilyn Radborn with TD Securities. Please go ahead.

Thanks very much, and good morning. So Anne, 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, Sherilyn. You know, we view 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, you know, knocking on the door of two years here. You know, we view the world as in our control, out of our control. When I normally say those words, the out of our control is the smaller part, the in our control is the larger part. And as you saw with the initiative, that's clearly the case with our workload. But in terms of the backdrop, it is unquestionably having a very significant impact. And I'll just bring you guys through kind of the journey we've been through. You are monitoring it as close as we are, 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, you know, 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. OEMs 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're clearly saying it's not going to be this year. It's going to be next year where things actually get better. And what we're seeing in the fourth quarter is that the tightening is actually getting worse, not better, you know, as expected. You know, we're very buoyed by knowing, look, the equipment continues to age, right? This isn't the case that, you know, if you don't buy a cup of coffee today, you're 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 to 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, it will take longer, and Q4, for sure, not getting better but going the other way.

Okay, 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?

Yeah, Sherilyn, thanks. Yeah, so we certainly looked at what other peer companies were doing in this space. And again, the goal was to be as helpful to the users of the statements as possible. Um, the gap measures are always there. So in our core reporting, um, the ShareBase comp is included in that. Um, I think what, what we're recognizing, um, and we, you would have seen it with the Rouse acquisition and, um, we'll see it with, um, you know, SmartEquip as well, you know, as you bring on new acquisitions, the costs related to those, which sometimes include a portion of the proceeds going into ShareBase compensation. just unfortunately continue 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 will 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.

You know, certainly past trends would be indicative, and it really is going to be newer acquisitions that cause that to ramp up. You know, 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, Sharon answered it very well. understand we take actions as a management team to ensure the health and wellness of this business. So for example, when we acquired Rouse, we asked for a meaningful portion of their proceeds to be rolled into Ritchie Brothers stock, both as a retention and candidly as a combined bet on the come of being aligned with our shareholders and what we're acquiring this company to do and build together. That's the same MO we took with SmartEquip, to Sharon's point, and future acquisitions. So what 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's no other intent behind it.

Okay. I'll pass it over. Thanks.

Your next question comes from Lawrence DeMaria with William Blair and Company. Please go ahead.

Thanks. Good morning. As far as the IMS, obviously you get the numbers around the growth sequentially. Can you talk about the engagement in terms of transaction volume and logistic and services revenue that these engaged organizations are using and the type of customers you're signing up? In other words, is it dealers or is it end users such as Fleece? Thank you.

Hi, Larry. Ann Sandozzi here again. I'll take that question. So, you know, obviously the trajectory of the IMS penetration has been, you know, really exemplary, I'm going to say. We're very excited about it. 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 the indications we're having so early are 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, you know, can we get them excited? The next phase will be all about when that study states. 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 dealers and big entities. Again, the reason we did that is we didn't want any false sense of security with just big numbers, right? So if we turned our attention to people with a lot of assets, Um, you know, and then they 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 IMS, but at the end won't really met, uh, the huge lever that we think this will be for our business. So right now we're focused on organizations. A lot of those are regional, uh, dealers as well are coming in, uh, rental comp, you know, folks are coming in, but, but we're really counting kind of by the numbers. And Carrie 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, our culture is test and learn. 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 they're interacting with it, how are they doing with loading assets, right? And what is that flywheel 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? You know, 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 of data, other connection points, like with getting financing inspection, you know, all of the others, and those of third parties. We are very, very excited to, again, via SmartEquip as an example, facilitate parts and service transactions on behalf of dealers and OEM partners, so not even our own. We'll be monitoring those as well, and then ultimately that will translate to a revenue growth. So I said a lot, it's a journey. We're excited, but we also want to methodically build this out, 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, so thank you, Ann. And then secondly, if I could just follow up, the new adjustments – implies that acquisitions are not one-offs right because we're moving from that back so should we expect this pace to keep up um and you know what does the pipeline look like for for m a or is this a heavy year and you know back to focusing on the core thanks yeah i'll start and then i'll turn it over to sharon so you know when we laid out our vision um it was really the what

So, you know, we laid out a very, very clear vision of transforming to this trusted global marketplace 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's the what. And I think what you heard from Sharon, and 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, like the Richie, you know, these kinds of things that we're doing on 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 SmartEquip, we would take an M&A lens. That's how we look at the world. So, you know, 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, does it give us a step change to getting to the vision? Sharon, anything to add?

Yeah, I would also add, you know, we've already announced significant acquisition activity. And, you know, just thinking of 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 the 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 good model to go forward based on where we are at the moment and what we see.

Okay, so we're going to back out the cost of the integration as well. Okay, thank you.

Your next question comes from Michael Feniger with Bank of America. Please go ahead.

Yes, thanks for taking my question. I'm curious, Anne, what you're hearing on the ground with customers given the rise in oil price and this potential infrastructure bill. You know, on one hand, it's probably good for demand for used equipment as the customers can't get their hands on new equipment, like you said, with production issues and supply. Yet, on the other hand, I think historically, rising oil infrastructure proposal could keep co-signers kind of holding on to their fleet, maybe less dispersals. I'm just curious if you see this dynamic as a net-net, like a drag dynamic. into Q4 and early Q1? Or is it actually, you know, infrastructure bill? Is this actually going to reunite, you know, GTV growth going forward?

Yeah, Michael. So, yeah, we're hearing everything you're 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 on the short term, really the single biggest macro effect is the supply chain, right? It is the single biggest, it is so overwhelmingly, and again, it's not, you know, we wish it was just chip shortage, it's chip shortage, it's shipping, it's, you know, ports getting back. 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 overwhelmingly causing, you know, a drought in equipment supply. And again, as we look at kind of that Q4 scenario, 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're using the time to drive our initiatives, but for sure. Then if you look at the bookend the other way, long-term, sooner or later, supply chain has to catch up. Sooner or later, these woes will be behind us. That's for sure. We know that. Sooner or later, as this equipment sits out there, and this is the nuance here, it will age and have to transact. And, you know, we're going to be here for that. So we largely see kind of the infrastructure of plans as being kind of a net positive for us. But again, that's really, if you think of the long run, an intermediate is anybody's guess where that tipping point comes.

Makes sense. And just the timeline for the CFO succession plan, I've I'm just curious what we can kind of expect there, given you guys have M&A integration. I think you're trying to close your auction. I imagine, you know, later this year, early 2022, you know, is this search more external? Are we looking for someone, you know, more on the equipment side of the industry or maybe more of a tech type background given, you know, what you guys are kind of building with the platform?

Yeah, so, well, the first headline is, this is why 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, we're not on video, we're not in person. Sharon turned 60, but she looks decades younger. You know, amen. But, you know, 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, yes, but in body, no. And so we've kicked off the search. It's early days. I will say we are, you know, looking for the best athletes. We have laid out the strategy. It is an external search because we are this transformation to a marketplace. The organic growth we're driving, you know, it's a complex business and it's big and it's getting more complex and it's getting bigger. 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, Sharon has, of course, graciously agreed to then do the right things with transition, but then also support all of the integration and all of the pieces we have on our plate. So the intention is for her to 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 Fast with Raymond James.

Please go ahead.

Thanks, and good morning. Just the one question for myself, but just looking if you could elaborate on what gave you confidence to expand the satellite yard 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. You know, we are a test and learn culture. So we had a point of view, and that point of view said, you know, what sellers want, they're clearly asking for the most money in their pocket. That is what they want, right? When they come to Ritchie Brothers, they say, you know, 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 put yards 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. Then we set up a whole set of KPIs around it to test and learn and then gain confidence. So let me pause there and then turn it over to Jim and what all of that was.

Yeah, perfect. Thanks, Anne. And similar to what we talked about last quarter, In the satellite yards and the pilot that we have, seeing 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 GTV 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 what we're continuing 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 it's still early days, especially here in the U.S. 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 we're very excited about.

Okay, that's it for me. Thanks.

Ladies and gentlemen, as a reminder, should you have any questions, please press star 1. Your next question comes from Sabahat Khan. with RBC Capital Markets. Please go ahead.

Great. Thanks, and good morning. I'm just following up on the comments on the satellite sites. I guess with the addition of those, are you considering any site closures of maybe legacy sites over the next few years, or is that still under consideration?

Yeah, so let me take that.

Go ahead, Anne.

No, I was about to just start and then turn it over to Jim. So, Just as a reminder that our point of view on these satellite yards is a very, very different view of our larger yards. So kind of, again, historically when we were live auctioneers and then I'm turning it over to Jim, right, it was more about the auditorium and about sale day and about, you know, that kind of point of view. Obviously, you know, we've been transitioning our business to a different model where, you Obviously, all of the transactions are online because of COVID, but what we want is kind of that blend of allowing customers the ability to obviously give us care, custody, and control of their equipment. They no longer want it. They don't need it. We take it. We market it. We spiff it up. We inspect. We do all of that stuff. But we really see kind of a hybrid model going forward and kind of a use of those legacy sites And the new satellite yards is kind of, I'm going to steal Jim's words, and I'm going to turn it over to him as kind of a hub and spoke approach of how we're going to go to market. But with that, Jim, sorry I interrupted. Back over to you.

Perfect. And I was just going to add, 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? 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 satellite 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 the profitability and the returns that we expect to get from our network. But we have a process, and that includes is there a new state where we should have a hub and create a spoke model? Is there a new country, international? But that's something that we kind of do quarterly.

Okay, great. And then just a second one on there's a lot of discussion earlier on the IMS, and you provided some good color on the different phases that you're thinking about. as that ramps up. I guess, do you have some timelines or even internally how you're thinking about how long it might take for each phase to kind of build up? Is it sort of number of units, customers? Just trying to get an idea of how we should think about that platform sort of fully ramping up over the next few years.

Yeah, we haven't, it's a great question. We haven't communicated a timeline, so to speak, but the way to think about it is it is a multi-year journey by the time we get there. And so, you know, I would kind of look at the history and even the page that we showed. You know, we have a point of view, whether it's IMS or listings or anything else. You know, we start with or even, you know, satellite yards to go to market model. We have a point of view. We form a strong thesis around it and we develop the KPIs before we ever hit the go switch. We then say, okay, what are the leading indicators and test and learn? Some things are much quicker. You know, if you take a look at the Satellite Yard page and what Jim's organization is doing there, you know, we started getting a lot of confidence quickly on the KPIs, you know, the efficiency of those sites, the new sellers that it was attracting, new buyers, and it gave us enough learnings quickly that we could start filling things out. But as Jim said, it's still a test, but filling things out more around the globe. Look at the other side of it where we had 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. And, of 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 us building out the modern architecture and the technology to really allow it to – fulfill its full ambition, you know, that comes, 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 in the tests and then move into the next one. We do it on a quarterly basis. We have a huge sense of urgency. I'm not, you know, holding back information. Literally when we feel like the organizational lift is, you know, on a good flywheel, we'll move our sites to the assets. And then when we feel like the assets are in a good place, we'll move our sites to the service adoption and 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 and we can scale, that's when we're going to go.

Great. Thanks very much for the call.

Your next question comes from Sherilyn Radborn with TD Securities. Please go ahead.

Thanks. Just to 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 equips?

Yeah, so let me start and then I'll, you know, always the how and pass the what over to Sharon. Sherilyn, we are, hopefully the signal you guys are getting from us is that we're, as it was, you know, December 7, 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, employees. I just keep beating the drum because this is it. There's no other architecture, 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. So 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, you know, speed, efficiency, and kind of driving this vision forward. So, you know, that is how we evaluate everything that we're looking at. But again, the prioritization is around getting to that marketplace and then fulfilling the vision of each of those five pillars. That is it. That is our focus. Sharon, do you want to add anything on the how?

Sure. So, you know, I think, Sherilyn, the way to think about how we've gone, how we've released the information around our intention to finance euro auctions is that plan really still holds. And those leverage models that we indicated at the time we announced Euro did actually anticipate enough room for some additional acquisitions and did, because we were fairly far along in our thinking of smart equip, we had made sure that in our discussions with our banks as well as the credit rating agencies that our intentions on that acquisition and potential acquisitions going forward were already incorporated into our leverage thinking. So, you know, certainly once we put the bond in place for euro, once the euro transaction completes, you know, we will be reprioritizing some debt repayment strategies to be able to get that you know, debt level back down to a more comfortable leverage range. But in that modeling, we have already anticipated, you know, not large-scale acquisitions, but certainly some smaller potential hows. We've been incorporating that into our thinking. You know, I think for the right acquisition, you know, we may be open to some, you know, as we talked about with Rouse, not just debt funding but some additional equity to be able to secure management teams to be able to you know kind of secure the 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 we're we're very you know conservative in our views. And so with our projections, I think what we've already relayed 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, again, to be able to keep what we'd see as our current rating structures with the agencies, keep them in line.

So can you just remind us what sort of leverage target you have before you would sort of embark on using the balance sheet more aggressively?

Well, we called out that we would, at closure of Euro, be just, I think, just under the four times level. You know, again, each acquisition that we're 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 miss fendozi

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 thanking our team members, many of whom listen in, thanking our partners, and thanking all of you for taking the time. Again, as we take a look at the future, hopefully you guys picked up the message that, you know, we are very excited. We're bullish about where we're headed. But the reality of the marketplace we find ourselves in and what we are facing in Q4 is real. It's a point in time, but it is real and something that 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.

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.