RB Global Inc (RBA) 2003 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Ritchie Brothers Auctioneers Inc. 2003 Q1 Earnings Conference Call. I would now like to turn the call over to Randy Wall, president and COO of Ritchie Brothers Auctioneers. Please go ahead, sir.

Thank you, operator. Good morning and welcome to the Ritchie Brothers Investors Conference Call. Today we will be talking about the results for the first quarter ended March 31, 2003. My name is Randy Wall, president and COO of Ritchie Brothers Auctioneers. I am on the line from our corporate headquarters in Richmond, British Columbia where I am joined by Peter Blake, our SVP and CFO; and Bob Armstrong, our VP of Finance. Dave Ritchie, our chairman and CEO is on the line from Phoenix, Arizona where we are conducting our auction which is just getting underway as we speak. Our presentation will take about 20 minutes and then we will accept questions.

At this time I would like to make a safe harbour statement. The following discussion will include forward-looking statements within the meaning set out by SEC rules and regulations. Comments that are not statements of fact are considered forward-looking statements. These statements include comments about projected future results and performance, amongst others. Our actual results may differ materially from those projected in this discussion. Additional information concerning factors that could cause such a difference is included with our periodic filings with the SEC.

I would also like to remind listeners that during this call we will talk about gross auction sales, which represent the total proceeds of all items sold at company auctions during the period. Gross auction sales are not a measure of revenue and are not presented in the company’s statement of operations. Auction revenues represent the revenue earned by Ritchie Brothers and are composed of, among other things, the commission earned by the company and the net profit or loss on the sale of equipment purchased by Ritchie Brothers. Listeners are encouraged to read Ritchie Brothers’ periodic filings with the SEC for a further discussion of the components of the company’s revenue.

I am happy to share with you that the momentum of 2002 has continued into 2003 with another record-breaking performance for Ritchie Brothers in this, the first quarter. We achieved gross auction sales of $341.5m. Auction revenues of $36.4m, and net earnings of $8.8m, all of which were new records for the first quarter for Ritchie Brothers.

We are continuing to see the benefits of our investments over the last few years in people, facilities and infrastructure. We remain focused on improving our productivity and efficiency and on taking advantage of our operational capacity to hold additional auctions. We expect to benefit from our operating leverage and continue to take advantage of opportunities as they emerge. We expect this to translate into further growth in our business and profitability in the years ahead.

The fundamental feature of the global economy during the first quarter of 2003 is uncertainty. With the situation in the Middle East, continued economic weakness in the United States and uncertainty about when to expect an economic recovery, stability seemed like a distant notion. Despite this economic turbulence, Ritchie Brothers was able to achieve a record performance, demonstrating the strength of the company’s business model.

We continue to believe that our reputation for honesty and fairness and our commitment to the unreserved auction process, together with our worldwide presence, have allowed us to repeatedly achieve new performance records.

In the first quarter of 2003, over 38,000 bidders registered to bid at our auctions. This represents a 32 percent increase over the number of registered bidders in Q1 2002. These bidders were competing for more than 34,000 lots consigned by over 4,500 consignors, increases of 17 percent and 20 percent respectively over 2002 Q1 levels.

We intent to keep taking advantage of the momentum that has been evident over the last number of years, and we expect this will drive further increases in these operating statistics in the years ahead. As we attract more bidders and continue to grow our customer database, we are able to attract more consignors and more equipment, which in turn attracts more bidders, and so on.

Although this momentum works in our favour, we are careful not to take our customers for granted. During our last conference call we talked about our intention to rededicate ourselves to excellent customer service in 2003 and this goal was a significant focus for us in this first quarter.

The last time we spoke to you at our 2002 year end conference call, we talked about expecting continued growth in Europe and the United States. During the first quarter of 2003, we achieved strong gross auction sales growth in Europe. In March we held our first sale in Greece, and by all accounts it was a success. We continue to expect a strong performance overall in Europe for the full year of 2003 and we are actively looking for further expansion opportunities in the European region.

We also enjoyed strong gross auction sales performance in Canada in the first quarter of this year. The sale in March of the three high-speed Catamaran ferries contributed $13.7m in gross auction sales and further enhanced the company’s presence in the industrial marine sector. The sale also set a new record for the largest single item ever sold at a Ritchie Brothers auction. Two of the ferries sold for $4.5m each. This sale demonstrated Ritchie Brothers’ ability to handle special projects and sell unusual assets, no matter the size. The ferry auction is an example of how our competitive advantages have allowed us to penetrate new markets and expand our presence in existing markets in recent years.

We remain confident about continued growth for Ritchie Brothers through the balance of 2003 and in the years ahead. We intend to continue our proven strategy of steady, controlled growth, recognizing that we have only a small share of the enormous and highly fragmented used equipment market in the world. This is a key point to take away from this discussion. No matter what happens in the world economy, we are confident we can achieve growth by increasing our overall market share. The ever-increasing number of bidders and consignors choosing to work with us is evidence that our strategy is working and that we offer a compelling value proposition to our customers.

Let me now turn this call over to Peter Blake, our CFO.

Thanks, Randy, and good morning everyone. I hope you have all seen the press release that we issued this morning. The numbers that form the basis of this discussion that follows are contained in that press release. Let me remind everyone that dollar amounts referred to in this call and in our press release are all stated in U.S. dollars.

During our last conference call, we indicated that we were expecting gross auction sales for the first quarter of 2003 to be about $320m. Gross auction sales for the quarter came in at $341.5m, approximately 16 percent higher than the equivalent period in 2002. The forecast for the first quarter of 2003 did not include any amount for the ferry sale that Randy discussed. This sale contributed $13.7m to gross auction sales for the quarter. So excluding this amount, our results for the first quarter of 2003 were about $327.8m, which is inline with forecasts.

Auction revenues in the first quarter of 2003 were $36.4m, a 24 percent increase over auction revenues reported in the first quarter of 2002. Our auction revenue rate was 10.65 percent for the first quarter of this year, compared to an even 10 percent in the first quarter of 2002.

The auction revenue rate improved in 2003, mainly as a result of the strong performance of our underwritten business, which is made up of guaranteed contracts and the net profit or loss on the sale of inventory packages. I am going to let Bob talk more about our expectations for the rest of 2003, however I will say that we had a tremendously strong auction revenue rate in the first quarter of 2003 and we are not predicting a continuation of this level of auction revenue rate for the remainder of 2003.

Direct expenses, which are comprised of the cost incurred specifically to hold an auction were 1.36 percent of gross auction sales for the first quarter of 2003. This compares favourably to the direct expense rate of 1.33 percent in Q1 of 2002 and the 1.45 percent rate forecast for the full year of 2003. The direct expense rate is influenced by the size of auction sales in particular periods, and by whether auctions are held at permanent sites, regional auction units, or at offsite locations. Larger sales, and sales held at permanent auction sites generally resulted in a lower ratio of direct expenses to gross auction sales.

General and administrative expenses were $16.7m for the first quarter of 2003, a 4 percent increase over G&A for the same period of 2002 and we were pleased with that performance. Depreciation was $2.6m in the first quarter of 2003, an increase of $600,000 compared to Q1 of 2002 and inline with our expectations. Depreciation increased in 2003 primarily as a result of the depreciation of new auction facilities constructed over the past few years, and an increase in charges related to the software development costs capitalized in 2002.

During the first quarter of 2003 we incurred interest expense of $900,000 which is below our estimate for the quarter. Interest expense in Q1 was offset by the recovery of approximately $600,000 of accrued interest in connection with an outstanding tax issue that was resolved during the quarter. Our income tax rate for the quarter ended March 31, 2003 was 25.3 percent, which is a bit below our guidance at our 2002 year end conference call of 28 percent. The lower tax rate experienced in the first quarter of 2003 was in part related to the outstanding tax issue that we resolved during the quarter, which resulted in a reversal of previously recorded income tax expense of approximately $250,000.

Net earnings for the first quarter of 2003 were $3.8m, or 52 cents per diluted weighted average share, an increase of about 63 percent compared to the earnings in the first quarter of 2002.

There are two factors to consider when looking at this year’s first quarter results. The first item is the fast ferry sale. Although we consider this sale to be in the ordinary course of our business, because we regularly handle special projects, it was a one-time event that may not recur in future periods. We estimate that the fast ferry sale contributed about 4 cents per share to our bottom line in Q1. The second item that could be considered non-recurring is the resolution of the tax issue that effectively reduced both our interest expense and our income tax expense for the quarter. It had a bottom line net impact of about 5 cents per share.

Dave is going to talk more about our recent property development activities, but I would like to make a few comments about our capex in the first quarter of 2003 and update you on our plans and our expectations for free cash flow in the remainder of 2003.

Capex for the first quarter of 2003 including maintenance capex was $4.9m. The expenditures during the first quarter of 2003 relate mainly to acquisition of land in Sacramento, California, which Dave will speak to, as well as costs relating to the completion of our new permanent auction site in Prince George, British Columbia. I still expect that we will incur gross capex for the full year in the range of $10m to $15m, and maintenance capex in the range of $5m for a total expenditure in the range of $15m to $20m for the full year.

Our actual growth capex for the rest of 2003 will depend on our ability to develop opportunities to develop new auction sites and/or other opportunities to grow the business. As I mentioned, we have acquired land in Sacramento that we intend to develop into a new, permanent auction facility and we are looking at several other opportunities in the United States. We expect to commence construction on the new auction facility in Sacramento later this year, and we remain interested in buying land in several other regions in the U.S.

If we are successful in finding suitable properties, we may complete the acquisition of land in 2003, but depending on the timing of the land acquisitions, construction of buildings and improvements will not likely start until 2004.

We are reiterating our guidance for free cash flow after estimated capex and scheduled debt repayments for the full year of 2003 to be in the range of $15m to $20m. We remain confident about our expectations for growth in free cash flow in 2004 and future years. The board of directors believes that excess cash should be returned to shareholders once appropriate reinvestment opportunities have been funded. Therefore, we are reiterating our guidance that it is more likely than not that Ritchie Brothers will return excess cash to shareholders in the form of a dividend, and the board is currently considering the appropriate yield for a possible dividend and the timing and frequency of payment, among other factors.

I will turn the call over now to Bob Armstrong, our VP, finance.

Thanks, Pete. Good morning. I am going to update our guidance for the remainder of 2003. In previous conference calls, we indicated that we were expecting gross auction sales in the range of $1.55b for 2003. Based on our performance in the first quarter of 2003, we would like to increase this guidance to the range of $1.56b for the full year. This represents growth of 13.5 percent over 2002 gross auction sales.

Even though we have not achieved double digit sales volume growth in recent years, we believe that our results to date, combined with the addition of All Peace for a full year in 2003, and based on recent forecasts provided by our regional managers, we should be able to realize this level of growth in 2003.

Second quarter gross auction sales should be in the range of $460m, or about 30 percent of the annual total. At this time it is probably reasonable to assume that the third quarter will represent approximately 20 percent of the full year’s business, and the fourth quarter will represent approximately 30 percent of our annual sales volume. We will offer more specific guidance on these numbers on future conference calls.

At this point in time, we continue to expect an average auction revenue rate for the remainder of the year in the range of 9.3 percent. Although this is lower than the 10.65 percent rate experienced in the first quarter, we believe that it is a more sustainable rate in the long term. We are not convinced that the higher than expected rates we have been achieving are either sustainable or indicative of a long-term trend. We have analyzed the components of our quarterly auction revenue rate over the last few years and have found little to indicate that we are witnessing a long-term trend. Our experience to date with respect to the impact of the 10 percent handling fee introduced in 2002, and the 2 percent internet purchase fee and proxy purchase fee introduced in 2003 has matched our expectations, so we are not increasing our guidance from that provided at our year end conference call.

For those of you not on that call, I arrived at the 9.3 percent rate by taking our historic average rate of 8.8 percent, adding 40 basis points for the handling fee introduced in 2002 and adding an additional 10 basis points to reflect the expected combined contribution of the new internet purchase fee and proxy purchase fee.

We continue to expect direct expenses, being the cost specifically related to particular auctions, to remain in the range of 1.45 percent of gross auction sales for the remainder of 2003.

We are increasing our guidance for G&A expenses for the full year 2003. On our last call, we indicated that G&A would likely be in the range of $64m for the year. Based on the results to date in 2003, I would like to increase this guidance by about $2m to be in the range of $66m for the full year of 2003, due primarily to increases in bonus accruals throughout the year to reflect the impact on our bonus tools of the already well above average performance achieved to date. At this point, I have no reason to expect any material quarterly variations.

Full year depreciation expense in 2003 should be in the range of $11m, consistent with our previous guidance, and as I stated in our last call, depreciation will be charged roughly equally throughout the quarters, but increasing slightly through the year as a result of depreciation on new buildings and improvements coming online. Specifically, our new Prince George auction facility opened in May of 2003. Depreciation of that facility will start from that date. Depreciation will also be higher than that of prior years as a result of continued growth in capitalized software.

Interest expense for the full year 2003 should be in the range of $5m to $6m. Interest will increase over 2002 levels as we expect to be capitalizing less interest to properties under development in 2003. The increase will be partially offset by the $600,000 recovery during the first quarter of 2003 of previously accrued interest expense relating to the income tax issue that Peter talked about.

Other income is still expected to be about $2m in 2003. We discussed previously an income tax rate for 2003 in the range of 28 percent. But factoring in the impact of the settlement of the income tax issue in Q1, I now think that the tax rate for the full year is more likely to be in the range of 27 percent.

Before I hand the call over to Dave, I would like to give you an update on our rbauctionBidLive internet bidding service. We continue to see growth in the use of this service in 2003, and by all accounts it has been an unqualified success. In January of this year we introduced a modest fee, applicable only to items purchased using the service. This fee does not appear to have had any impact on users of the service. Both buyers and consignors of equipment appreciate the advantages of rbauctionBidLive and this tool is becoming a significant competitive advantage for Ritchie Brothers. Internet bidders are already buyer or runner up on approximately 15 percent of the lots being offered over the internet, and the popularity of the service continues to grow. By March 31, total sales over the internet had surpassed $100m since we launched the service.

Now I will pass the call over to Dave Ritchie.

Good morning, everyone. I would like to speak to you briefly about our property development plans and give you an update on the used equipment market. The first thing I want to tell you is about our grand opening in Prince George which we held last week. We opened a new permanent auction site, replacing a small one which we had been operating for many years. Our new site is on a 114 acre parcel and we have so far developed 60 of those acres. We have been operating in Prince George since the late 1960’s and the sale last week was our 107th sale in that area.

I talked to a lot of people at the sale last week and everyone was impressed with our new facility. With over 2,200 registered bidders, the sale was a big success. I am really proud of everyone who helped get the facility up and running and put it all together with the wonderful sale.

I am also happy to report that we have completed the acquisition of a great piece of land in Sacramento, California on Interstate 5 just north of the city. We have been operating in Northern California region for some time now and we feel this is a huge market opportunity. I am excited about getting our new facility built there and I am hoping that construction will start this year, once all permits and plans are in place. This site consists of over 90 acres and will be an excellent base for us to develop the Northern California market.

We have also been busy expanding in overseas market. During the first quarter we signed a lease in Spain for an auction site just outside of the city of Valencia. We had been holding auction sales in Spain for a number of years now, out of a temporary facility and we think it is a good time to establish a more permanent presence there. We have become well-established in the Spanish market and are educating Spanish equipment owners about the merits of our business model. So far they have been very receptive and our sales in this market are increasing.

We have a terrific crew of folks in Spain and the surrounding European marketplace and this new regional auction unit will allow us to increase our presence evermore in this part of Europe.

Another development I want to talk about is our new regional auction unit in Melbourne, Australia. The land lease was just signed last week and we have been conducting off-site sales in the area for some time now. The sale is also to establish a more permanent presence in this market. Our continuing goal is to hold two or three sales per year on this site and I think we will see some good things coming out of Melbourne in the next few years.

We are still looking for other new properties in the United States as well as internationally. I can think of two regions in particular that I could do very well in. I hope we can add another property in the United States later this year, or maybe early in 2004.

Although the pace of our expansion is not going to be what it was over the last five years, we are going to continue to look for opportunities to increase our presence in markets we are operating in and to get into new regions where we don’t operate. I won’t say very much about the prices of used trucks and equipment today other than to say that the prices have remained firm across most categories. We sell more used trucks and equipment than anybody else in the world, so we have a very good feel for the prices and the trends. And as it happened before, the used market is holding up very well, even while demand for new equipment is under pressure and the world is facing all kinds of economical and political uncertainty.

From our perspective, supply and demand appear to be well balanced, and for the most part, the prices have been steady in most categories of equipment. There will always be pockets of weaknesses in the used equipment market, but we stand by our belief that the value of well maintained, late model used equipment will remain strong in the year ahead, and so far results at our auctions have supported this view.

Now I will return the call back over to Randy. Thank you.

Thanks, Dave. As I noted earlier, there are lots of opportunities for Ritchie Brothers in the industrial asset marketplace. The challenge for Ritchie Brothers is to take advantage of these opportunities and to expand into related markets where we can create value for our customers. Our plan is to grow the business by developing more and deeper relationships with the equipment owners; by introducing more people and more industries to our unreserved auctions; and by continually improving the service we provide so that the value proposition we offer to both buyers and consignors remains compelling.

Ours is very much a relationship business. We understand that our service does not sell itself, and that our team of sales representatives and administrative personnel need to provide the very best in customer service in order to support our growth initiatives.

Fortunately, we have a strong and dedicated team and I feel very confident about our future. Before we open the call to questions, I would like to recap the main points which we covered in this call. Firstly, we have ended the first quarter with gross auction sales of $341.5m; net earnings of 52 cents per diluted share; a 16 percent increase in gross auction sales; and a 63 percent improvement in earnings over the 2002 Q1 results. We are expecting further growth in gross auction sales for the remainder of 2003 and have increased our target to $1.56b for the entire year.

Secondly, thanks to the infrastructure investments of prior years we have significant operating leverage which is driving improvements in our margins, our earnings and our cash flow. Over the next several years we will continue to work towards average top line growth in the range of 10 percent, which should translate into average earnings growth in the range of 15 percent.

Thirdly, I want to reiterate that we do not expect the unusually high auction revenue rates experienced over the last several quarters to continue. As Bob has mentioned, we’ve studied the components of our auction revenue rates in recent periods, and we have found little to indicate that there is a long-term trend. In addition, we are continuing to aggressively pursue all our business, whether it be straight commission or underwritten business.

Finally, the used equipment market is facing challenges and uncertainties that are creating market opportunities for Ritchie Brothers. The market opportunity in front of us is huge and we have the capacity and the operating leverage to go after it.

Now, we would be pleased to answer any questions that you have. Operator, I will turn the call back over to you, and can you please begin the question period?

Yes. (Operator instructions) The first question comes from Murray Gainer, Scotia Capital Markets.

Good afternoon. I would just like to ask a question about what is behind these numbers -- I mean, the rate increase in the number of consignors, bidders and buyers in this quarter as compared with last year. Can you talk a little bit about what specific action you’ve done that is resulting in these kind of increases?

Murray, this is Randy Wall. Number 1 and foremost would be the internet. We are seeing expanded audiences involved in the bidding and buying fold of our auctions because the accessibility to the sales is improving and online internet bidding has become exceedingly popular.

In addition, we are just continuing to grow and to add more auction sales to our calendar. It’s just attracting more people. I wish I could be more scientific in giving you a better explanation, but the internet is a big component. We’ve acquired All Peace which has gathered a new customer base in Northern Alberta which is now seeing larger attendance figures at other auctions where those people are travelling to. Peter, Dave or Bob, if you want to add anything to that.

Murray, this is Dave Ritchie. I think one of the more important things is these yards that we’ve built over the last two years are maturing, and the people have now become very familiar with us. They know where the place is at and they want to come and do business with us. I think we now have a good visible presence 12 months of the year at these locations, and it automatically brings the R&N to us.

Well it’s not so automatic, Dave. Hi Murray, it’s Peter here. I will share that comment as well with Dave. I think that the momentum that we talked about in building these sites and modifying the buying and selling habits of people in a particular area really come into play there. We have an increasing number of bidders to get consignors to get more bidders to get more consignor as Randy spoke to in his prepared comments. Really, it is just a function of that multiplied by all of the sites that are out there. We’ve had now a good kick at many of the areas where we’ve put these sites in play, in 1999 and 2000. They are starting to mature and they are starting to gain momentum in each of those areas. So it is just a leverage in that respect as well as the financial respect.

Okay, thank you.

Your next question comes from Anthony Geller of Livingston Capital.

Hi guys, and nice job. Just two questions for you. The first is, financing arm. Companies that are involved in big-ticket items often have an embedded finance company that helps finance purchases. Have you ever thought of adding that to your business model? The second question is more mundane. Your maintenance capex looks like it is about $5m. That is the guidance you gave in the call. Your D&A is around $10m. Why is there such a large difference?

Anthony, it’s Bob Armstrong, I can answer the first one because that is a great question for me to answer. I joined the company about seven years ago, and I’d been here about a week and I saw the way to save the company from a horrible future. I was going to introduce Ritchie Brothers Finance, the new finance arm. It is a brilliant idea, but I was immediately put into a corner and told to wear a pointy cap. Apparently I wasn’t the first smart guy to come up with this idea.

I was reminded that some of our biggest customers are in fact finance companies, and if we were to get into the business to be competitive with them, we would essentially be alienating some of our best customers. Obviously it is customer service business, we like to define ourselves as a 'switchalent' -- all things to all people, and not to do anything to alienate anybody else.

So I agree with you 100 percent, it seems like an obvious thing for us to get into, but it’s been dismissed. Every time a new guy in finance is hired it is brought up and immediately dismissed.

Okay.

But as to your second question, I want to make sure I understand it. You noted correctly the maintenance capex is about $5m, and you were comparing it to G&A?

Depreciation and amortization. D&A.

D&A, excuse me. Well, I guess it kind of is what it is. I will just tell you what goes into maintenance capex as we define it. It is not a lot of maintenance on the site. These auction facilities, which are the bulk of our capital assets, don’t require too much maintenance. Maintenance capex for us is more automobiles and computer equipment and that sort of thing. They depreciate at a fairly fast rate, whereas the bulk of our capital assets is land and buildings, which either depreciates at a zero rate or over an extended period of time.

Or appreciates.

Thank you very much. As Dave would gladly tell you, they appreciate.

So what is depreciation? What is getting reduced in value every year that makes your D&A a positive number?

Well, the land of course does not depreciate, but our investment in buildings is fairly significant and that is depreciating straight line over the life of the asset. We have a fair bit of capitalized software and computer equipment, and we have actually a fairly healthy fleet of automobiles operated by all of our sales folks.

Okay, thank you.

Our next question comes from Sarah Hughes, from Sprott Securities Inc.

Hi, I had a few questions. In terms of All Peace, were there any auctions in the first quarter or are they all going to be mostly in the second quarter?

Sarah, it’s Randy. No, we did not have any agricultural auctions but we did have one industrial auction in the first quarter. The bulk of them will be in fact in the second quarter.

I know that you’ve had quite a few of your All Peace auctions. I wonder if you can just comment on how that business is going in regard to what your expectations were when you went in and bought All Peace.

Sarah, it’s Peter here. Are you referring to the agricultural side or just in general?

The agricultural side.

The agricultural side had a brisk April, but it is fairly early for us in the marketplace for us to understand a little bit more about how the lever is to grow that business, so we are currently chewing on that right now. I think it is fair to say that the guys worked very hard, they had a very good run. They are rather restricted in the marketplace that they are in right now because they basically operate in Northern Alberta primarily. So to take that and lever it over the whole of North America, as an example, it is an entirely different business unit for us. So we are currently looking at that.

And the decline in the U.S. dollar, has that had any impact on your U.S. auction sales? Any increased demand from other countries, Canadians or Europeans through the internet or even showing up at the auctions? Have you seen that at all?

Let me try to answer that, Sarah. It’s complex. Of course you are going to benefit some people and make it a challenge for others. The U.S. component of our business is the largest chunk, give or take $1.5b, so those people are operating within their own marketplace predominantly. However, they are also major players and influences in pricing outside. So Americans travelling to Canada or Americans bidding in overseas auctions, there tends to be of course greater participation by the United States buyers when their currency is relatively stronger.

I mean, that’s no different. I would say there has been less buying by Americans offshore or internationally, but as those countries continue to grow, their economies and things -- particularly in Canada we’ve had strong results. In Europe we are just continuing on our expansion program consistent with our plans and strategies. It is a much more important factor for us to be expanding our customer base to growing our geographic reach than is the currency itself.

And then one last question. On the Caterpillar’s recent results they talked about their rental equipment sales were quite strong in the first quarter, and they talked about how the rental companies are starting to replace their fleets. Have you seen any impact on that in 2003 at all?

Dave, do you want to take that one?

Well there has been some replacement. The Caterpillar dealers themselves have been quite aggressive on acquiring new fleets, but the rest of the industry has been quite reluctant to buy a lot of new, and I think they are still maintaining their present fleets. I have not seen a lot of additional fleets purchased.

Okay, that’s it. Thanks, guys.

Our next question comes from Ben Chemiavsky from Raymond James.

Good morning guys. Nice quarter. I am particularly pleased I don’t have to ask where the growth is.

-- Laughter

We’re happy not to answer that, Ben.

Let me ask a few other questions though. In terms of the gross auction margin, which obviously performed very well, what is the -- I recognize you probably don’t want to disclose the precise commission you charged on the B.C. ferries, but was that above or below the average? In other words, did that skew the gross margin up or down?

Ben, it’s Randy. That ferry sale, even though we talk about it probably too much in the sense of it being a unique event, it is quite normal in our traditional business in the sense that we get into special projects from time to time. I would say that our revenues generated on that particular contract, we cannot disclose particularly or precisely because we don’t disclose any of our individual financial terms to our deals. I would say it was in the normal course of business.

So it wasn’t materially responsible for skewing the margin in any way, the gross auction sales margin?

What I would say is that our underwritten business this quarter was the most significant factor in where the results have gone up. We’ve performed very well in our underwritten business and we’ve aggressively pursued a lot of business in a lot of different areas, and the markets were positive. As Dave has said, we’ve seen stability and relative strength in the used equipment pricing that generated and flowed through to the results of our underwritten business. That was the most significant factor.

Ben, it’s Bob. I will just add to that. Directly to your question, the answer is no. It did not have a material impact one way or the other. The whole sale itself was $13.5m, in a quarter that was north of $300m, so it just didn’t have a material impact, you are absolutely right.

Thanks. In terms of the auction schedule, how many do you expect to hold in the second quarter? I think my count is about 40. Last year you did 45. I am just wondering if -- I know you talked about smoothing your auctions for the year. I wonder if you’ve borrowed a little bit of growth from the second quarter.

Just to go over that, in the first quarter we held 28 auctions. In the second quarter I agree with you Ben, I think 40, somewhere in that range is probably right. Last year in the first quarter we held 22, and last year in the second quarter we held 45, you are correct. As you know, we don’t put a lot of weight in actual auction count. There are big ones and small ones. The average auction size, it’s relatively constant over a full year, but not over a quarter.

I don’t think we borrowed from Q2 into Q1 at all, I’m not aware of that. In addition, in the auction count of 40 that you and I are both talking about now there is no reference to any of the farm sales, and maybe that’s good thing to say on this conference call for all listening. We talked about number of auctions going forward or even today, we are excluding from that smaller farm sales. They tend to average well under $1m. We are excluding them entirely from that count. They are definitely included -- or excuse me, will be included in gross auction sales, auction revenues, expenses, all of that, but I am leaving them out of the count of auctions just because it would immediately make all periods non-comparable.

Again, just to directly answer your question, I don’t believe that we’ve borrowed from Q2 and put into Q1.

Ben, one other thing to add is that offsite sales always crop up as projects arise, and they are almost impossible to predict precisely. I am pretty confident that the head count of auctions as we go forward throughout the quarter could trim up one or two or three or four, or could drop down one or two. We add them as we go forward as the need arises.

Just to get more specific for you Ben, I was looking at Q2, the listing here, and we have in that total of auction sales last year we had six or seven offsite sales that were quite small. We are talking $1m or $2m auctions.

That is last year?

Last year’s Q2, so I wouldn’t get too stressed out about the fact that there is 40 instead of 45.

Another housekeeping item, what is your sales force head count now? Has it changed much since the end of the year?

We are up one from where we were at the end of the year, 189 moved up to 190.

Okay, and finally, just on the cash flow and the dividends, two questions in one. Can you comment on whether or not the new site developments that I think Dave alluded to or specifically talked about, Sacramento and a few other places, is that in your capex forecast for this year and next year? As well, what is taking you guys so long on the dividend? When can we hear about this? After a quarter like this you’ve got to feel pretty comfortable that you can make some kind of commitment to paying out some of your cash flow.

Ben, this is Dave Ritchie. This is your favourite question and my favourite answer. I just believe that if we can keep investing the money in the company and make good returns, that is what we will do. The point when we can’t find a good enough investment to make a good return, that is what we will do. We are getting close to doing that and we’ve had lots of discussion. It is certainly in front of us, and we are certainly giving it lots of consideration.

And Ben, your answer on the capex, those sites that we have planned are included in our planned capex number so it is not like we have magically invented some use that we haven’t talked about earlier for funds that are available. So I think the free cash flow numbers that we left for you after capex plans included plans for the future sites that we talked about.

In fact the Sacramento site is the one that has been at the top of the pile for quite some time. We have cryptically talked to you before on working on sites and helping it come together. This is the one we’ve been working on the hardest, longest, so it coming together is completely part of the capex plan we’ve been speaking of for some time.

Okay, just to be clear then. Are you debating the size and timing of a dividend, or are you still debating whether or not you are going to pay one.

Bob is pointing at me saying I should answer that question.

Well I know what Dave’s answer is.

I guess the best way to answer that Ben is just to reiterate that it is in front of us, we know it’s in front of us, we are going to do the right thing by our shareholders, we are going to do the smart thing from a management point of view and the guys have put their trust in us to manage the funds of the company effectively. We will get the return, and then we will return it to shareholders. It is squarely in the crosshairs of the board right now.

Okay, great. Well you guys have done a good job doing the right thing the last couple of years, so I trust you will do the same here. Thanks a lot.

The next question comes from James Gentile of Sidoti & Company.

Good quarter, gentlemen. I was just wondering if maybe you could give us a little more detail on what exactly is driving your underwriting business. I understand the structure of it, but it was definitely your highest auction revenue rate ever, so.

James, in our question do you mean what is driving the volume of that business or the rate we are achieving on that business?

The volume, not the rate.

James, we go out everyday of the week and chase whatever business is in front of us. Depending on the deal, if it is a largish deal we will typically offer a variety of alternatives, including the straight commission or a guaranteed or possibly an outright purchase proposal to the owner. It is really the owner that makes up his mind what he wants to do. We find that as we continue to grow and as our markets mature, people tend to actually prefer straight commission business, as they become repeat customers and so on. When we find, however, new customers in markets that we might have been operating in for a very long period of time -- and there are lots of them, we find them everyday -- then they are not quite as comfortable and they sometimes prefer the belt and suspenders.

Likewise as we grow geographically when we forge our way into new markets overseas, then it is more probable that a customer will chose the underwritten business. So the percentage of our business that is done at risk can change, but historically it has been in that 25 percent -- somewhere between 25 percent and 30 percent on a quarter by quarter basis. We are endeavouring to do our business as smart as possible, make sure that we understand the pricing, understand the markets, understand the quality of equipment, understand the customers and all the dynamics that factor into the success or not of a deal. We’d like to think that we get it right -- well we do get it right more often than we get it wrong, obviously. Dave, did you want to add something?

I believe that we are in it so often -- you know, when you are selling every day you get a pretty good feel for this market. We see it as soon as anybody does, and we know for certain that everything that we have sold has been sold unreserved and it’s real and it’s not artificial. Other auctions that continue and carry on are not like ours. They are artificial and they are not an absolute sale. So our results and our work is based on our numbers. We are as close to this market as anybody.

Were there one or two large sales that drove your underwritten business in the quarter, more so than last year?

We had about the right amount of large sales. It is definitely the large sales that gives us the real volume and the leverage in the business.

James, I think if I recall in the first quarter, the amount of underwritten business wasn’t unusual, it wasn’t out of line. It was obviously performance above average and that pulled our rate up. I can’t even go to sleep at night if I don’t say right now that that could change tomorrow. We don’t go into these things expecting to make a lot of money, we go in expecting to make a reasonable amount of money. We price them so there is a good risk premium built in, knowing full well that as history has taught us, that several of those deals will not work in our favour, but on average they should come out at a good number.

What we saw in the first quarter was we didn’t have very many that went bad. We had an awful lot that went really well, and that helped us a lot.

Great, thanks.

The next question comes from Anthony Geller of Livingston Capital.

Hi guys. Just a follow up, to absolutely beat a dead horse, another use of cash is the repurchase of shares. By my quick math your company trades as an asset at 10 times EBITDA, which means the 10 percent yield. Are you saying when you don’t repurchase shares that you are finding assets for that cash that yield more than 10 percent? Is that the kind of math you are doing?

Hi Anthony, it’s Bob. Yes, I do. I will answer it -- I will describe how we look at the repurchase question, because we’ve certainly considered it. Maybe the history on this -- the board has said since day 1, I think it is in our IPO prospective that the goal of the company is to raise cash, reinvest it in the business for growth, and then if we have money left over after all of our intelligent investment opportunities inside are taken care of, then we would return it to shareholders.

Now for the last while we’ve seen that as a likely scenario for us, so we’ve considered the alternatives and dividends and repurchases are the two. For our company to get into a repurchase situation has a number of pitfalls, not the least of which is our very, very small float right now and the fear of exacerbating that problem if we got into a repurchase.

So from day 1 we have seen that as a potential problem. We could find ourselves in a repurchase program that is really not sustainable long term, because after a while you kind of run out of shares to buy, whereas a dividend is something that if we were to look to return cash to our shareholders, it has a longer life to it as compared to the repurchase.

So while your question is a good theoretical question, we actually have a practical constraint that almost eliminates our looking at it that way.

Okay. And the second unrelated question is, the ferries were a hot item this past quarter and Class A trucks were a hot item last year. What is the hot item for the rest of the year, if there is one?

Just real good used iron, and lots of it. The quality, if it is there, is selling very well. I am at a sale right here today in Phoenix as I speak to you and anything quality is selling right up there. For us to go out and get as much of it as we can is the whole answer.

But there is no particular model of truck or equipment that is hot, like there were specific hot items last year?

Well things change. They are not necessarily a hot item, they just have improved. Like Class A trucks, we’ve had a good strong truck market all spring here. We had an excellent logging truck sale in Prince George last week and we are into a big fleet of trucks here. We have over 400 big trucks in this sale today and the market looks very strong for it.

I guess I should rephrase it. I called it a hot item because of the one-time change in the laws made those trucks desirable because they were grandfathered, it was a kind of one-time hot issue. I guess there aren’t any one-time hot issues this year.

Let me try to add a little flavour to that, Anthony. First of all, the Middle East market had its uncertainties, but it is a hot item -- it’s a hot market. I think we will see strength in that area. New equipment, we are continuing to sell more unused equipment than we have in the past, it is the normal course of business for us. Some manufacturers are continually finding that we form a good alternative distribution channel that they are considering, and that is a possible item. But nothing more. These are all things that are in our normal course of business, and as Dave has said, good quality used equipment and some unused, as we sprinkle it in from time to time we grow our relationships with all the manufacturers. We are on the button and on the pulse in all the markets of the world. There are always going to be some that are weak, and some that are hot.

Sure.

You see Anthony, the other thing is we have these facilities built to service these customers to improve the quality of it, to clean it, to paint it and to look after it. We can offer wonderful one-time stop and do it all right here. It does improve the value of the equipment for that customer and that is starting to really take hold for us.

I am a total disciple of the company, I just wanted to get the current, near-term issues. Long term, I think it is a great investment.

Thank you.

Thank you.

The next question comes from Ross Turnbull from Odlum Brown.

Good morning. A couple of questions here. The first thing is, in the Middle Eastern markets, what percentage of Q1 sales came out of that market?

I don’t think you’d find it abnormal from last year. Maybe just shy of 10 percent.

A little less than 10.

And compare that to Q1 last year?

About the same percentage.

Bob, with the internet bidders you are getting, do you know what percentage of them are people who don’t attend the auctions?

Percentage that don’t attend the auction? Meaning ones who have never been to the auction, or?

In what sense are they new faces for you?

That is a great question, because there are two ways to answer it. The vast majority of our internet bidders are existing Ritchie Brothers customers, that is critical because we won’t let people in unless we know exactly who they are or they put out a really significant cash deposit. So they are not necessarily new to the company, but the vast majority are in fact new to that auction. So at our average sale now we have 10 percent to 15 percent of our registered bidders are internet bidders. For sure there are a few of those who would have gone to the sale site to be there in person if we didn’t have this service, but the vast majority have made it clear to us they are simply using the service so they can now participate in more Ritchie Brothers auctions. Now they can participate in three, four or five a week instead of just one a week. So they are not so much new to the company, but they are new to an auction, and that is just as good as a brand new customer.

Do you, for example, track customers and you know how much they are buying on a year to year basis?

Oh yeah, To the penny.

Can you see them going to the auction site and buying more equipment? The e-bidding site?

For sure. The folks who are using the internet bidding service are now participating in more auctions than they were previously. I haven’t run that balance but I am sure if I did, I would see that they are buying more.

I think what it is doing is it is allowing some of the same people to participate in more auctions than they otherwise would of. That is one of the factors driving the increase in the number of bidders. I agree with Bob that the vast majority are existing customers or known people, but there are also very notable new entries in. I can think of a very large crane that we sold last year and it was a $0.75m item or thereabouts, and it was bought by a customer who had never attended one of our auctions before, and he bid online. So it is also bringing in new blood.

Okay. The mention of the crane kind of segways into my next question, which is about your underwriting business. If we look back at the Olympia auction where you guys sold all those cranes, that was an example where you did underwritings very successful in that particular sale. I am wondering if that type of success is something you are using to draw new people to your underwriting business, because you can point to, here is a person who liquidated his fleet of cranes and got a good price for it. And that this was a legitimate way and a fairly moderate risk way to do so.

Absolutely. There is no question that we lever our successes and use those as sales tools in generating new business. You know, the most effective salesman is your silent salesman, as Dave likes to say. That army of people that come to our sales and see with their own eyes and experiences, and then hears the feedback from customers that have been satisfied with the experience that they have had with us.

So there is no question that that adds to the momentum. With the sites and the internet bidding and with the continued growth, you know it all adds up to some pretty positive dynamics that create a compelling sales proposition to the customer who is adding as well the value proposition to the shareholder base.

These customers are our friends and they are all our silent salesmen.

Your comment, Dave, was that the older customers tend to go to a straight commission and it is the new customers that tend to use the underwriting business. Is that right?

That’s correct.

So is this underwriting business, is sort of stable over time, or do you guys see it as growing?

No, it’s all growing together. It is inline.

We studied this, because we knew it would be a hot question in this quarter, and going back I think over the last three years, every quarter analyzed how much was straight commission, how much was underwritten, what was the percentage of return and all the dynamics that factored into it. I would have to say that as we continue to grow, there has been a very, very slow or small decline in the precise percentage of underwritten business because your base of straight line is continuing to grow from your repeat business and so on, but you know, we are quite hesitant to say there is a long-term trend or that this is going to be continuing in the future. Because we are out in the market every day, we aggressively pursue all the business that there is. We offer a menu of choices to our consignors and the economic cycles ebbed and flow as well. There is uncertainty in the market, financial companies are big, big customers of ours today as are the manufacturers, the contractors. So there are so many factors. The underwritten business is not generally increasing in size. If anything, it has trimmed down very moderately.

I think our rate right now is about 75 percent straight commission, 25 percent at risk, approximately in that range. It has kind of hovered in there for the last little while. We really don’t anticipate it changing very much in the future.

If you pulled out the extra auction rate you are making from your underwritten sales, is your 75 percent coming in at the same rate as you forecast at the beginning of the year?

I guess it probably is, actually. When we looked at the current quarter to see why we had the good lift, it was attributable almost entirely to the underwritten business. To answer your question, we usually don’t get into too much detail, because I think on a quarterly basis it is almost misleading. We definitely want to look at a longer term, rolling 12 months. I agree with Pete’s comment, over time -- I guess it was Randy’s comment -- we have seen a slight shifting away in terms of share of business from underwriting to straight commission.

In fact, when we went public we used to say we were about two-thirds straight commission, and one-third at risk. Now as Peter said, we are probably more like three-quarters, one-quarter. It has taken five years to do that.

So the long-term trend of your auction rate coming down still holds.

Long-term trend of our auction rate coming down?

Well over last year, for example.

I hate to say coming down. I think it is just not -- we don’t expect to be able to maintain that high rate. It is wonderful, and if we can we will, but we are not actually out there trying to get 10.5 percent. We are doing well in our underwritten business in the first quarter, much better than what we have done before, and that pulled the rate up. As we head into our second quarter, there is nothing to indicate that we would be able to do that again. That is an unusually positive experience.

And just final question. Are you guys going to provide us with any press releases from the All Peace Auctions? They are sort of below your materiality level, but there is interest in what is going to happen there.

I don’t think so. Let me go back, it was one of the parts of your original question, I think you were asking whether we are using the underwritten business -- whether we are using our ability to underwrite deals as a way of attracting business. That is a really important question, because the answer is yes. We, as Randy described, we lay out the alternatives in from of the consignor. They make the choice. We are one of the few people that can actually lay out those alternatives, so it is a huge competitive advantage. This is where our scale and our size and our financial strength really, really becomes valuable to us.

So it is quite an astute question to look at that in that way. We have a unique ability to service the customers who do in fact want an underwritten transaction.

Okay, thanks guys.

There are no further questions at this time. Please go ahead, Mr. Wall.

Thank you very much, operator. I thank you for joining us on our conference call here, everyone. We appreciate the questions. It is always a pleasure talking with you. We are pleased and confident about our results and excited just about getting back at work and doing it again for the next quarter, we hope. Thanks very much, operator. That concludes the call.

This concludes today’s conference. You may all disconnect.