RB Global Inc (RBA) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to be Ritchie Brothers Auctioneers Q3 earnings results conference call. As a reminder, this conference is being recorded Monday, November 3rd, 2003. I would now like to turn the conference over to Mr. Randy Wall, President and Chief Operating Officer. Please go ahead sir.

Thank you. Good morning and welcome to the Ritchie Brothers Auctioneers investor conference call. Today we will be talking about the company's results for the three and nine month period ended September 30th, 2003.

My name is Randy Wall, President and Chief Operating Officer of Ritchie Brothers. I'm joined today by Dave Ritchie, our Chairman and CEO, Peter Blake, our Senior Vice President and CFO, and Bob Armstrong, our Vice President of Finance. Our presentation should take about 20 minutes and then we'll open the call for questions.

At this time I would like to make a Safe Harbor Statement. The following discussion will include forward-looking statements within the meaning set out by S.E.C. rules and regulations. Comments that are not statements are fact are considered forward-looking statements.

Forward-looking statements include comments about projected future results and performance, growth initiatives, development plans and other matters. Our actual results may did you differ materially from those projected in this discussion. Additional information concerning factors that could cause such a difference is included in our periodic filings with the S.E.C.

I'd like also to remind our 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 GAAP financial statements. Auction revenue is the top line of our GAAP statement of operations, and it represents the revenue earned by Ritchie Brothers. Its main components are commission income, and the net profit or loss on the sale of equipment owned by Ritchie Brothers.

With three quarters of 2003 now complete, I'm pleased to report our third solid quarter of growth in 2003. This quarter was by far the largest and most profitable third quarter in the company history, with significant top line and bottom line growth. Results to date this year reflect gross auction sales growth of 18%, and bottom line growth of over 40%. We're very pleased with these exceptional results, which we believe are a direct result of enhanced sales force productivity and the operating leverage inherent in our business.

In addition, the 2003 results include for the first time, the full benefit of the All Piece acquisition we made late in 2002. However, I must caution that you going forward we are not expecting to maintain these unusually high growth rates. Bob is going to talk some more about this and about our current preliminary projections for 2004, but I would like to take this opportunity to reiterate management's focus on achieving an average 10% top line growth.

We believe that our results to date in 2003 reflect the value of our investments over the last few years in people, facilities and infrastructure. While we're proud of what we have accomplished to date, we remain focused on several areas including continue to improve our productivity and efficiency, delivering first rate customer service and growing our margins by taking advantage of our operating leverage.

With respect to sales force productivity, our 12-month gross auction sales per front line sales representative currently exceeds $8 million on a trailing 12-month basis, which is the target level we have been working towards. We'll be looking to add to our sales force over the next year, while striving to keep productivity in the $8 million range. I'd like to see sales force grow between 5% and 10% in 2004.

In the last two years, we have been experiencing considerable momentum in our business, which is evidenced by our ability to continue to attract increasing numbers of bidders and consigners to our auctions. We believe that our focus on customer service is fueling this momentum.

We offer a first rate, high value auction experience that is attractive to existing and potential bidders and consigners. And our experience has shown that as we attract more bidders, and continue to grow our customer base, we're able to achieve higher prices which helps to attract more consigners and more equipment which, in current, attracts more bidders and so on.

And as example, since the introduction of our Internet bidding service we have seen an increase in bidders of over 20%. This has (inaudible) a significant competitive advantage for Ritchie Brothers. A large number of bidders and consigners allow us to achieve economies of scale from our extensive auction sites. As their volumes grow we are ability to hold larger auctions and in some markets more auctions without equivalent increase in cost. Our global presence also allows us to hold auctions in new regions and enter new market segments as opportunities emerge, also without a significant increase in cost.

We expect these factors to translate into further growth of our business and profitability in the years ahead. Before I hand the call over to Peter I want to reinforce to our shareholders and other listeners that we intend to remain focused on our objectives objectives. We know we are in a very competitive marketplace and we are committed to delivering a compelling value proposition to our customers and we will accomplish this by continuing to work hard and providing excellent customer service. We have only a very small share of the enormous and highly fragmented used equipment market. To achieve our goals of remaining the world's leading industrial auctioneer and delivering an average 10% top line growth we will continue our proven strategy of steady, controlled growth and our commitment to customer service.

While sticking to the basics is hardly an exciting strategy it is working well and we believe it is the best approach. Let me turn the call over to Peter Blake, our CFO.

Thanks Randy. The numbers of the discussion are contained in the press release. We also filed our quarterly report on form 6 K the morning. Let me remind everyone that all dollar amounts referred to on this call are stated in U.S. dollars. During our last conference call we indicated that we were expecting gross auction sales for the third quarter of 2003 to be in the range of $290 million. Gross auction sales came in at $277.8 million, or about 4% off our target. So far this year, we have generated total gross auction sales of $1.08 billion, which is about 18% higher than in the first nine months of last year.

The increase over the prior year is the result of higher gross auction sales in almost all our markets, combined with the effect of the currency fluctuation which I will discuss in a minute. Auction revenues for the nine months ended September 30, 2003 were $113.8 million. This is a 28% increase over the equivalent period of 2002. The growth in auction revenues can be attributed to several factors including increased gross auction sales and a higher auction revenue rate. Our auction revenue rate for the nine months ended September 30, 2003 was 10.52% compared to 9.74% last year. Our underwritten business, which is made up of guarantee and inventory contracts continues to perform better in 2003 than expected, and this has been the main driver behind the strong revenue rate in 2003.

Bob will talk more about our expectations for the rest of '03 and 2004. Let meet state that our expected auction revenue rate continues to be 9.5%. We know from experience that our auction revenue rate can and will change from quarter to quarter, depending on the performance of our underwritten business. So even though we have been fortunate to achieve above average rates for several quarters in a row we are sticking to our expectation of an average 9.5% rate.

Net earnings for the third quarter of 2003 were $2.9 million or 17 cents per diluted weighted average share. For the nine months ended September 30, 2003, we had net earnings of $24.8 million or $1.46 per delight weighted average share, which is about 43% ahead of last year. The main factors to consider in comparing our 2003 and 2002 results are the higher gross auction sales and the improved auction revenue rate.

Before I cover capital expenditures and cash flow, I want to comment on the impact of currency fluctuations. I talked about this during the last quarter's call but it needs to be mentioned again because of the increasing strength of the main nonU.S. currencies in which we conduct business and the fact that changes in exchange rates in 2003 have been more dramatic than in past periods.

Ritchie Brothers conducts operations on a global basis in a number of different currencies, but our reporting currency is the United States dollar. Approximately 30% of our revenues and approximately 40% of our operating costs are denominated in currencies other than the U.S. dollar. As a result, material fluctuations in foreign exchange rates during the period can impact the presentation of our financial position and the results of operations. The main currencies other than the U.S. dollar in which our revenues and operating costs are denominated are Canadian dollar, the euro and the Australian dollar.

In the past, fluctuations in the value of these currencies have not had a material impact on the presentation of our results of operations. So we have not referred to them, and not referred to the currency swings when discussing our financial information. However, during 2003 there has been significant increase in the value of these currencies relative to the U.S. dollar. Changes in currency values do affect some aspects of our business beyond simply the mathematical translation of financial results. They influence things like the equipment flows between different countries, the purchasing power of buyers, the motivation of consigners, the value of equipment and more.

As a result it is impossible for us to precisely identify the effect of currency fluctuations on our business and financial results. However, while individual line items on our financial statements are affected, we believe that the overall impact of currency fluctuations on our financial results for the third quarter and for the nine months of 2003 have been roughly neutral.

Now, on to capital expenditures and free capital expectations for the remainder of 2003. Capex for the third quarter of 2003, including maintenance capex, was $3.5 million, bringing our capex for the first nine months of 2003 to $11.7 million. We still expect that we will incur growth capex for the full year in the range of $10 million to $15 million, and maintenance capex in the range of $5 million. For total expenditures in the range of $15 million to $20 million for the full year.

Going forward, we expect to add one to two new auction facilities per year. As a result, we expect that capex will remain at an average level of $15 million to $20 million per year, for the next few years. We believe this level of investment will be sufficient to support our growth objectives. We are reiterating our guidance for free cash flow.

After estimated capex and debt repayments free cash flow for the full year of '03 should be in the range of $15 million to $20 million. Based on this, our board of directors has declared another 15 cent per share of quarterly dividend. This will result in a dividend payment of $2.5 million in December of this year. We remain committed to reinvesting in the business and we feel that the dividend yield we have started with will allow us to achieve our growth targets and take advantage of opportunities to grow the business as they emerge.

Now I'll turn the call over to Bob Armstrong our VP Finance.

Good morning. I'm going to go through the details of our performance to date, the remained of 2003 and 2004. The guidance will be updated at our year end conference call scheduled to be held in late February. We continue to expect that fourth quarter gross auction sales will be in the range of $470 million. Based on our performance in the first nine months of 2003, and this expectation for the fourth quarter, we are looking at full year gross auction sales in the range of $1.55 billion which would represent a growth rate of approximately 13% over 2002.

Our preliminary guidance for 2004 is gross auction sales in the range of $1.7 billion which would represent growth of about 10% over our expected gross auction sales in '03. This is a number that we will revisit on our next conference call, once we have received updated individual forecast from our field managers.

On our previous conference call we increased our (inaudible) revenue rate guidance to 9.5% of gross auction sales, and our guidance for the remainder of 2003 and for 2004, remains at the 9.5% level. Direct expenses were 1.4% of gross auction sales for the year to date, this compares to a direct expense rate of 1.43% for the first nine months of '02. The direct expense rate is influenced by the size of auctions held in a particular period, and whether auctions are held at permanent sites regional auction units, or offsite locations. (inaudible) sales, and sales held at permanent sites, generally result in a lower ratio of direct expense to gross auction sales. We continue to expect direct expenses to remain in the range of 1.45% of gross auction sales for the fourth quarter of '03, and for the full year 2004. General an administrative expenses were $17.8 million for the third quarter of 2003, and $51.7 million for the nine months ended September 30, '03.

These amounts represent increases of 22% and 12% respectively, over the equivalent periods in 2002. The increase in G&A can be explained by the costs associated with executing our growth strategy including increased personnel and infrastructure cost, and higher performance bonus accruals corresponding to our higher than expected earnings, as well as fluctuation of currency.

I expect that fourth quarter G&A will probably be in the range of $18 million putting full year G&A in the range of $70 million. Our expectation for 2004 is that G&A will fall in the range of $71 million. Although this represents an [absolute] dollar increase over 2003 G&A as a percentage of gross auction sales we expect that G&A will be lower in 2004 just as the 2003 rate is expected to be lower than the 2002 rate.

Our G&A expenses as a percentage of gross auction sales are returning to the levels experienced before we embarked on our infrastructure expansion program. This continued reduction of G&A as a percentage of gross auction sales is tangible evidence of our operating leverage. Depreciation expense in the fourth quarter should be in the range of $3 million and for 2004 I would expect to see depreciation come in at about $12 million. During the third quarter of '03 we incurred interest expense of $1.4 million and year to date interest total $3.6 million. Interest expense for the full year '03 should be in the range of $5 million which is consistent with previous guidance. In 2004, we are expecting interest expense of approximately $4 million and the decrease over the 2003 level is primarily attributable to decreasing interest rates.

Other income was approximately $400,000 for the quarter and about $900,000 for the nine months. Both figures are down from the prior year. The 2002 balances included a gain on the sale of redundant property in the second quarter of about $1 million or about $800,000 after tax. Other income for the full year of 2003 is likely to end up in the range of $1.4 million, which is slightly below our previous guidance. We are expecting other income in the range of $2 million for 2004.

Our income tax rate for the quarter and the nine months ended September 30 was about 30%, which is in line with our previous full year guidance of 29% to 30%. Our tax rate fluctuates based on where we earn our income and we have been earning an increasing amount of income in the high tax rate jurisdictions of Canada and the United States. We anticipate that this pattern of earning increasing amounts of income in high rate jurisdictions will continue in 2004.

As a result, we expect our full year tax rate to be approximately 31% for 2004. For 2004, the expectations I have just outlined add up to a net earnings level that is roughly flat with current expectations for 2003. 2003 is turning out to be a very successful year largely due to an unexpectedly high and well above average auction revenue rate. It would be overly aggressive to assume we could repeat this performance in 2004. We delivered [28%] earnings growth in 21, 25% growth in 2002, and we are on track for earnings growth of approximately [30%] in 2003. Even if 2004 earnings are unchanged from 2003 we would be looking at a 5-year compound annual growth rate of about 10% and a four-year compound growth rate of about 19%.

While we don't anticipate a repeat of the above stated rate, we are always trying to achieve high rates, and even a small change in the revenue rate can have a big impact on revenue. (inaudible) achieve a 30 basis point lift in '04. For example, if we achieve 9.8% instead of the expected 9.5% then all else being equal our earnings growth in '04 would be approximately 10% over expected 2003 earnings.

So we may be able to deliver some earnings growth. But I caution you not to count on it, given the tough comparatives that we have created for ourselves thanks to the string of above average growth years we have recently achieved.

Before I hand the call over to Dave, I want to give you a brief update on our RB Auction Bid Live. All accounts it has been an unqualified success. Internet bidders are buyer or runner up on approximately 15% of the lots being offered over the Internet. This means that Internet bidders are having a positive impact on the prices of a significant portion of the items we we sell. Our sales over the Internet in 2003 have exceeded $100 million, which brings our cumulative sales over the Internet to date to over $180 million. This has become a very significant competitive advantage for Ritchie Brothers.

Now I will pass the call over to Dave.

Thanks Bob, good morning everyone. I'd like to provide a brief update on our property development activities and give you an overview of the used equipment market in the various areas in which we operate. We are committed to a steady expansion program that will see us add one to two sites a year over the next several years. Our current active project is Sacramento, California. And this, the necessary permitting is in place and the construction is moving forward. We hope to complete this site and get it up and running in the second half of 2004.

We are always on lookout for new properties in the United States as well as internationally. In the United States, Ohio and the New England regions are two that we're are working on. Longer term, I think Europe will be an area where we will want to add some sites, although the pace of our expansion is not going to be what it has been over the last five years. We are going to continue to look for opportunities to increase our presence in markets we already operate in. And to get into new regions where we don't operate. The rate of expansion should be more than sufficient for us to achieve our growth targets.

2003 has been a very interesting year for Ritchie Brothers and the used equipment market in general. We have been experiencing a low interest rate environment, which allows equipment owners to hold on to their underutilized equipment that they might otherwise have sold. Had their cost of ownership been higher. This has led to a shortage in the market of good quality late market equipment. Another factor that is impacting is the current state of replacement cycle.

Sales of new equipment have been off over the last few years, but now we appear to be on the edge of an economic recovery in many of our major markets. Demand (inaudible) is strengthening . We believe that this situation will continue to play out over the next several quarters.

What do these factors mean to Ritchie Brothers? The biggest impact is on the (inaudible) we are achieving at our auction. Increasing demand and tight supply have translated at strong prices at auction. Over the last 12 months we have been witnessing a strengthening market for used equipment. We continue to believe that our reputation for honesty and fairness, our commitment to unreserved auctions, together with our worldwide presence has given us the market presence we have today.

Thousands of new customers are choosing to work with Ritchie Brothers, each year, to buy and sell equipment. This is a strong vote of faith in our value proposition, and proof our approach is working. I continue to be excited about our prospects for future growth, and now I'll turn the call back over to Randy.

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

Ours is the relationship business. We understand that our service doesn't sell itself. And that our team of sales representatives and administrative personnel need to provide very best in customer service in order to support our growth objectives. We are fortunate to have a strong and dedicated team, and I'm confident about our future. Before we open up this call to questions I'd like to recap the main points that we've covered on the call. Firstly, we ended the first nine months of 2003 with an 18% gross increase in auction sales and a 43% increase in earnings over the first nine months of 2002.

Secondly, thanks to infrastructure improvements we have significant operating leverage which is driving improvements in our margins, earnings and cash flows. Over the next several years we will continue to work towards average top line growth in the range of 10%, which should lead to an average bottom line growth of 15%. However, because of the unusually strong and above-average earnings growth enjoyed over the last three years we don't expect to see, in another year, of spectacular earnings growth of 2004. Finally, a demand for used equipment is strengthening, while the supply is tight, which is creating 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'd be pleased to answer any questions that you with have. Kathleen will you plies open the call for questions?

Thank you. (Operator instructions) Our first question comes from the line of Ben Chemiavsky from Raymond James. Please go ahead.

Good morning.

Good morning Ben.

I think Peter you mentioned in your commentary or you acknowledged that the third quarter gross auction sales was a little below target. Why was that? Have you pushed some auctions forward or was it -- were there some opportunities that you missed or why did you come in a bit light there?

Ben, it's Randy. No particular reason. I mean, there is, as you know, quarter to quarter can be lumpy. We're out there in the marketplace, there's a bit of a tightness going on in the marketplace. One thing that we wanted to stress is the live bid is bolstering the prices which is adding to the phenomenon of less, lets say, bargains in the system and overall strengthening and prices as well the rates. And Dave did you want to add something?

Both Dubai and Moerdijk were into the third quarter. I'm sorry, the fourth quarter.

Ben, there we're couple of date changes, I don't think, like Randy says I don't think there's anything significant here. Like $12 million lighter than you thought you'd be for a $300 million or $280 million quarter.

What can you expect for fourth quarter in the terms of number of auctions you will hold? I think last year you did about 50?

I think Ben we're looking at between 45 and 50.

Okay. The Dubai auction came up a little bit -- I know you don't like to look at -- you encourage us to not look at the same store sales perspective, but the Dubai was a little bit light. Does that have any -- any relationship to what's going on in Iraq at all, is equipment moving into there and not coming into your hands or anything like that?

You're talking about the Dubai sale that happened actually at the beginning of the fourth quarter.

Yeah.

What you'll find there is it's not light and our expectation or view, we will be having another auction in Dubai in December and for the first time ever we're going to have four sales in Dubai. So over the course of the year you'll see a significant amount of growth in the operations we are pushing through.

We continue to adjust our program to take maximum advantage of the markets and the facilities. So it's just another thing not to get too excited about one auction in and of itself. But that marketplace has still not yet felt the impact of Iraq. There is a little bit of speculative operation going on there.

But by and large, the rebuilding activities are not going to happen until next year. And people are positioning themselves. And it's still not a very safe part of the world, in Iraq, that is. And there's still lots of uncertainty there.

Okay. And finally, you mentioned your ratio of -- your trailing 12-month sales to sales reps. I suppose I could do the math myself, but could you tell me how many sales reps you had at the end of the quarter?

End of the quarter, 189 or 188, around there. Pretty much the sales force as being static in terms of its overall size. We're continuing to replace and upgrade as well as add to the experience base of the staff. We do expect that the sales force size will continue or will grow coming next year. It's just a matter of finding the right people. You know, we've kind of slowed down in terms of just hiring, and our belief is that you have to have the right people in place. And we are opportunistically poised to do that. Every time we find one we add them.

Thanks very much.

It will thank you. Our next question comes from the line of Bruce Simpson from William Blair. Go ahead.

Good morning gentlemen.

Good morning Bruce.

Specifically expectations for SG&A, Bob, you threw out a number of $70 million, I'm talking about 2004 here and how you relate to the comments that Randy just made about the sales force. Does that assume a particular rate of hiring now that you apparently have hit your target of $8 million per man, for example, is that five or 10% more bodies on top of the 189? Thanks.

Yeah, Bruce, you're right. The G&A number for '04 definitely assumes a growth in our headcount on the territory manager side. And I've build in about a 5% to 10% growth in that number. It also assumes fairly modest growth in the rest of our infrastructure. The other people if you like, our head office functions for example and support functions. We’re Not expecting them to grow nearly as fast as the sales force. We're pretty confident we have quite a bit of capacity right now in our system and can do more business with less.

So I guess those are in terms of personnel that's in there. The other thing to consider is the -- one aspect of our compensation is our is bonus system and the number for 2003, I think we got into the range of $70 million, that includes higher than expected performance bonuses. Because they are driven in part by corporate performance.

So going into our budgeting process for next year we're actually expecting lower bonuses for next year. I guess that could change if in fact performance for next year comes in far better than expected then bonuses will go up as well.

Okay. On a related question, significantly above the 9.5% sounds like your guidance for '04, does that plant out to 9.5% per quarter Bob or would you expect that to be predictable in how it falls into the four quarters of next year? And at what point would this sort of trend of significantly beating it cause you to reassess the total value proposition and how that plays out in the run rate in particular?

Bruce, it's Randy. I'll take the question. It's the magic question, auction revenue rate. You know, we continue to counsel people that on the long term basis, 9.5% is the right rate. And we've seen over time that depending on how the at-risk business performance that that rate could be exceeded or we could fall short.

And how does that play out quarter to quarter? You've asked that subquestion. Really, we expect it to be pretty much even over the year. Except that our quarterly results have been and are expected to continue to be lumpy. In your first and third quarters, they are typically smaller quarters that have the opportunity to be influenced greater by swings in your at-risk performance. Therefore, Q2 and Q4, higher volume quarters, more heavily influenced by the straight commission rate.

But on balance over the year we don't budget or plan any differently quarter to quarter. We think 9.5 is the right rate, and last quarter, we bumped the expectation by 20 basis points from 9.3 to 9.5. And we believe 9.5 is a good long term rate.

Randy is it just a coincidence that the strength in the overall pricing of used equipment seems to correlate with you being able to beat this from outperformance in your underwritten business? It seems like a simple equation that perhaps when you bid or appraise on packages as you detailed for us last week in New York, that is based on a certain level of pricing and as pricing strengthens it is a tide in your favor.

Do you think that's true and therefore in '04 if we get more equipment coming to market and perhaps softer prices, that in and of itself might put downward pressure on the outperformance in the underwritten business?

Bruce, it's possible. But you know, we -- every deal is looked at in terms of its risk merits. And when the marketplace is rising often if there is somewhat of a shortage of equipment you have to be more competitive or more aggressive in order to security the business. So there can be countervailing impacts on what impacts on what actually happens. Perhaps, but perhaps not.

We move on this market so quickly, like we're watching this every day when you're having three and four and five sales a week you're in it so you know you're going up or down daily. And we react to that instantly. And the thing is I think Bruce is we're actually maturing in our yards and getting the efficiency out of the yards and out of our people that are running them.

Okay, thank you. Last question for me before I get off is, I just sort of curious Bob as to how you go about creating a guidance number in gross auction sales for the next year given that, you know, kind of had our ups and downs. And how did you arrive at that 1.7, given the assumptions (inaudible) going into that (inaudible) number.

Probably if we didn't need to do it we wouldn't do it. But if we don't pick a number we know for a fact that you will. And I'd love to give you some help there. We think the 10% top line on average our reasonable target is the appropriate target so that's the number that we use. We think that 1.7 is achievable given the investments we've been making and the people we plan to add and the people we have in the saddle now, it ties into our 10% target. Everything we do is sort of geared to getting to that point.

We are in the process of doing a region by region analysis, regional managers put together the analysis. We start getting signals from the field that contradict what we think we should be able to do overall then we'll pull back our numbers and we'll this increase our numbers. That's kind of the tweaking that we provide each quarter on these calls, tweaking of the guidance. 1.7 number is essentially representing 10% growth.

It's in line with our strategy and objectives and action plans. As we get further into the year we'll be able to provide more precise guidance for example quarterly breakdowns.

Thank you.

Murray Gainer, Scotia capital, please go ahead.

I’d like to ask a question relating to the (inaudible) 5% to 10% increase in sales force,. Are you beginning to draw from a new talent pool and what training do you expect to add that number of seams persons and still expect the $8 million per person, (inaudible) why is the $8 million sort of a magic number? I recognize that's your previous peak but is there expectation that could be raising over time?

Murray, the $8 million is an historical number we've been able to achieve and we find it to be a good one. As time goes on we have the opportunity to increase that number. In terms of hiring, one of the things that we've developed and started last year is a territory manager training program. And we see ourselves in adding to our sales force from the ranks of educated, young, energetic, trained people. And this program takes about a year to produce graduates, and we're just starting to see people come out of that program today.

So we see some of our sales force growth coming from that initiatives, which is new in the last 12 months. We continue to look at the marketplace in terms of quality people. And as the marketplace ebbs and flows, it is always a challenge to find the right people. And we find that we just have more success in taking a moldable person and creating them to the objectives and the energy and the things that are important to Ritchie Brothers.

So Murray, Peter here. Just so it's clear, we've had territory manager training programs for quite some time here, and this initiative that Randy's referring to is one where we've really gone outside the box to pick the guys in our industry, people who are already in it in some form either a guy at a dealership or in the equipment industry.

So it has fairly steeped equipment knowledge and we've gone outside the box in taking guys that have very little or no experience but they're bright, energetic, sort of sponge that's able to learn, young guys typically, generally under 30 and we bring them into our nest and we've got a specific training program just for them. And they see different aspects of the organization not just the sales side. So it is a program that's been quite successful and we're happy to see it coming through graduates of that program.

Okay . Thank you.

Thank you. Our next question comes from the line of Burt Powell from Nesbitt Burns. Please go ahead.

Thanks. Bob, I wonder if you could give us the mix of the underwritten versus straight commission for this quarter versus a year ago?

Oh, versus a year ago. Just about to answer the question I thought you were asking. It was approximately 25% to 75% for the quarter and for the nine months. And that's roughly consistent with the prior year as well.

We have not seen any big movements there so just to clarify that, that's 75% straight commission, 25% at risk or underwritten, some volatility around that number but that's been a pretty solid number for the last couple of years.

You have benefited from the underwritten business. What about the straight commission business, are you able to get higher commission rates in those environments or have those been pretty steady?

We've noticed a gradual trend upwards in the straight commission rates and that's one of the reasons you heard us on our last conference call talking about raising our expected long term average to 9.5%. Is because we really think we have found a way to achieve a higher rate on a more sustainable basis.

Okay.

Some of the other guys might have a comment on that?

Just one thing I'd like to add, as your sales force gets more mature and better able to represent you as people, customers now see the value that we're delivering with our sites and our technology, Internet bidding and so on, the value proposition strengthens. And we're providing good value for service, and that's a sustainable increased fee, given the better performance that we're providing our customers.

Okay. Given the supply dynamics in the market at this point, are you guys seeing a lot more, you know, competitive pressures from the dealers, brokers getting in there, you know, trying to bid in accounts to win that business, is that partly what's at play in terms of maybe the gross auction sales, you know, being maybe a little bit lighter than expected?

This business has been the same for 45 years. And it will continue to be damned competitive. And if you think you don't want to work hard to make this happen every day, we do. And I don't see very much of a change over all those years that we're just getting a little bit better at it with the facilities, with the people, and the whole organization.

And with the complement of the Internet supporting what we're doing, we make it a very competitive proposition for anybody to do business with us. And I just see that we're just gaining a little ground in all areas.

Okay. And auction revenue days that you expect, I know you gave auction, you know, the number of aches, but the number of auction days that are on the calendar for Q4, versus Q4 '02, do you have that number?

That's interesting. I know that some people track that. That's not a number we track. I could probably look it up, but it is not a number we look at.

It is not the number days. It is how big the sales is and how good the sale is that counts.

That gives us some idea too.

(inaudible) Edmonton (ph) has got three day track rather than one. We just don't track it as a metric.

Fair enough, thanks.

And we have a follow-up question from the line of Ben Cherniavsky from Raymond James. Please go ahead.

I was just wondering if you guys could comment on the mining sector, big recovery in metal prices, precious metal, pretty much across the board, nickel, copper. I know you don't do -- or at least as far as I understand you don't have a whole lot of business, certainly you don't hold any big auctions in South America, or some of these big mining areas. But are you seeing any deal flow coming out of that sector, fleet replacement, more demand for equipment in that -- in that industry that uses a lot of machinery?

Most used mining equipment is well used. And it does not represent a very big part of our business. Although we have had some huge mining sales in the history of the company. The number of mining sales that are actually coming up today, they usually come in dribs and drabs because this equipment is always turn over.

And we're getting segments, people have this equipment on a five-year plan or a three-year plan. And as the hours run up on these machines, they start to phase them out and bring in new equipment. And until a mine closes and it's a complete liquidation, that's when we really come into play.

But it's always changing, and the numbers on the used equipment coming from mines is probably gone down in the -- in my history. But there's tremendous opportunity out there in that mining game. And as it cycles our business follows right along with it. I think there's a good potential for some good mining sales in the coming year.

Well, the fact that you haven't seen much lately, I don't think the big OEMs have seen a lot of equipment being sold into mines. Presumably, that used stuff has to go somewhere, and if it's been well used, I would imagine sending it to the auction is probably the fastest way for these companies to get rid of beaten up equipment.

I would think that your opportunities there might be a positive catalyst next couple of years.

There's no question, Ben, that it is positive.

Okay, thanks a lot.

Ben, sorry, Peter here. I think Ben you're sort of edging on one of the other consents on the call. Reiterate the aspect of replacement cycle, I know the major OEMs have talked about that in their recent offerings to the market. We see that coming along as well, and we see there is a pending replacement cycle that is commencing, I guess.

And those are favorable environments for us to operate in because it loosens up the market, that tight supply of good quality used equipment is really as a result of the lack of -- or the diminished production in some of these major OEM in the last several years and now that they're ramping up for replacement then that's good for us. And that triggers sale of used into the marketplace, and that creates of course more opportunity for us to grow the business.

Well, that would make me inclined to think that your 10% forecast for next year might be conservative. Because if the environment or the opportunities may pick up, and the turnover equipment may pick up, presumably you're going to have an above average career.

The mining component that Dave's mentioned, Ben, a relatively small piece of our business in a direct business in terms of the mine ownership itself. But we have continued, and have always done a larger amount of our business with the support industries that are around the mines, building roads in and removing overburden and there's contract mine companies.

We do a lot companies. We do a lot of business with those contractors every year. (inaudible) tends to be a little bit smaller equipment, you can call a D10 or D9 smaller. By the end of their useful cycle to the mine they are really, really well used and huge amount of hours. So the resale potential on some these assets is pretty challenging and dismantling and relocation, transport factor, huge, huge factor when it's sitting on the top of a mine in Peru.

It is interesting and we have a plan that we're working on geared to the mines. So it is a positive impact, as you say, but I don't know that it's going to be hugely material.

Well, even going beyond the mining sector, I think some of the OEMs and rental companies are saying that the replacement cycle just in general construction is picking up. And I would think that would be something that might give us a boost next year.

There is no question, any of that business is very positive for Ritchie Brothers. Any time there's a replacement cycle we always have done well.

Yeah, I know, I think we're all agreeing on that. I'm just surprised that you wouldn't factor that in to your expectation for next year. In years when the replacement cycle picks up, I would be more willing to bet you're going to have an above-average year.

You know, Ben, when markets turn a little to the softer side there's other reasons as well that stimulate movement in selling. And whether the markets go up or down, there's just different reasons. And I don't think really one is better than the other.

I think one of the guys on the call earlier referred to the fact if the used equipment supply is less tight, then it may be a softening effect on prices. We don't know what's going to happen ultimately, because it changes every day. We're in the market four or five times a week and we know what's going on.

I understand what you're Saying, but we think the numbers we've given you guys are fair, and they're reasonable numbers and we're going to stand by them and go up there and make as much as we can anyway.

I'm certainly not going to crucify you for being too conservative. I was just curious what your thoughts were, thanks a lot.

Okay, thanks.

Our next question comes from the line of Yvonne Varano from CIBC World Markets.

Just a little follow-along along that line. Is there a potential for actually less equipment to end up coming to market if you have a tight supply environment, and maybe as the economy picks up, you get more of new buying in terms of expansion and not really replacement?

Every year, Yvonne, the market gets larger. Every year, they build billions of dollars worth of equipment. And they add it to the pile. And it doesn't go away. And it just gives us a greater opportunity, every year, to work with the bigger pile. And basically, if it's out there, we'll find a way to get it.

Okay. I was just thinking, if the economy picks up that people are really going to be using this equipment, and they might not, you know, be wanting to sell it or exchange it.

Well, there's no doubt if people have work for their equipment, they don't sell it. But historically in good times, people keep buying new and they go forward. And that causes this turnover, all the time. And that's where we live, we're always taking the older equipment, and selling it. The operator's going in and buying new equipment. Any time there's that movement it's a very positive thing for us.

I think Yvonne, you and Ben are both talking about sort of the same ideas this happen these are external factors that can affect the overall marketplace. I’d like to make the point, sort of over and over again, that as Dave says, the market is absolutely huge, we are the biggest player in the market, yet we only have 1% market share. The real restrictions for our growth or opportunities for growth, aren't so much what's happening in the economy as a whole but the replacement cycle being good or bad. It is (inaudible) to come up with the right strategy and execute it, that's where we put the focus and we're opportunistic.

We're taking advantage of the opportunities that come our way. The market being so large we're not too stressed by individual external factors. That's where our focus always is I guess. That's why we avoid having an economic argument for higher or lower sales for the year. And the 10% works well for us.

we had one question on the Q3 size, and how we performed on the gross auction sale in total. I'm looking at the list of auctions in 2003 and the (inaudible) that we had in '02.

And you just mentioned opportunistically reacting, Bob, and there's no question in 22, we had two or three what we called offsite auctions that were opportunistic that the projects happened and the timing fell and it happened in the third quarter.

And likewise, this year there's two or three in the third quarter of 2003. And you can look through our history over time, and you will always see the regular basis of where we have auctions every quarter in all our major sites and then there is the sprinkling of these opportunistic events. The building of the Hong Kong airport or a local event when a major contractor decide to retire. They come and go and there are different reasons over the course of history.

But we're out there and very positive about the results. And Bob has commented on the fragmentation of the market and how much -- how big that pile is that Dave calls it and how little we are scratching on the edge of it. We'll be out there and work hard to get all we can.

So that is a really good lead in Randy to the one thing I was trying to get in earlier I think Murray was asking -- whoever it was asked about Q3 and why was it a bit smaller than we'd expected, I say we pretty much hit the number. When we're only missing it by $10 million one way or the other, given it's a opportunistic, event driven business, I would suggest to you that we actually hit the number bang-on. I think we're opportunistic and it's going to be a bit lumpy and that's why we focused on the longer term.

Just a clarification, I thought Dave said the Dubai and Moerdijk auction were pushed into Q3 from Q2?

No, they've always been in October.

And can you tell me how many options were held at permanent sites versus regional sites?

Will somebody else say something while I count them?

Can you give me a call.

Third quarter there were five offsite sales. And it looks like four held at regional auction units, the rest at permanent auction sites. To be confirmed.

And how many were in total?

30.

30. Thanks.

We have another follow-up question from the line of Bruce Simpson from William Blair blare. Go ahead.

Can you give us any comment on the state of your agricultural division, either qualitatively or quantitatively what that contributed in the quarter?

Sure Bruce, Peter here. The ag division, typically it's very cyclical, as farmers go through their typical cycle of farm. I don't think we had more than three or four sales in the quarter for Q3, which is pretty regular. Most of the activity in the farm segment would be in Q2. And I think it was relatively immaterial activity in terms of the total dollars that drove through in Q3.

But of course, we're looking to grow that business as well. At the same time as we're focusing on the construction side of, the whole ag market itself is very significant and we're putting a lot more effort and resources into expanding that operation.

Thank you for that. And could you -- do you care to or are you able to quantify it just in round numbers what that might have contributed in gross auction sales this period?

I would care not to, none number one. And number two, I think the number like when I say material, it's very small. Bob, you're the policy guy here. I don't think we disclose that kind of information do we?

Great, put the pressure on me. No, we've never, Pete's right, I'll go so far as to say it was less than $1 million in gross sales.

I'm not showing any further questions at this time so I'll turn the conference over to you. Please go ahead.

Thanks. We're pleased to be able to have this kind of conversation with everyone on the line and pleased to be able to deliver these kind of results.

We're just going to sign off now. Thank you for your attention. We're going to carry on and do our business, we're excited about it and thanks very much.