RB Global Inc (RBA) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the 2004 Second Quarter Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time if you have a question please press the "1" followed by the "4"; on your telephone. As a reminder, this conference is being recorded Thursday, August 5, 2004. I would now like to turn the conference over to Randy Wall, President and Chief Operating Officer of Ritchie Bros. Auctioneers. Please go ahead, sir.

Thank you Danielle. Good morning and welcome to Ritchie Bros. investor conference call for the quarter ended June 30, 2004. As you heard from Danielle my name is Randall Wall, President and Chief Operating Officer of Ritchie Bros. Auctioneers. Today I am joined by Peter Blake, our Senior Vice President and CFO; Bob Armstrong, our Vice President of Finance; and David Ritchie, our Chairman and CEO. Today we will be talking about our results for the 3 and 6 months period ended June 30, 2004 as well as the management's succession plan that we recently announced. Our presentation will take about 20 minutes and then we will be happy accept your questions. At this time I would like to make the usual Safe Harbor 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. Forward-looking statements include comments about projected future results and performance, growth initiatives, development plans, and 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 in our periodic filings with the SEC and Canadian Securities Regulators, which are available on our website and [SEDAR] and SEC websites. I would also like to remind listeners that we will be talking about gross auction sales during this call, gross auction sales represent the total proceeds from all items sold at our auctions that were completed during the period. It is not a measure of revenue and is not presented in our statement of operations. Option revenues represent the revenue earned by Ritchie Bros and are composed of among other things the commissions we earned and the net profit or loss on the sale of equipment purchased by Ritchie Bros. Listeners are encouraged to read our periodic filings for further discussion of the components of our revenue.

Now, I am going to give a few general comments before I pass the call over to Peter and Bob to give you the financial overview. Dave will then talk to you about the press release we issued yesterday afternoon regarding our management succession plans. The first half of 2004 has been marked by a string of record breaking sales at several of our permanent and regional auction sites as well as that and offsite location, which started in the first quarter with gross auction sales records falling in Orlando, Chicago, and Statesville, continued full steam into the second quarter. We held our largest Canadian sale in Company history at our permanent auction site in Edmonton, our largest auction sale ever in the state of Georgia, and our permanent auction site in Atlanta, and our largest California sale ever at a regional auction unit in Stockton and we also held our largest Canadian offsite sale ever in Fort Nelson in Northern British Columbia. All of theses significant achievements helped us achieve record breaking quarterly and six months gross auction sales performance. We have gross auction sales for the quarter ended June 30 exceeding $553 million and for the six months coming in at north of 932 million. Entire Ritchie Bros team from the front line sales people to the back office administrators and everyone else in between has worked extremely hard to accomplish these results and for this they must be commended. We're very proud to be part of such a dedicated and hard working group, and we’re all fired up to strive for further success in the second half of this year.

I [often think] how we are going to be able to continue to deliver gross auction sales increases in light of the growth we’ve seen at RBA over the last few years. Many of you will be familiar with our strategy which in a nutshell is a steady organic growth accomplished by exploiting new markets and regions in which we did not already operate by expanding our sales in existing regions, by using technology to enhance our sales and sale force productivity, but let me give you a quick update on how we’ve been doing so far this year. We’ve made good progress on the international front over the last -- for a while. In the last year or so we’ve brought on new sales representative in Brazil, Iran, Indonesia, and Turkey. We’re now on the final stages of establishing our presence in China. We’ve now hired two people in China and a territory manager from our Singapore region will be moving to China in the fourth quarter as well to become our chief representative in that country.

We’re very excited about the prospect in this fast and untapped market but want to assure you that we will take the same measured approach as we commence our expansion into this part of the world. Other areas that we’re currently looking at and expect to have news about over the next few quarters are India, Kuwait, and Eastern Europe. I am optimistic that you will see the RBA flag flying in some if not all of these regions before to long. One another growth initiative I want to mention today is our recent decision to expand our presence in the industrial plant market, and talk about industrial plant I'm referring to equipment used inside industrial applications such as manufacturing plants, factories, and other similar processing facilities.

We’ve already had successful sales on this segment and now we’re intending to target some of the larger opportunities in this sector that we believe could benefit from our unreserved auction methodology. We will be starting small but our intention is to make more consorted effort to apply our expertise to what we think is a large potential market. We’ve already hired a manager and some dedicated staff and his position will be based in Denver, Colorado. The heart of these expansion initiatives is our continuing focus on building relationships with potential customers and showing them the benefits of participating in our global marketplace. This will continue to be a key strategy as we move forward. Now let me turn the call over to Peter Blake.

Thanks, Randy, and good morning, everyone. I hope you have all seen the press release that we issued this morning. I will also draw your attention to our MD&A and financial statements which we also filed this morning. The numbers that form the basis of the discussion that follows are contained in that press release and in our quarterly report. Let me remind everyone that all dollar amounts referred to in this call and in our press release and Securities Filings are stated in U.S. dollars, and all per-share amounts reflect the 2-for-1 split of our common shares that took place at the close of markets on May the 4th.

During the last conference call, after Q1 this year we indicated that we were expecting gross auction sales for the second quarter of 2004 to be about $510 million. We actually achieved gross auction sales for this quarter of $553.8 million, which is more than $43 million higher than we had originally expected. So far this year we have generated gross auction sales of $932.4 million, which is 16% higher than the gross auction sales reported for the first half of 2003. We are seeing a strong performance in the U.S. market in 2004 and this is going to be responsible for most of the growth in the second quarter and year-to-date. Included in the total figure for the six months of 2004, is gross auction sales of $29.3 million from 73 unreserved agricultural auctions we held during the period, which compared to $20.1 million for the corresponding period in 2003. This is the first time we have disclosed specific details of our agricultural auctions but the numbers are starting to get larger, so we feel it is an appropriate time to start talking about them.

Auction revenues in the second quarter of 2004 were $56 million and were $93.7 million for the first half of 2004. This represents growth of 11% compared to the auction revenues reported in the first half of 2003. Our auction revenue rate for the first six months ended June 30, 2004 was 10.05% which is less than the 10.45% we achieved in the first half of '03 and slightly above the top end of our expected range. Both our state commission and underwritten businesses are continuing to perform well. Direct expenses which are comprised of the costs incurred specifically to hold an auction, were 1.42% of gross auction sales for the second quarter of 2004 and 1.33% for the first half year. This compares favorably to the direct expense rate of 1.42% during the first six months of 2003. The direct expense rate is influenced by the size of auctions held in a particular period and by whether auctions are held at permanent auction sites, regional auction units, or at off-site locations.

Larger sales and sales held at permanent auction sites are more cost-efficient and generally result in a lower ratio of direct expenses to gross auction sales. As Randy mentioned previously, we held several very large auctions during the first half of 2004 and this is reflected in our direct expense rate. It is interesting to note that the average size of the industrial auctions we held in the first half of 2004 was approximately $13 million compared to the $11.7 million in the first 6 months of 2003 and $10.9 million average for full year of 2003. This is high average auction size contributed to our lower direct expense rate in 2004.

General and administrative expenses were $20.4 million for the second quarter of 2004 and $39.8 million for the first half of '04, which is an increase of 16% over G&A for the first 6 months ended June 30, 2003. Our G&A was higher than the equivalent period in 2003 for several reasons including the impact of currency fluctuations and a continued growth in our business, which has necessitated higher expenses. For example, our employee numbers increased from 589 at December 31, 2003, to 616 at June 30, 2004. This led to higher salaries and wages, as well as other costs associated with bringing new employees on board.

Other factors contributing to the increased G&A included the increased cost of upkeep for our auction facilities, the cost of the new executive long term incentive plans and a change in our method of allocating costs to internal software development projects which resulted in a lower level of costs being capitalized to such projects of course brought an increase in software development expenses.

Overall, the higher G&A primarily reflects the ongoing and substantial growth in our business. G&A for the quarter was higher than the level we had discussed on our last conference call and partly because of the increased [inaudible] accruals during Q2 which resulted from the above target results that we delivered.

Our income tax rates for the six months ended June 30, 2004, was 36.1%, which is higher than our previous guidance and above the 30.2% experience during the first half of 2003. The higher tax rate in the first half of '04 was mainly a result of earning a significantly higher level of income in a higher tax rate jurisdiction such as the United States and Canada compared to the same period last year. Net earnings for the second quarter of 2004 was $15.2 million or 44 cents per diluted weighted average share and for the six months ended June 30, 2004, were $21.8 million or 63 cents per diluted share which is marginally ahead of 2003. As we have mentioned in our two most recent conference calls, our expectation for 2004 is that our net earnings will be fairly flat compared to 2003 and that continues to be our expectation.

Before I pass the call over to Bob to update you on our guidance for the rest of the year, I want to take a dip and talk a bit about our current CapEx projects and future expectations. The development of permanent auction site at Sacramento, California continues to move forward. We expect to hold our first sale there on that site in December 2004. We are also still in hunt for several new properties in the U.S. particularly in Ohio and the New England area, but so far we have not closed on any deals. We are planning to put one land deal together this year and at least one more in 2005. Overall our CapEx for the first half of this year including maintenance CapEx was $9.6 million. We still expect that we will incur growth CapEx for the full year in the range of $10-15 million plus maintenance CapEx in the range of $5 million for a total expenditure in the range of $15-20 million for the full year. I am also happy to report that our Board of Directors have increased our quarterly cash dividends to 11 cents per share payable on September 17th to shareholders [inaudible] record on August the 27nth. This represents a nearly 47% increase from the quarterly dividend we have contained for the last year.

Our board continues to believe that our excess cash should be returned to our shareholders provided that we first take advantage of all appropriate opportunities to use the cash to expand our business. When we started paying dividends last year we deliberately started at a conservative level. The significant increase that the Board has announced is intended to get us to a more appropriate base level. Please do not expect us to increase our dividend by this amount again next year but at this point in time I would expect that in future our board will consider increases more in line with our rate of earnings growth. The total amount of dividend payable is expected to be in the range of about $3.8 million this quarter. Now I would like to turn the call over to Bob Armstrong.

Good morning. I am going to update our guidance for the remainder of 2004. On our conference calls at the end of Q1, we indicated that we were expecting full year gross auction sales to be in the range of 1.72 billion for the 2004. Based on our better than expected performance in the first half of this year and projections for the remainder of the year coming in from our mangers in the field we are increasing our guidance to the range of 1.77 billion for the full year of 2004. This will represent growth of over 15% compared to 2003 gross auction sales. I would expect to see gross auction sale of about 350 million in Q3 which was put it there about 1.3 billion for the first nine months. This represents an increase of more than 18% over the same period last year. I would like to remind listeners that we held a three-day Moerdijk auction that started at the end of the second quarter and this sale will be recorded in Q3. This is consistent with our revenue recognition policy for auctions that start in one period but end in another. We’ve recognized the revenue and expenses from this sale on the date when the auction was complete.

At this point in time, we continue to expect an average auction revenue rate for the remainder of the year in the range of 9.5-10%. The 10.05% rate experienced in the first half of this year was slightly aside this range and it is entirely possible that future rates could be higher or lower.

We continue to expect the direct expenses to be in the range 1.45% of gross auction sales for the remainder of ’04 because we don’t expect our average auction size to remain at the unusually high level, experienced in the first half of the year. We are increasing our guidance for 2004 full year G&A expenses mainly because of our performance to date this year. On our last call, we indicated that G&A would likely be in the range of $76 million for the year. So far, we have been ahead of our guidance for the several reasons that Peter already mentioned, and based on this experience and our current expectations for the remainder of the year, I would like to increase the guidance by about $3 million to be in the range of $79 million for the full year of ’04. Much of this increase has to do with higher than expected performance bonus and executive long-term incentive plan accruals which are formula driven based our performance to-date. Full year depreciation expense in 2004 should be in the range of $12 million, an interest expense for the full year of ‘04 should be in the range of $4 million. Hope these numbers are consistent with our previous guidance. Other income is still expected to be between will $1 million and $2 million in 2004.

On our last conference call, we indicated that our income tax rate for 2004 would likely be in the range of 32%. We have so far this year experienced a higher rate than that guidance, mainly because of the much stronger than expected growth in the U.S. Based on our earnings performance expectations for our U.S. and Canadian operations for the remainder of the year, we are increasing our tax guidance, tax rate guidance for the remainder of the year to be around 35%. As Peter mentioned a few minutes ago, our cash rate is sensitive to the jurisdictions in which our income is earned, which makes precise estimates difficult. The U.S. the tax rate jurisdiction and earnings for this market has caused our tax rate to move up in recent periods. We are still producing flat earnings for the full year of ’04 because the over 13% gross option sales growth that we are predicting is expected to be offset by return to a more sustainable auction revenues rate. Increased G&A and higher than expected tax rate are also holding our rates down this year. We still believe that we should be able to achieve average earnings growth in the range of 15% per year but as we have noted on previous calls, having achieved earnings growth of between 25-30% per year for the last 3 years, means that we’re up against a very tough comp in 2004, and now I will pass the call over to David Ritchie.

Good morning everyone. I hope you have all see the press release that we issued yesterday afternoon. It describes the key aspects of our management succession plan and I wanted to talk a bit more about the changes today. I am sitting here and listening to Peter and Randy talk about the impressive performance we have achieved so far this year and I am struck by what an exciting time it is for Ritchie Bros and the future of our company. We have lost the momentum rate now and the equipment world is changing in our favor. Over the last few years we’ve build a great team of people throughout the company and we have really strong leaders in place running this business. In addition technology is playing a much bigger part in our business and [inaudible] and it has created a whole new area of opportunity for us. There are massive untapped markets like China, India, and Brazil waiting for us to come knocking at the door and I am confident there is a huge potential in these regions where we have barely started scratching the surface. I have been at the helm of this company for 46 years and I have had so much fun, it has never once felt like bored and I am so great full to have the opportunities to build this company from the ground up working first with my brothers, then with the great group of partners, and now with the team of over 600 talented and dedicated people. But, you know what there comes a time when us old guys have to hand over the reigns to young fellows coming along behind. We are so fortunate to have such a committed and hardworking group of employees and guys who have been running this company for the last few years. Randy, Peter, Rob Mackay, Robert Whitsit, and Roger Rummel amongst others have been doing a great job and I have been slowly stepping back from the administrative matters over the last few years letting them take care of day- to-day details and I have been impressed by the job they are doing.

So I think I can step back a little further. I have my [partner Gloria], I have my health a complete confidence in knowing that there is nothing going to change at RBA. Our team is focused on goals and I feel really comfortable that they will be successful. I will still be going to auctions, still meeting customers, still having fun, and still make sure these guys don't forget the basics. On October 31st, I will be stepping aside Chief Executive Officer of Ritchie Bros. The very capable Peter Blake will be taking over as CEO on this date. I will remain as a Chairman of the Board of the Company and the Company's largest share holder. That part also may change. Randy Wall is continuing as President and COO and Rob Mackay is continuing as Executive Vice President. Bob Armstrong will become CFO effective November 1st. I won't be taking this step if I didn't have a complete faith in this team of managers and employees that makes this company tick. And now I will turn this call back over to Randy.

Thank you, Dave. Before I wrap the call I want everyone to know how much Dave means to us on a personal level. The success of this company and where we are today is a testament to this man. He has worked incredibly hard over the years to build that can only be described as an amazing company with an incredible culture and an exciting future. We are all very proud to be part of this Company that Dave and his brothers founded and I want to assure you that Dave's mark is all over this Company. Anyone who has ever worked with Dave Ritchie, over the years has learned a great deal from him and we will take those lessons to heart as we continue to build this Company. We have a very strong management team in place, all of whom have grown up under Dave's guidance and this business will continue to move forward. Dave is not retiring from the Company; in fact I don't think that Dave could ever retire from this business. He is just pushing off some of those less interesting parts of the job to Pete. He has made it clear that he will be a pretty active Chairman.

Now before we open the call up to questions, I would like to recap the main points we covered on this call. Firstly we ended the first six months of this year with gross auction sales of $932 million and net earnings of 63 cents of diluted share. We are expecting further growth in gross auction sales for the remainder of '04 and have increased our target guidance to 1.77 billion for the year. However, we are still expecting flat earnings for the full year. Secondly, thanks to the infrastructure investments of prior years, we have significant capacity and operating leverage. Over the next several years we will continue to work towards average top line goals from the range of 10% which should translate into average earnings growth in the range of 15% over the long-term. Thirdly, we are increasing our quarterly dividend from 7.5 cents to 11 cents per share and finally while Dave Ritchie will remain as Chairman and largest shareholder, Peter Blake our current CFO will become the CEO of the Company on November, 2004.

Now Danielle we would be pleased to answer any questions that you have and Danielle can you please take us through the question period.

Thank you. Ladies and gentlemen, if you would like to register a question please press the "1" followed by the "4" on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration please press the "1" followed by the "3". If you are using a speakerphone please lift your handset before answering your request. One moment please for the first question. Our first question or comment comes from the line of Benjamin Chemiavsky of Raymond James. Please go ahead sir.

Good morning guys, nice numbers

Hi Ben, thanks.

First of all, can you just the clarify you'd mention how many people you now have at Ritchie as of June, versus December? How many those your sales people?

Okay, that -- we had 188 at December 31st, Ben and June 30, we have a 199.

So quite a step up there.

Yeah, in our past call we’ve been telling you that it is our objective this year to increase the net size of the sales force and we are moving along nicely there. We're quite happy with that.

Now are we going to expect to see from those incremental higher same learning curve unfold where it may have impede productivity a little bit?

For sure the new hires are less productive than the old ones, there is nothing change there is in fact that learning curve you have referred to then but, I believe that we have weeded out some of the weaker players over the last two years and I think that we’re getting very good quality people coming in and we have new training programs and sales trainee program that are I think going allow us to retain a little higher -- you won't see the dip that we had before and we’re well above the 8 million per head mark right now and I'm optimistic we can maintain it above 8.

And can you, I wouldn’t expect you to have a specific number on this but maybe if you can make some comments on to what degree the strength in your gross auction sales which is obviously going to be very impressive, to what degree is that reflective of new market penetration, more productive sales force, just internal initiatives versus what’s happening in the market with pricing on used equipments, turnover, new equipment supply shortages that may mean people are rushing to the used market, so what’s kind of the mix between internal and external factors?

Dave, do you want to take a stab at that first?

I think we are growing in all areas, Ben. It’s going to be a combination of all. You know, the tech market has certainly made a great used equipment market this year but it doesn’t matter which way the market goes in our business, you know we are in position now to take advantage of these swings and I think it’s going to get better and even if we have a tightening at all, our position in all these markets are so strong, compared to where it was even five years ago, that our ability to take advantage of those swings and even with the current strike that maybe pending at [inaudible] I do not believe, it will have any impact on us at all.

This is Pete. It’s a classic scenario that you see in…

Well, you guys certainly there is a lot of feedback are you on a speakerphone or something I can’t hear what you are saying?

Yeah. Can you hear Dave comment?

There is a lot of echoing going on.

Why don’t I take a stab here Ben, is that any better?

That’s a lot better. Thanks Randy.

Alright. Your questioning on internal, external, and you know where is that benefit really coming from and I believe that the bulk of it is internal. The market does what it does, as any of your that have seen us or talked to us as we make the rounds towards our stay the market is immense. We are barely scratching a surface and it’s far more important how we execute our strategy than it is what the outside world is doing and we are benefiting for sure from some increase in our momentum as Dave calls it in our facilities, people, the internet bidding, all of these things are combining and I believe that we are just increasing our penetration into the market in a greater and greater way and we’re seeing gains in lot more sectors and I think that contributed to our strength much more so than it is to market dynamics.

But the used pricing and general strength in the equipment market must be helping in turnover and your margins and so forth to some degree.

Well, that's a two edged sword. Yes, the used equipment values have been very strong but they have been strong because supply has been somewhat less, so then you have to search further and wider in order to define product it self so, you know its an age old thing when markets turn down, the value per item is a little bit less and here we are in an environment where there is generally a shortage of equipment in North America, manufactures did not ramp up production fast enough to keep pace with the rising demand, prices have pushed up, but that's not necessarily the case overseas and even with this tightening in supply of equipment, we have been able to increase our numbers so yes, it is some of what you are alluding to Ben but it is a double edged sword so it is not all also.

Great, well that’s encouraging. Thanks very much.

Our next question comes from the line of James Gentile of Sidoti and Company. Please go ahead, sir.

Good morning guys, good quarter. I was wondering you guys exceeded your revenue estimate by about your gross auctions sales estimate, excuse me, by about $40 million plus. You allocated about $10 million of that to growth and your added culture business potentially, I was just wondering, you know what else is driving that, is it potentially your entrance in three industrial plant market or is [ag] business particularly strong, help us understand what you guys did right?

Hi, James it's Peter here. How's the sound quality for now is it…

It’s fine for me.

Pardon me.

It's fine.

Okay. The exceeding the original target of $510 million this quarter you are right. $10 million of that was allocated to [inaudible] by $10 million. The other is simply wide across the board and not even lay down to any one specific things it's a kind of more what Randy referred to earlier about momentum and penetrations in the market place were becoming more of a known commodity out there, more of a standard market trading place than any of the markets, so it's a fairly, I understand it’s a fairly broad answer but at the same time it's a fairly broad concept that we are out there pushing everyday in each of the markets that we operate.

Are there any particular geographies that you are seeing special strength coming from?

Well we saw as we mentioned in the call we saw an awful lot of strength in the U.S. market. We…

But more regionally within the United States.

Pardon me?

More regionally in the United States.

I would say not. It's fairly broad and we are still making consorted efforts as we mentioned in the call of trying to get into the Ohio market and New England market. We believe there is more opportunity there for us than we have exercised so far. We don't have terminal locations in those markets so we would like to get in there and start creating the same momentum that we have seen in many of the other key market places in the U.S. I would say there is no one particular region that's been stronger or weaker, at least in the U.S.

I just would like to add one comment here and that is Canada has also been very strong this year and you mentioned James Industrial plant. That division has not turned a wheel in the past quarter in Q2, so there's no impact from it.

Okay,

Our next question comes from the line of Bert Powell of BMO Nesbitt Burns. Please go ahead, Sir.

Peter or Bob, what was the underwritten as a percentage of sales in the quarter?

It was roughly 25% Bert, just sifting through the MD&A right now. For the quarter we have actually heard [average] was about 28% of total for the quarter.

So it's picked up a little bit in the last couple of quarters, is that sort of a trend or is that just some larger sales that are causing a bit of an anomaly.

Actually it hasn't crept up much but, we have taking an average 25 though, 28 is pretty close and I think last quarter was actually unusually low with more like 15% last quarter. It was quite low last quarter. We are not seeing a trend at all. It is an interesting question because I think it's interesting that we are not seeing a trend. It will definitely vary quarter-by-quarter sometimes high, sometimes low for example first quarter. We are not seeing anything that would indicate any permanent loop in one direction or another. This is an example Bert in Q2 of '03, our average percentage was 30%. So it's kind of -- it's hovered around 25-30 and I agree [inaudible].

But the star market that we are seeing I mean, it is hard for guys to get equipment as they are these days, the underwritten business certainly has got to be benefiting from strong used prices in the market right now, correct?

I think one of the reasons that's not true Bert is because when we do an underwritten deal, we are only exposed for say 30-45 days, so if we do a deal with you today for a sale in 45 days, the only way that strong prices will assist us to make more money on the deal but the prices deduction increased during that 45 day because we go into the deal today you and I don’t have similar information about the market, in other words what it is today and our principle is no better than anybody else's probably to what it look like in 45 days to this time, and the truth is it is not that long a period. So it certainly isn’t heard of if prices are strengthening but I don’t believe that that’s one of the reasons for strength on that side of the business.

Bert, this is Randy. I will just add to that that while the market is strong and that benefits the pricing, it is still a very competitive market. We -- the owner or a seller of that product has always a variety of choices with which out of transacted sell it himself, trade it back in, and use independent dealers or brokers or an auction channel and so still a very competitive world and we’re continuing to penetrate deeper so we feel our share of that market is actually growing but the dynamics in a strong market does not necessarily mean its going benefit from doing.

What’s happening if I look at kind of a year ago six months versus six months this year, what does the average age of quick side your auctioning on look like, is it -- are we seeing the kind of the ages of getting you know a little bit older as, you know, we start to see supply is that dynamic playing itself a little bit.

I was about to say that I don’t have any stabs on that but as I am saying it Dave is looking at me saying it is getting a bit older. I don’t think we have any steps to back it up and anecdotally what we are selling will be a little older this year. I'm not aware of being [inaudible] or materially. We don’t necessarily track that, Bert?

We do track some it, Bert but the thing what I find is that because of the short supply of new iron people tend keep their later model iron a little longer.

Right.

And that’s what we are experiencing since this last one year that I said probably on average a year or two older but it just got to keep filling up the shelf all the time and when they can’t deliver the new, you are not going to get their best pieces.

Right.

Once that we [build shelf] we will have another good run.

[inaudible] reflective of suppliers in the marketplace today in that regard what we sell at the auction is very much reflective of the supply of the use marketplace in general and there is a shrinking supply of new going into the marketplace in aggregate and we will probably see reflective, similar impact of the offered items at the auction.

[But the same guys] having to go farther and wider to get equipment?

I don’t know if it’s farther and wider I think just – same time they are penetrating more and more of the marketplace and you know you can keep in mind that we are less than 2% of the total market resource, so we are still meeting people today that have never heard of us. So an archive is out there. They have 4-5,000 customers on their customer list and they are banging on doors everyday. Lots of people out there that still don’t know who we are, so there is a tremendous amount of potential in the marketplace for us to continue to penetrate and the more that you penetrate, the more momentum you get. That’s what we are seeing over the last -- for a while particularly as a result of the permanent sites that we have put in place and the profile that we get and the continued permanence that we get by having those sites in place.

Okay. Thanks. Bob, just one last question, just on [inaudible]. I know you guys had given some guidance in terms of what's going to be in for the year. I think it was a $1 million and do you think that there is a little bit higher this quarter, can you help us just maybe breakout what it’s been for the first six months in this quarter and maybe just help us understand the formula a little bit better going forward for modeling?

Sure. Definitely with the [inaudible] program with the executive long-term incentive program and so I guess, we are using estimates to figure what it will come in at. The amounts of the -- the cost of the company is largely formula driven and it's tied directly to the amount of short term incentive bonuses granted to our senior management team. If our corporate performance is poor that grinds our executive bonus down it also grinds the [inaudible] expense where corporate reforming is above target that ramps up, the executive bonus pool which in turn can ramp up the [inaudible] will cap out and a cap started number below $2 million. So that’s the Moerdijk event too. My guess is that during the year it will be somewhere between $1-2 million and as we are seeing here right now with the strong performance of our targets so far this year it will probably end up closer to the top end of that range, if we pulled our own through the rest of the year, if we continue to out perform for the rest of the year then I will be quiet comfortable saying it will hit the top end of the range and if the rest of year is softer then it will drop off. I am trying to accrue for it through the year so that I don’t have massive lumps hitting. If I think it's going to come in close to top end of the range, I am trying to accrue roughly a quarter of that each quarter where we probably accrued about half of the top end of my range so far. So, my accruals in the rest of the year could come down, if performance doesn’t continue at higher levels or it could maintain an another million like it accrued for the rest of the year.

And the primary metrics that drive, are what profitability, sales growth?

Executive bonus is purely formula driven and it's driven out of pre tax to earnings target.

Okay. Thanks.

Our next question comes from the line of Bruce Simpson of William Blair. Please go ahead sir.

Good morning and congratulations to your whole team.

Happy vacation Bruce. Oh, sorry.

Working vacation. Okay number of items. First the industrial plant market what is the catalyst for getting involved there, talk a little about competitive landscape, and how you intend to approach that please?

I can take that. To start the catalyst is that we have an infrastructure that can be applied to new asset categories and we are constantly looking for things which to take our franchise if you will, and applied else where. We have done some work in that sector it the past without a real consorted effort and what we believe is out there is that there is some competition but we believe that there is no body there that is holding true unreserved auctions and we don't believe that there is anyone that also comes to the full service process that we can do. So, we believe that we can come in to that sector with a competitive advantage and we been talking to some potential customers in that field and believe that there is a hunger for it. So that's one of the, I mean, there is volume, there is potential business but there is also a need and that's really that has caused us to have another look at it.

And you intend to do those on site of course rather than add a Ritchie Bros location?

That's right Bruce. I mean that these are factories that will be traditionally retooling. May be a new line of automobiles being built this year and undo the old assembly line or perhaps manufacturing capacity is moving from one part of the world to a different part. So, yes, you go to the factory and do the liquidation there.

Randy is there any particular vertical that attractive or that you -- I mean I know that, for example one of the larger players in that space I think is across several verticals and that there are particulars things that are tightly tied into the your current market that would make more sense than others?

I don't think that we have really got any particular focus at this point in time in vertical sectors and I think we probably stay more to the industrial flavored side as opposed to the consumer technology side but this is still pretty early days. Our outside expert if you will has been brought on board to head this up, actually started only about three days ago, so its pretty fresh.

Okay. Taking a different track I was interested in your comments about evolution of your business, particularly in China as well some of the other markets. Should I be reading into that that there is a change either regulatory or in your own attitude, the last several times we talked about it, it seems like while you have always been interested in being there, you still sort of [inaudible] the regulatory regime, now it sounds like you are moving a little bit more actively on positioning people on those countries, is there a door opening for China, for example?

This is Dave speaking. We have looked to China since 1980. We have got people there for six months at a time to try to analyze it then we again in the 90's and now Rob Mackay who is sitting here with us and has done a lot of work on our China program, he is going to speak to you and address that directly.

Good morning, guys. Nothing's changed since the last conference call in China, from what the market is, and the direction that it may be going but it’s a big enough market that we have to be there and we have to be present there and our job in the next short-term be it a year or somewhere around that time frame is to get in there and get involved with the government offices that right the laws that would affect our business and the exchange of used equipment or even new equipment. When China opened this market to new businesses they have a mandate that they want to seek out the top 12 companies to coming in there and create an industry practically and morally and with all the right avenues that the rest of the industry will follow in time. So, it’s a very good opportunity for us to get in on the ground floor work with government officials to create auction laws that are suitable to our industry, used equipment laws, and purchasing laws by being there and being on the ground we could have an affect on some of the policies and laws that they may write in the future. If we are not there we will have no effect on it, so it is essential that we get there and get a representative office open and getting involved in the government changes that are going to come in the future years.

So, this what was mentioned by Randy, on caller layer about having two people in China and I believe sending another TM there from Singapore in the fourth quarter, that’s more along lines of what you’re saying rather this is kind of long term positioning to at the ground stage rather than moving into an active base?

Yeah, it is hard to say when we would move from the ground phase to the active phase. People are reading today in the news that there is a slow down, bit of a slow down in the economy there driven by the government of course. They want us to slow a little bit, lots of rumors about backlogs of new equipment sitting around which we've not found but as that economic changes and the demand for equipment changes we are going to be there and be poised to take advantage of any of it and it maybe that surplus equipment could come out of China that could go out elsewhere in the world. So we would be there ready to attack rather may be take it to other market to sell if the opportunity arose. Similar to what happened in Asia in 1997-98 or there is state on enterprises that government continually privatizes and as the state own enterprises become privatized they have assets that have never been sold. So there is lots of opportunity there. How quickly it will spring open from being a stand still operation, to being a functional, having auctions it is a bit of a big question right now, but obviously we are going to be there and be poised to take advantage of it.

Okay and thanks for that Rob and the last question has to do with G&A expenses in general. You know obviously one of your attractive pieces of the puzzle here for investors is the leverage inherent in the model as you grow and I wonder if Bob and particular sounds like about $3 million incremental expectation per G&A prior to what we were talking about before. It sounds as if perhaps maybe a $1million of that is from this long-term incentive program? And help us understand sort of is the balance for that largely from hiring the new TMs or it is coming staffing out additional sites or where is that infrastructure expense going and how does that – how do you think about leverage given that has cracked up?

Sure. The leverage is still very important to us. I agree with your comments that is one of the choice of our business model. Last year as a percentage of construction sales our G&A came down, not a lot but it did and I expected it to come down again this year and each year going forward, that’s part of the program. However, when we have years with strong performance but what we had the last few years are formula driven executive competition [inaudible] and those go to G&A so there is a bit of a formula driven factor in there. If we have soft year, you will see G&A come down potentially dramatically from the prior year and a strong year G&A may not come down that much because the bonuses get scooped up. As executives -- the competitions is significantly high to bottom line performance which we think is good but it does have the effect of making G&A a bit tough to analyze. That is the main factor I would suggest to you in why we’re increasing the guidance for the rest of the year. The performance for the first half has been so strong that we have to increase our bonus accruals for the second half of the year to deal with that and that has triggered increases in the long term incentive program that was discussed as well. So those are the large things that point to in terms of the change in guidance but the leverage is still important to us and I still believe it's there as I mentioned and I still think it's going to come down.

Okay, lets see. I am just thinking, I am doing some quick math here and if you spend an incremental lets say $3 million on long term incentive and take that down by the tax rate and if you got something like 34-35 million shares and thinking that’s may be sought of like a nickel a share does that sound fair, Bob on an annual basis for 2004.

Got to stop [inaudible] it's not all the executive long term incentive program is, may be we are [inaudible] in the total world of the competition the new pieces is [inaudible] and that’s not $3 million, that’s somewhere between $1 and $2.

Okay.

And then there is the standard executive bonus program, that has been in place for a couple of years now at least that is based entirely on corporate performance.

Okay.

But I didn't try and follow your math but you are probably right, it is something that would be pretty straight forward.

Okay, well, thanks again and congratulations to your whole team.

Thanks Bruce.

We have a follow-up question from the line of James Gentile. Please go ahead, sir.

The China horse has already been beaten down and I have been working on my Carbage [ph] game.

Got you there.

Good question.

Our next comes from the line of Sarah Hughes of Sprott Securities. Please go ahead.

One quick question. You talked about a lot about kind of what the market is doing in North America, can you just talk a bit about Europe and Middle East and Dubai.

Sure I will take that Sarah. The Middle East is bit of a shortage of equipment similar to the United States but a little bit clear, exasperated. They are suffering from -- suffering is maybe the wrong word, currency swings had a fairly significant impact on the world scene. In Europe the euro is so much stronger that's having an impact of the market in Europe in general is weaker than it is in the States. We are still having some growth particularly in Europe and not have as high as we had last year and this is a similar seesaw that happens through out [inaudible] history set of one market in year is red hot and in the next year somebody else and so far this year the U.S. has been the strong suit and the Middle East is a little bit off of our projection in terms of where we wanted it to be and that's caused by resulting from the shortage of some equipments supply. But Europe is continuing to grow and we are expanding in to new countries. As we are in the Middle East with new efforts in Kuwait and in Iran and that team is well will be moving towards the Indian subcontinent so there is lots of opportunity there.

What are your pricing in Europe?

Pricing in Europe, the part of the difficulties here is not only currency and production, first of all, a short answer to your question is, in the first part of the year we saw some similar to the U.S. strong, strong numbers because of same dynamics in the U.S. in one respect to the shortage of [inaudible] model, good equipment, however, there are barriers to the easy flow of equipment around the world whether its American ETA, emission controls, or its European CE markings and standards. They have otherwise reduced their demand for what could be surplus European equipment, but it cannot move to the U.S.

Okay,

So, we might have seen -- might have expected absent that I would have expected higher prices in Europe but they are being held in check because that equipment cannot go to the U.S. markets.

And then just one last question, Randy you talked about a kind of new growth initiatives internationally mentioning Iran, Brazil, Indonesia, Turkey, is there a few that are lot more advanced than others or kind of what's the time line in those markets, you know, starting to lose that?

It's not really a whole different than what Rob described in China. We plant an individual whether its an expert that we move in or a local that we hire, and more often than not, these days we have to hire a local, because of culture and language and so on, and there is this learning curve of a new person, there's an education of the market -- traditional countries do not have auctions at all, or if they do the only thing that they have are sort of bankruptcy related distress events, so very, very much is the education of the people, and education of the market, and a totally new style of transactions. We tend up to take more risk in those markets. Sometimes those markets are in distress then there is extra opportunity. In recent years Egypt has been in the distress and Turkey went through a financial crises as well few years back, so sometime it makes things opportunistic for ourselves but from a long-term point of view lots of market education, lots of new personnel education, there is a learning curve, and they are pretty much in similar stages. We would see Poland, Greece, some areas like these [inaudible]. Its newer areas for us. I don’t really think either any of them are more advanced one that I am quite excited about at the moment is Spain doing well and we had our first option industrial equipment option in Italy earlier this year and I see some opportunity there. That’s a market that will do quite well and is ready -- really ready for what we’re doing.

Okay, great, thank you.

we have a follow up question from the line Bert Powell of BMO Nesbitt Burns. Please go head sir.

Thanks, just on expensing software rather than capitalizing it what was the impact of that in quarter versus for 3 and 6 months and also versus a year ago just so we can kind a get sense there, you know, how material that is impacting the G&A expense?

First of all we’re expensing all software, we just -- we’re not capitalizing and overhead two software so it is still quite a bit of software capitalization going on. We have just taken one piece of it which we are not capitalizing and is more consistent and it’s a not big number that we are talking -- it is about a million.

Okay, fair enough. Randy, just in terms of expansion into the industrial market, is that predicated on some success the you had -- is that the places you are starting, what would have been sort of the top three other markets you would have looked at? I mean you’ve already gone into [Ag] why this one, why did this one get to the top of the list and what would be kind of number two or three?

Hey, Bert this is Dave speaking. We have been around this business a long time. We’ve been in and out of this business a number of times. We’ve done a lot of saw mill, we’ve done a lot of mines, we’ve done a lot of plants manufacturing and industrial plants and we have always looked at it as a potential part of our business that's taken by the color of that [inaudible] and kind of shied away from the industrial plant but this is really not new to this, it is just that we are developing a little better expertise within the group and we probably now have the capacity to handle it better and make to make it a viable operation and it’s just a natural extension to what we’ve already done for years and years.

Then in terms of what else do you look at but I think we talked before about how Ritchie Bros is open to lines of business that are good fit with our business model and then the 2-3 we can bring to [bear] whether it’s our customers list, international reputation, our network of auction sites, the fact that we do anything on unreserved basis, and how that has been able to create global marketplaces. So you also mentioned in your question about what else we looked at, probably better is what didn’t we look at. We are looking at all sorts of opportunities where we can bring value to our marketplace. We want to be all over that and as Dave said here is one we to have experience and we know we can do the job for our consigners in this area and so it’s pretty straight forward for us.

And I want to add something as well. It may – it appears to me from some of the questioning that it’s getting greater [press] than it perhaps warrants at that time, are there things that we are continuing to do that, actually as Bob said we look at lot of different things and the remaining things that we handle today that have as much or even greater upside potential and I will just name a few transportation. Now there is a sector approach that we are applying here to expand our presence as we have been working on for the several years. The finance sector is something that is seeing significant penetration by ourselves and we’re continuing to work on programs to make it more so. [Ag] you have already mentioned and we have a strategy there of bringing some new people on board and attacking that market. I would say those three are well ahead of industrial plant then you got your traditional business that we already employ that is well ahead of industrial plant in terms of its business potential. Geography opening up new markets and all of that I would say is as much a more potential as industrial plant and industrial plant is one more that we are using in event of our infrastructure to chase after.

Great. Thank you very much.

We have a follow up question from the line Benjamin Chemiavsky of Raymond James. please go ahead sir.

Sorry guys. Can I just consider repeating couple of things that I missed during the opening commentary, the tax rate you said was -- did you say would be 35% for the second half of the year or for 2004 now.

My guidance was for the second half of the year, Ben.

Okay. Actually I think that’s it, the others have been clarified for me thanks.

Okay. Thanks.

As a reminder ladies and gentlemen to register for a question, please press the "1" followed by "4" on your telephone. Our next question comes from the line of Ross Turnbull of Odlum Brown. Please go ahead sir.

Hi, good morning.

Good morning Ross.

How many sales people do you guys expect to have at year end?

Oh boy, we get asked that question from time-to-time. We don’t guide or target specific numbers. We did say that we want to increase the size of that sales force over the course of this year which we have been doing. Its more -- we are very much looking quality people and if and when we find somebody that's quality even if he wasn't in the plan lets say we are going to take advantage of hiring that individual. So I can’t really tell you. Also in terms of where the number should be, but I would suggest that it should creep up a little bit from where it is.

At same kind of pace we see in the first half?

Okay.

One thing we have to Ross, that we do -- hope that sales workforce may grow between 5-10%. We are targeting 10% top line growth. Simple math tells me that comes from a combination or in part comes from the combination of number of sales people and sales force productivity. So, you know, between 5-10% is probably where we end up this year.

Okay. Any of your customers complaining to you or talking to you both shipping costs of the equipment they are buying at the auction?

Rob, why don't you take that?

If you are talking [inaudible] shipping costs, yes. There is definitely a struggle our there today both from the point of view of cost and both from the point of view of timing. We have seen pretty significant strengths in the Australian market but one of the biggest hurdles they have to get equipments is ocean freight and a number of the major shipping lines have stopped direct service between the U.S. and Australia so of course these guys have to ship via Japan and it's taking them anywhere from 2-3 months to get a piece of equipment back to the U.S. The other parts of the world shipping prices were sure gone up. Part of it of course is the price of oil and the other part of it is still the remnants of the Gulf war and the positioning of all the ships around the world that haul construction type equipment versus container type equipment. So overseas shipments definitely the cost has gone up.

Do you see that as a risk to your business?

No, its just an equation that these guys have to put into their model to buy equipments and when they look around the world to source equipments if its outside their country, there is probably little more time spent on what's the cost to get it home from Japan, vis-à-vis America, vis-à-vis Europe, but if they need it and they can't source it at home, its just the cost of doing business.

Okay, actually Rob, [inaudible] something you had said about China. In your discussions with people in China, are you looking 2-3 years out where North Americans maybe going to China and buying used or very close to new equipment and bringing it back to North America? From China I mean.

I think its very hard to predict what it might be. As long as the Chinese economy continues to grow at the rate that it is, their production facilities and the numbers of units they produce there quite likely will be consumed within the country. If there is a slowdown and the manufacturing facilities are still producing it will create surplus equipment that could go elsewhere in the world.

In my understanding of the caterpillar equipment, for example, in China, is that its different price than what you can get in North America, is that right?

Every manufacturer has preferential pricing in different markets around the world for sure.

So your proposed business there might have a pre-material impact on someone like Caterpillar?

I don't think 0that the amount of business that we would ever get out of there would have a material effect on them. We sourced equipment before round the world and other markets where the pricing is significantly different than the U.S. and shipped the equipment like in 1997. There is still differential pricing in Asia than there is in the U.S. or Europe and we were searching equipment [automation] in '97-'98 and taking it to other markets, but to have a material -- profitable material effect to the manufactured there got to be a stretch.

Okay

I think you remember Peter that, you know, the U.S. have their EPA rules and EPA sticker engines can come in and those who don’t have stickers cannot, and they are fairly vigilant in the application of those [inaudible] about the CE certification as Randy referred to earlier so its bit of a different standard [inaudible] but more safety related but its also restrictive of importation in the Europe so there are methodologies that have been enacted by governments and manufacturers as well to control the flow of their equipment and preserve the marketplaces that they created in terms of their preferential pricing.

And I would like to just add some balance to this lets call it a Caterpillar discussion. Caterpillar product that we sell is not the majority of the equipment, there are so many different manufacturers in the world and so many different industries that we operate in that caterpillar is not, I mean the majority of the equipment as I said is not Caterpillar. There is so many different colors and brands and styles that is the biggest manufacturer in the world. Our sales are reflective of that but there are many more and it's just a fraction of our business.

Okay, then I just to finally follow up with comment that Ben made at the ending of the call which about the price of used equipment, we have just gone to your website and looked at the prices for some of the more popular items that you tend to sell and on average it seems like five year old equipment is going for about 10% more than it was a year and a half ago and that’s got be reflected in your top line and your assertion was that you can make it up by having increased loss to [compete] for the fact that prices may come off from cyclical high and that’s a lot of extra lots.

Hi, this is the classic discussion on economic drivers to the economy and how do they impact our business and yes, I would say that pricing has arisen and it is not just in new product, that's in use but you have a higher price now with lower number of units and when the market comes down traditionally you are asking a question that's the opposite of what we usually hear and usually people believe that when markets are weak that stimulates the bottom line of Ritchie Bros more so because there is so much more to tell and your question is quite the opposite. So, it’s a very complex world, very complex formula. We believe again I reiterate that its our internal execution of our own strategy that are of greater importance than economic swings up and down.

I would also like to add to that I think looking back at our gross auction sales, throughout for the last 20, 30, 40 years, regardless to what's happening in the economy we just keep growing the gross auction sales and pursue there have been periods of time when prices have gone up and prices have gone down and supplies gone up and supplies gone down, but as Randy said as long as we execute our strategy and take advantage of the fact it’s a colossal market, we are largest player but only have 2% market share, we can grow through all those different environments. So prices have been going up. Yeah, surely in most categories, that’s probably true and they could have been going down as done in prior period. We continue to grow through those times.

Okay. Thanks again.

Mr. Wall and Mr. Armstrong, there are no further questions at this time. I will now turn the call back to you.

Thank you very much Danielle. Well we appreciate your time and your questions everyone. At this point to close off the call, I would like to personally congratulate Peter Blake on his appointment and also to thank Dave for his many years of guidance, Pete, Rob, and I have worked together very closely for 15,16, almost 20 years in Rob's case and this is a dynamic exciting company to be involved. We have spent the bulk of our careers working for this organization and we’re very, very pleased to be a part of it and look forward to carrying on days as time goes on and with that thank you very much and we’ll look forward to doing even better things as time goes on here.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.