“Kaizen is Our Way of Life” – Danaher Core Values
Kaizen is an approach to creating continuous improvement based on the idea that small, ongoing positive changes can reap significant improvements over time. I experienced this philosophy first-hand when one of our Japanese portfolio companies invited me to visit their manufacturing facilities in Thailand last year. I’ve been involved on the Board of two different manufacturing companies and what still stood out to me was how our portfolio company’s management had a relentless commitment to efficiency and process optimization. This dedication to improvement was evident in every aspect of their operations – from immaculate manufacturing floors to a laser focus on key performance indicators at every production line to custom-designed equipment to improve automation and cycle times. It was clear that their focus on kaizen extended to even the smallest details.
At EdgePoint, we have a single time-tested approach to investing that’s generated pleasing returns over multiple decades. We look for a proprietary insight in our businesses that allows us to identify growth that the market doesn’t see. The application of the approach requires us to do three things exceptionally:
Idea generation – identifying a proprietary insight about a business;
Investment diligence – conducting deep diligence to determine the validity of the proprietary insight; and
Business judgement – evaluating the quality of the business and management team.
While the investment approach has always stayed the same, we have our own kaizen where we are constantly striving to improve the application of the investment approach.
In the Cymbria Annual 2024 private commentary, I introduced the idea of how our active involvement in operating private businesses makes us better investors and better operators. One example is your investment in RB Global, Inc. (“Ritchie”).i
On the auction block
Ritchie is the largest auction marketplace, both on-site and online, for buying and selling used equipment and vehicles in end markets such as heavy construction, transportation, agriculture, energy and automotive. If you’ve flown into Edmonton, you may have noticed one of its sprawling auction yards along the highway, rows of massive yellow and orange excavators and trucks lined up in the yard as you drive towards downtown. Unsurprisingly, running this business involves a complex mix of logistics that involve moving and storing the goods; appraisals and inspections; and title management and financing. Success also requires scale on both sides of the marketplace – enough buyers to drive attractive pricing for sellers and enough sellers to attract buyers. This kind of two-sided network is extremely difficult to replicate.
In the case of Ritchie, our private investing experience helped us from idea generation to diligence to our ongoing evaluation of the investment.
Idea generation – We were familiar with the Ritchie’s business because it was a customer of one of our private portfolio companies, Inovatec. We admired its track record of organic growth and the quality of the business. When the market reacted negatively to Ritchie’s acquisition of IAA, a salvage vehicle auction company, we recognized an opportunity to buy growth without paying for it.
Investment diligence – Thanks to our experience with private companies, we’re used to evaluating small, niche businesses with limited public information. For us to get comfortable with an investment, we typically try to speak to as many of its customers as possible to understand a company’s quality and growth prospects. During the IAA acquisition, the market’s perception was that IAA was a broken business. To challenge this narrative, we conducted extensive diligence by speaking to every major insurance carrier and evaluating IAA’s performance against competitors. We consistently heard that there was no material difference in performance across key KPIs and developed a proprietary insight that the business wasn’t broken.
Business judgement – Operating our own businesses helps us assess leadership. Before Jim Kessler became Ritchie’s CEO, we had already heard positive feedback from our reference checks with prior employers and his positive reputation from his colleagues at Ritchie. We have seen in our businesses that great CEOs demonstrate urgency, driving both operational and financial improvements quickly. Under Jim’s leadership we have observed measurable improvements in Ritchie’s operating metrics and positive operating leverage, increasing our confidence in the management team. These data points gave us conviction that not only was IAA not broken but would start to regain market share.
Your initial cost base in Ritchie is C$76 per share from 2023. If we’re right about our proprietary insight, we believe that the positive change could result in EPS growth of over 15% annually (to more than C$10 per share) by 2030. While the share price has appreciated since our purchase and now trades at a similar valuation to its historical range of 26x to 27x earnings, we continue to believe the long-term return potential remains attractive.ii
Investing is an extremely competitive field and requires constant improvement. Just like kaizen, we’re always looking for ways to improve our edge. Your investment in Ritchie is an example of how we can leverage insights from operating private businesses to improve the application of our investment approach and improve returns for you as a Cymbria shareholder.