RB Global Inc (RBA) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Ritchie Bros. Auctioneers 2004 annual earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, February 24, 2005.

I would now like to turn the conference over to Mr. Randy Wall, President and Chief Operating Officer. Please go ahead, sir.

Thank you, Operator. Good morning and welcome to Ritchie Bros. Auctioneers Inc. investor conference call for the year ended December 31, 2004. As you know, my name is Randy Wall, President and Chief Operating Officer of Ritchie Bros. Joining me here today on the call are Peter Blake, our new CEO; Bob Armstrong, our VP Finance and CFO; and Jeremy Black, our Senior Manager of Finance. For questions toward the end of the call, we've also got Dave Ritchie, our Chairman, and Rob Mackay, our Executive Vice President, here with us as well.

We will be talking about our results for the year ended December 31, 2004. This presentation will take about 20 minutes. And then, we will be able to take your questions.

Before we get started, I would like to make the usual Safe Harbor statement. The following discussion will include forward-looking statements as defined by SEC rules and regulations. Comments that are not statements of facts are considered forward-looking statements. Forward-looking statements include comments about projected future results in performance, growth initiatives, property development plans, and other things. 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 including our M&D for the year ended December 31, '04, which are available on our website at rbauction.com and on the SEC and SEDAR websites.

In this call, we will be talking about gross auction sales. As a reminder, the gross auction sales represent the total proceeds from all items sold at Company auctions. It is not a measure of revenue and is not presented in our statement of operations. Auction revenues represent a revenue earned by Ritchie Bros. and are composed of the -- most other things -- the commissions that we earn on the sale of consigned lots and asset and the net profit or loss on the sale of equipment purchased by Ritchie Bros.

I will make a few remarks about our overall performance before I pass the call over to Bob and Jeremy to give you the financial overview. Peter will then have a few comments before I conclude the call and open it up to questions.

In 2004, we sold more equipment for more owners and registered more bidders at our auctions than in any previous year. This led to gross auction sales of $1.79 billion, which represents growth of 15 percent over 2003 levels. The fact that thousands of additional customers are putting their faith in our unreserved auctions each year is significant because it confirms that we are delivering services that are real value for our customers. If we did not have their trust and if we were not able to provide them with the best net return on the sale of their assets, we would not deserve their business. And we would not be continuing to deliver growth.

Perhaps the best example I can give you of the value we provide to our customers is the contract we recently signed with CitiCapital. Under our deal with CitiCapital, they have outsourced to Ritchie Bros. the remarketing of all North American equipment returned to them at end of lease or through repossessions. They can focus on writing the paper, and we will take care of their asset remarketing needs. We're proud to be associated with the people at CitiCapital. And when a group like CitiCapital makes a decision like this, we have to believe that we are in fact doing something right.

When we look at our organization, we see a company that is somewhere on the evolutionary path between a small company and a large one. And we are doing everything we can to enjoy the benefits of both. We are using our ever-increasing scope and global reach to offer an unparalleled level of service to our customers, while at the same time, nurturing a unique culture and guiding principles that have defined us since our first industrial auction in 1963.

As we continue to grow and evolve, we will remain true to our roots and use our dominant market position to the advantage of our customers, employees and shareholders. We were able to achieve several milestones in 2004 largely because we are providing an increasingly valuable service in target equipment owners around the world. Our auction in Orlando, Florida in February of last year generated gross auction sales of $63 million and was at that time the largest ever sale in Company history, eclipsing a mark that was set in 1998 in the Netherlands.

In December, our European team reclaimed the title posting a EUR51 million auction or 68 million U.S. at our permanent facility in Moerdijk. While I am pleased to report that that record set in December has fallen already. Orlando reclaimed it last week with an unprecedented auction that delivered gross auction sales of $79 million. Our Orlando team was however quick to point out that the Europeans do still hold one record -- that being the record for holding the title for the shortest time. Now, we wait to see how that team in Moerdijk is going to respond.

All and all, we've set eight new regional records in 2004, including auctions that were our largest ever Canadian, U.S. and European sales. Our Internet bidding service, rbauctionBid-Live, is just in its third year of operation and accounted for nearly $200 million of our total gross auction sales in 2004. While the majority of our customers continued to participate in our auctions by attending and bidding in person, customers using the rbauctionBid-Live service are now the buyer or runner-up bidder on between 15 and 20 percent of all lots available for online bidding. This service has proven to be a perfect fit with our strategy of using technology to enhance but not to replace our live auctions.

As we look to the future, we are embarking on an aggressive plan to improve the way that we conduct business while taking a hard look at all of our business processes and systems -- and have given ourselves until the middle of 2007 to put in place more efficient consistent and scalable processes that will enable us to meet our growth objectives well into the future and to do so with greater efficiency and better operating margins. We've taken several experienced people out of the field to work on this initiative. Our processes and systems are excellent. But they need to evolve to keep pace with our client growth and to allow us to increase our gross auction sales by 10 percent each year without an equivalent increase in cost. This strategy is part of our plan to deliver annual sales growths of 10 percent and an average annual bottom-line growth of 15 percent. We refer to this initiative as our MO7 program, which is short for Mission 2007. And we'll keep you posted on our progress.

Before I pass the call over to Bob, I'd like to say that as a management team, we're proud of the dedication, commitment demonstrated each day by every member of the Ritchie Bros. family. A family that today includes 615 full-time employees and thousands of part-time employees. We thank them for their hard work and their "glass is half-full" attitude. And we now -- I'd like to turn this call over to Bob Armstrong, our CFO.

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 audited financial statements, which we have filed this morning and which are available on the SEC and SEDAR website. The numbers that formed the basis of our discussion are contained in the press release and our annual filings. All dollar amounts referred to on this call and in our press release and filings are stated in U.S. dollars. And all per share amounts reflect on a retroactive basis the 2-for-1 split of our common shares that took place at the close of market on May 4, 2004.

As Randy mentioned, our gross auction sales for 2004 came in at 1.79 billion, which is 15 percent higher than our 2003 gross auction sales. Gross auction sales were 550 million in the fourth quarter, as we continued to see strong growth in our U.S., Canadian and European operations. Our Canadian and European results for '04 were aided somewhat by the strengthened Canadian dollar and euro compared to the U.S. dollar. Also included in the Canadian results in 2004 is gross auction sales of 45 million from the 93 unreserved agricultural auctions that we held during the year, which compares to just over 22 million for the corresponding period in '03. Our agricultural division is still relatively small but it is growing at an impressive pace.

Auction revenues were 182.3 million for the year. This represents growth of 13 percent. Our auction revenue rate for the year ended December 31, '04 was 10.19 percent, which is lower than the unusually high rate of 10.36 percent we achieved in 2003 and just slightly above the top end of our expected range. Both our straight commission and underwritten business performed very well in 2004.

Direct expenses, which include the costs incurred specifically to hold an auction, such as wages per temporary staff, advertising and travel expenses for staff to attend and work at the auctions, were 1.31 percent of gross auction sales for 2004. This compares favorably to the direct expense rate of 1.42 percent experienced in 2003. Our direct expense rate for a particular period is influenced by a number of factors including the size of auction sales, whether the auctions are held on 1 day or several days, and 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 generally result in a lower ratio of direct expenses to gross auction sales. The average size of our industrial auctions in 2004 was approximately $12 million compared to 10.9 million in 2003. And this increase was a significant contributor to our improved direct expense rate. We expect our average auction size to remain at this higher level in 2005.

General and administrative expenses came in at 85.7 million for the year. This represents an increase of 20 percent over the comparable amount in 2003. Our G&A in 2004 was higher than in 2003 for several reasons, including the impact of the continued weakening of the U.S. dollar. As we have noted on previous calls, approximately 40 percent of our expenses are denominated in currencies other than the U.S. dollar, primarily the euro and the Canadian dollar.

The other major contributor to G&A growth was the continued growth of our business. For example, our average employee count increased 6 percent in 2004, from an average of 580 employees in 2003 to an average of 615 in 2004. This led to higher wages and benefits as well as other costs associated with bringing new employees on board, including an expansion of our training and employee development programs. Our labor costs including salaries, benefits, stock compensation expenses and employee performance bonuses represented nearly 60 percent of total G&A in 2004.

Other factors contributing to increased G&A include the costs of our new executive long-term incentive plan, bonus accruals driven by our better-than-expected pretax earnings, a change in our method of allocating overhead costs, and internal software development projects. And this resulted in a lower level of cost being capitalized for such projects. The increased costs of owning and operating our expanding network of auction facilities, including property taxes, insurance, maintenance, and costs related to hurricane damage in Florida and Texas.

In addition, the cost of satisfying public company of regulatory and corporate governance obligations including the cost associated with the expansion of our Board of Directors and our TSX listing in early 2004. There is also the cost of insurance that has increased in comparison to the prior year.

Overall, the higher G&A primarily reflects the ongoing and substantial growth in our business. As management, we look at G&A as a percentage of our annual gross auction sales when we monitor G&A levels. In recent years, G&A has been around 4.6 percent of gross auction sales. And in 2004, we ended up being approximately 4.8 percent of gross auction sales. The growth in this number, up from approximately 4 percent 5 years ago, reflects the significant infrastructure expansion of recent years and the costs we have added to our system in order to provide increasing levels of customer service. The benefits of these additional expenditures include our ability to hold larger auctions, the increased capacity that we now enjoy, and our ability to achieve higher commission rates.

Just to clarify that latter point, one of the reasons we have been able to realize improved auction revenue rates in recent periods is that we have been able to earn more revenue thanks to the increased levels of customer service we have been providing. We need to keep the lid on our G&A. But our concerns are somewhat mitigated when these incremental costs help us to improve revenues. As well, our move towards holding a greater proportion of auctions at permanent auction sites has effectively transferred some costs from direct expenses to G&A.

Going forward, we expect the rate of G&A, as the percentage of gross auction sales, to come down gradually from current levels. And Jeremy will speak further about our expectations shortly.

Our effective income tax rate for the year ended December 31, '04 was 40.1 percent. As we discussed on our last conference call, the higher-than-normal tax rate in '04 was in part a result of a $2.1 million charge arising from the realization of foreign exchange gains at the subsidiary level in connection with certain debt that came due in the second half of '04. This was a one-time situation and is not reflective of our ongoing operations. And we're not expecting similar charges in future periods. Excluding this charge, our income tax rate in '04 would have been 36.5 percent for the year.

Net earnings for the full year were 34.9 million, and diluted net earnings per share were $1.01. Including the impact of the 2.1 million income tax charge, net earnings for 2004 would have been 37 million or $1.07 per diluted share, which is roughly the same as the diluted net earnings per share we reported in '03 and consistent with the guidance we provided throughout 2004.

Before I pass the call to Jeremy to discuss our expectations for 2005, I want to talk a bit about our recent capital expenditure projects and future expectations. Overall, our CapEx for 2004 including maintenance CapEx was 23.4 million. The largest expenditures related to the continued work on our new permanent auction site in Sacramento, California and to our acquisition of property in Nashville, Tennessee. The development work on our Sacramento site continued into '05. We moved off of our regional auction units in nearby Stockton, California earlier this year. And we will be holding our grand opening sale on the new Sacramento site on March 10 and 11. This is a 90-acre site right on a major interstate highway. And we have high hopes that this facility will anchor some impressive growth for Ritchie Bros. in the massive Northern California market.

Going forward, we're expecting CapEx including maintenance CapEx to remain in the range of 20 million in 2005. During January, our Board of Directors declared another quarterly cash dividend of $0.11 per share, payable on March 18 to shareholders of record on February 25. The total amount we expect to payout for this dividend is around 3.8 million.

Now, I will turn the call over to Jeremy Black, our Senior Manager of Finance.

Thanks, Bob, and good morning. I am going to give you more complete guidance for 2005 and update the preliminary information that I provided on our last call. If completed our annual planning process and from what our field managers have told us, we believe that we can deliver an average gross auction sales growth rate of close to 10 percent in 2005. We are targeting gross auction sales in the range of $1.95 billion for the year, which is consistent with the preliminary guidance that we gave you in November. Based on the numbers generated by our field managers, we're expecting that approximately $400 million will be achieved in the first quarter of 2005. At this time, it is too soon to provide specific numbers for the rest of the year. But it is probably reasonable to assume that the second and fourth quarters will each represent a little over 30 percent of our annual volume. And that the third quarter will be a little bit smaller than the first quarter. We would expect to offer more guidance on these numbers on future conference calls.

Although we have experienced a number of quarters where average auction revenue rate has come in ahead of our guidance, we continue to believe that our sustainable auction revenue rate is in the range of 9.5 to 10 percent. Given our recent strong auction revenue rate performance, we will not be surprised if it comes in near or at the top end of the range in 2005. But at this point, we're not prepared to raise our expected range or predict anything too far into the future. Having lived through periods of volatility in the past, we are very aware that our future average auction revenue rates could be higher or lower than this target range. Over the long term, we continue to believe that our auction revenue rate will be in the range of 9.5 to 10 percent.

Our direct expense rate fluctuated in 2004. But it remained below the levels experienced in prior years. Based on our actual performance in 2004 and considering that we're seeing an increase in the average size of our auctions, we believe that direct expenses will be in the range of 1.30 percent of gross auction sales in 2005. This is a reflection of the economies of scale that we are able to achieve at our permanent auction sites.

On our last call, I told you that we thought general and administrative expenses were going to be in the range of $86 million for 2005. That was based on preliminary estimates. And now that we have completed a more thorough review of our plans for 2005, we are increasing our guidance for G&A to be approximately $89 million. Much of this increase in guidance has to do with further weakening of the U.S. dollar to the fourth quarter of last year. It weakened 9 percent against the euro and 5 percent against the Canadian dollar during the quarter. The increase in GAA over 2004 levels reflects expenditures needed to support the continuing growth in our business, including higher salaries and wages and the costs of owning and operating our expanding network of auction sites. The increase also reflects the ongoing costs of being a public company, which we expect will increase in 2005 as we work towards compliance with the Sarbanes-Oxley internal control certification requirements in December 2005.

One of the main reasons that the projected increase is only 4 percent higher than the actual G&A 2004 is that our 2005 budget assumes a base level of bonuses that is well below the actual amounts earned in 2004. If our 2005 performance exceeds our targets, bonuses and G&A will increase somewhat. Conversely, if we miss our targets, bonuses and G&A will decrease.

Regarding quarterly variation, at this time, we do not expect any significant quarterly swings in the G&A during 2005. Depreciation expense in 2005 should be about $14 million, and interest expense should be approximately $3 million. Other income, which comes mainly from our appraisal division, is expected to be around $1 million in 2005. In addition, you should be aware that we will be recording a non-recurring gain in Q1 on the sale of excess land in Texas. The sale has already taken place and will generate a pre-tax gain of approximately $5.5 million that will be included in other income.

Our tax rate is sensitive to the jurisdictions in which our income is earned, which makes precise estimates difficult. The U.S. is a higher tax rate jurisdiction, and we continue to earn the majority of our income in this market. In 2005, we're expecting that our overall effective income tax rate will be in the range of 36 percent, which is roughly consistent with our normalized rate in 2004, which Bob discussed earlier.

The net result of our expectations is net earnings growth in the range of 12 percent for 2005. This is below our long-term expected growth rate of 15 percent due to our assumption that our auction revenue rate will return to a more sustainable level in '05. If our auction revenue rate remains at the level we enjoyed in '04, all else be equal, our earnings would likely grow by about 18 percent over 2004. This is a dramatic reminder of the sensitivity of our earnings to our auction revenue rate. And while we continue to caution people to look at Ritchie Bros. over the long-term, not on a quarter-to-quarter basis.

And now, I will pass the call over to Peter Blake, our CEO.

Thanks, Jeremy. We have been pretty active over the last year, increasing our global presence and working on the expansion of our network of auction sites. And as we get the ball rolling on the 2005 auction season, I thought I would give you an update on the execution of our growth strategy. We have mentioned on previous conference calls that our continued expansion into new regions in which we did not previously have a presence, such as China, Indonesia and Iran -- we have not slowed our base of expansion. And since our last call, we have introduced sales representatives into India and Poland. Although we now have a presence in most continents around the world, there is still a large number of regions in which we have yet to establish a permanent sales presence. And we have plans to continue increasing our global footprint.

During the fourth quarter of 2004, we completed our acquisition of the 75-acre property in Nashville, Tennessee. We're going through the approval process and permitting right now. And we plan to start construction on the new permanent auction site very soon. I would expect us to hold our first auction on this new site in late 2006.

On our last call, I mentioned the auction agreement that we had signed for our 100-acre parcel of land in the Columbus, Ohio area. We're presently engaged in the permitting and rezoning stage and expect to complete our due diligence process over the next few months.

Since our last call, we have also entered into an option agreement for a 122-acre parcel of land in Houston, Texans. This is a fabulous piece of land. And if we complete the purchase, we intend to construct a new permanent auction site to replace our existing Houston yard, which is a 54-acre facility that we opened in 1993 and also which is now at capacity.

Given the growth in the Houston market and in particular the activity in the port of Houston, we are confident that we have an opportunity to do significantly more business in Houston with a larger yard and up-to-date facilities. We're continuing our search for suitable property in the New England area as well as in several other regions of the United States and Europe. At present, we have only 1 permanent auction site and 1 regional auction unit in Europe. There is tremendous opportunity in that part of the world, and I'm confident that we can find suitable properties in several countries -- most likely starting with the U.K., Spain and Italy.

Before I pass the call back to Randy, let me describe how I see the size of the market opportunity facing Ritchie Bros. It is difficult to estimate our long-term growth potential; however, looking at our Canadian experience can be instructive. We consider our Canadian operation to be our most mature. We have been operating in this market for more than 40 years. And our annual gross auction sales in Canada have grown to be in the range of $300 million. While the population and economy of the United States are roughly 10 times the size of Canada's, our sales in the United States are in the range of $1 billion or only about three times of Canadian sales. The simple comparison would suggest that we can grow our sales in the United States from current levels to roughly $3 billion per year before reaching the level of market penetration that we currently enjoy in Canada. Extending this logic to Europe would suggest significant growth potential in that market as well.

This tells us that the opportunity available to us in current market is enormous, not to mention the large and growing economies of China, India, Brazil, and other parts of the world where we are only starting to scratch the surface. It is again to this backdrop of market potential that we are pursuing our growth strategies. I will remind you; however, that we intend to pursue these opportunities in the typical Ritchie Bros.' style. We will continue to go our business, as we have done in the past, with patience to find the right people to add to our team and serve our customers and with the persistence to get the important deals and always do what is right. We won't sacrifice our culture in an effort to accelerate our growth because we believe that our culture is one of the key drivers of our growth.

Now, I will turn the call back to Randy.

Thanks, Pete. Before we open up the call to questions, I would like to recap the main points that we covered on this call. Firstly, we ended 2004 with record gross auction sales of 1.79 billion -- records adding a growth of over 15 percent -- or 15 percent over 2004. And we're forecasting approximately 1.95 billion in gross auction sales for 2005.

Secondly, net earnings in 2004 were 34.9 million or $1.01 per diluted share. Excluding the impact of the 2.1 million one-time income tax charge which is not reflective of our ongoing operations, net earnings for 2004 would've been $37 million or $1.07 per diluted share, which is roughly the same as the diluted net earnings per share that we reported in 2003 -- and which is consistent with the guidance we provided to you through 2004.

Our expectation for 2005 is that net earnings growth will be in the range of 12 percent. This is below our long-term expected growth rate of 15 percent due to our assumption that our auction revenue rate will return to a more sustainable level in '05. If our auction revenue rate remains at the level we enjoyed in '04, all other things being equal, our earnings could go by as much as 18 present. But we are not guiding to that level.

Thirdly, we continue to make progress on our worldwide expansion plans with the new property in Nashville and properties under option in Ohio and Texas. In addition, in 2004 and early '05, we opened new offices and added sales representative in Iran, Indonesia, China, India and Poland. We're also actively looking for suitable properties in a number of regions within the United States and in Europe.

Finally, we remain focused on our founding principles of doing what's right in conducting the best unreserved auctions in the world. We have been doing it for over 40 years, and we don't intend to alter our course. We have an energetic and focused management group in place. And we're looking towards our goals of growing our earnings and maintaining the unique culture of our organization.

Last but not least, if you are planning to attend the Conex Show in Vegas in March, please drop by our booth. We'll have a very large presence at the trade show. And we would be real happy to talk to you.

Now, we would be pleased to answer any questions that you have. And Operator, would you please begin the question period?

(OPERATOR INSTRUCTIONS). James Gentile, Sidoti & Co.

The biggest variance -- obviously the model was the G&A line. And you know, all of the reasons, Bob, that you gave for the higher G&A are obviously well received. But I was just wondering why particularly in the fourth quarter, you saw the incremental $3.5 million in expenses, where generally these expenses have been spread about throughout the year.

Sure, James, it's a fair question. And we will be honest -- even the fourth-quarter numbers were higher than we had expected when we started the quarter. Foreign exchange fluctuations during the quarter though account for the largest chunk of the excess, if you like. And then we had a number of one-time items like you have in any given quarter, none of which on their own are significant enough -- that we are a big enough company now that if you have enough of those they add up. But really, the foreign exchange was the biggest one.

Well, how much was the foreign exchange approximately?

Well, we always kind of get into this conversation, I guess. You could break it out mathematically, but that never tells the whole story because foreign exchange affects our business in so many different ways. It affects buyer behavior and seller behavior. It has impact on a number of different financial statement line items. It's just a mathematical calculation. It was the largest single factor affecting the growth in the fourth quarter.

And then, I was kind of distracted when Randy Wall was describing the Mission 2007. And I was just wondering -- what is that all about?

James, this MO7 concept -- really we are just looking in the mirror essentially to be sure that how we do things is in fact the most efficient and the most growable. And as we look out in the future and imagine ourselves doing 3 billion, 4 billion, 5 billion in volume -- are we set up in terms of all of our infrastructure to handle that? And that infrastructure is not just auction sites. It is our people, our HR systems, our internal financial management information systems, accounting and other IT systems. And we believe that it is the right time to have just a good look and a good study at that. We are a few months into the study. And as yet, exactly what the outcome and the investments we will need to make are not yet clear. But within the first half of 2005, we will be able to give more clarity to that. But we are just looking at ourselves to be sure that we can grow ourselves. And we can repeat with efficiency and high levels of customer service and effectively with reduced cost -- as we grow.

What I would like to see is that our overhead costs stay more relatively constant, and you would be able to do more volume with lesser cost increases.

Charley Brady, Hibernia South Coast & Capital.

It is actually Brendan sitting in for Charley. I've got a question as it relates to the leverage in the model. And just going through your guidance, it sounds like you are giving earnings guidance growth of 12 percent on top of revenue growth of 10. And previously, you have spoken about earnings growth of 15 on top of sales growth of 10 percent. And I am wondering what the initiation of the Mission 2007 initiative -- if that is a relationship that you do not see getting that leverage until 2007 or if you expect to get that in '06? I'm just wondering if you can comment on that.

Sure, Brendan, it is Bob. Just to clarify the guidance for '05, we are looking at top-line gross auction sales growth of about 9 percent. So, it was in the range of 10. And we believe that will translate this year into bottom line of around 12. The reason we're not saying 15 is largely because we're expecting our auction revenue rate to return to more normal levels. If in fact, we achieve the auction revenue rate in '05 that we saw in '04, we are suggesting earnings growth would exceed 15 percent. But we are not going to guide to that level. We do not think that is sustainable.

In essence, our auction revenue rate in '04 is a tough comp. And so we think the model actually is still holding, and the leverage is there. What you are seeing this year is a suggestion by management that we will return to more sustainable auction revenue rates. If our auction revenue rate is consistent year-in-year-out, I think you be seeing at say 10 and 15, 10 and 15 repeatedly. But we have to -- we are affected by this auction revenue rate.

And then to answer your question for MO7, I think Randy described it well a second ago, and I would echo his words. MO7 is part of a continuing plan by Ritchie Bros. to ensure there is good leverage in our system to ensure that we can in fact achieve earnings growth that exceeds sales and revenue growth. We have been doing that in the last several years. Going forward, we want to ensure that we continue doing that. And as the Company gets bigger, we need to do a little introspective work -- look at all of our business processes and our business systems to ensure that they are as efficient as possible -- make sure that as we are a 2 or 3 or million company that we're still keeping the same leverage. And we think it would be naive to assume that our current systems would provide the same benefits 5 years from now. 2007 is not a target for achieving 10 to 15; it's more a process along the continuum. We were looking at 7, 15 as average rates over the next several years as well.

Okay. And just so I am clear, is the 12-percent growth that you are projecting for '05 -- is that on top of '04 earnings inclusive of the tax charge or excluding that tax charge?

Excluding -- good point. We refer to our earnings sort of on a normalized basis, I guess, when we have one-time wins or one-time hits. Whether it is taxes or property sales, we don't consider that as part of our 15 percent or in this case, 12-percent earnings growth.

Okay. That makes more sense. And then just a quick question on -- what is your plan for permanent and regional sites that you would expect to have at the year-end '05?

At the end of '05, we will have added Sacramento, California, Brendan. That is -- actually, we have moved in now in the last month. And our grand opening sales going to happen here in March. And that is probably the only change in terms of sites finished and brought online for '05. Nashville is going to be in construction throughout this year. Zoning and land use issues have been completed. And we are now at the final stages of contractor selection. And we will be moving vertier (ph) within a month or 2. So we would see that one coming onstream in 2006. That would be in the short term what we would see. And there is a variety of other sites that we're looking at -- Ohio and Texas that are under option. And we're doing due diligence now. So they are going to be beyond that.

It is Peter, Brendan. The site numbers right now, I think, were 29 in total including regional units. 7 and 22 permanent -- that is assuming Sacramento is a permanent site. Those numbers will probably hold for '05 and '06. Nashville will be a net add. There are no regional units or permanent sites in Nashville today. So that will be a net add. Houston will be a replacement. Ohio will be a net add. And the others, we will tackle as we bring them onstream.

(OPERATOR INSTRUCTIONS). Ben Chemiavsky, Raymond James.

A couple quick questions -- first -- and I apologize if you mentioned this early on; I missed the first few minutes but -- the big auction in Florida last week -- some of that must have had -- must've been related to equipment with the hurricane and the rebuild. I know you talk about your business sort of being driven by events like that. Is it fair to say that was one of the events that benefited you in that region?

Hey, Ben, it is Rob Mackay here. I would say that that auction had a bit of equipment in it from the hurricane, not a lot. The market activity in Florida is immense. When you drive and fly around that state, everywhere you look there's construction going on everywhere. And the size of that auction was created from the economic activity that goes on in that state. A couple of large consignors that we annually have down there plus an import from adjacent states of a lot of equipment that is characteristic of the kick off to the auction season every year in Florida. That sale is a magnet to people in surrounding states, maybe as far as 2 or 3 states away to bring their equipment to that sale because of its drawing power. It had attendance and registered bidders from over 60 countries around the world. And it is probably the biggest event that we have on our calendar every year. And hence, it has immense drawing power for consignors.

I will add two things to that, Ben. It is evidence of the continuing momentum that the Company has of the strength and power of these facilities. And it was only 2 years ago that we opened that thing. And I remember standing on the site there. And whether it was with Dave or Rob Whitsit, another Senior VP, and we kind of -- gee whiz, someday, we are going to have an 80 million and maybe $100 million auction on this yard. And 2 years later, low and behold, you're basically got your $80 million event. And what we have seen -- and there are other companies that hold spring or February Florida events. And we have seen those events get smaller, as ours are getting bigger. So, we are gaining market share, as well as continuing with this momentum. Despite a very, very tight equipment market at the moment, we are getting good growth.

Could I also ask you -- can you elaborate at all on the CitiCapital agreement? Do you think -- have been able to measure how much equipment that might bring to your yard this year or next or at some point in the future?

This is Peter. We measure everything of course. But the question is what can we talk about. And in our agreement with CitiCapital, we have got exclusive or fairly tight guidelines for walking between the lines here. But what I can tell you is that we expect that CitiCapital will be one of the larger consignors for us in the year. And potentially, it could continue to be that in that group, as we carry forward with this agreement. So we are quite pleased with the deal. I think it is a win-win, certainly from their perspective. They're very happy to be able to attack the market with the style of business that they are looking towards.

No one really has siractualized (ph) the service to our customer base in this way before. And we just rolled it out really in the first instance in Orlando, where they had their kiosk and set-up -- and serve the customer base. And there was an incredible amount of positive comments from our customer base and from the CitiCapital people themselves about how terrific service was. And from our perspective, it is seamless and it provides improved customer service. And of course, the flip side being the supply of equipment end of lease for us is a nice way to see the equipment coming back. Even in fact equipment that gets financed through them from the auctions, we will likely see that coming back and circulating through the sales in the future too. So it is a nice circular agreement that benefits both parties and also benefits our customer base.

And very quickly, can you just -- I didn't catch the percent of your SG&A that was a function of the bonuses?

We didn't actually break that out, Ben. We have never done that. We just talked about G&A as a large number.

Salaries and bonuses -- can you say that much?

Sorry, yes, the whole personnel side was 60 percent.

Bruce Simpson, William Blair.

I wanted to try to make you quantify, Bob, if you would, the impact of foreign currency on this G&A spending rise. And it seems to me that in the past, generally, you have responded that you think that cost exposures largely offset revenue impact. So that as a whole, the Company is largely protected against currency swings. And I'd like to know -- do you need to update that? Or do you think that is still the case? And to put that into a real world situation for the whole year 2004 over 2003, do you think that currency changes impacted your earnings at all?

Good question -- and we did a lot of analysis on that because it was such a major factor affecting our numbers. And you kind of answered it for me, Bruce, so thank you. Our total exposure to non USD is -- on the revenue side, is approximately 35 percent. So said in another way, 35 percent of revenues in '04 were denominated in non U.S. dollars. And approximately 40 percent of our expenses -- G&A depreciation, direct expenses -- approximately 40 percent of our expenses were denominated in non U.S. dollars. The absolute dollar amount of those two was very similar. And the bottom-line impact was essentially neutral.

I always feel the urge after making a statement like that just to make my disclaimer again -- that there are other impacts on our business from foreign exchange fluctuations in particularly the impact on borrower behavior and consignor behavior. My guess is that the activities at the Orlando auction were influenced by the current weakness of the U.S. dollar. And it is a fact that we had 50 plus different countries competing in that auction -- says to me that in fact, people were taking advantage of the weaker dollar. European auctions, Canadian auctions, they all benefited or get hurt if you like in different ways. But just in terms of just the mathematics of it -- when we ran our numbers for the year, we concluded that we were essentially neutral on the bottom line consistent with what we have seen in the prior years.

And what is that dollar amount that is plus in one direction and minus in another?

Well, if 35 percent of my auction revenues are in non USD and my auction revenues for '04 -- I am doing this on a calculator, I apologize -- 182 million roughly last year were my auction revenues. And I am saying 35 percent of that was non USD, that's about 63 million in auction revenues that were denominated in non USD, primarily Canadian dollar and euro off some Aussie dollar in there. So that is the amount that was exposed. And then the equivalent number roughly on the expense side.

And can you give us kind of a year-over-year fluctuation? What I am trying to do is I'm trying to pin down the impact particularly on SG&A spending.

Sure, I accept it. Pulling out a copy of MD&A, we -- because it is a good issue, in the MD&A this year, we added a foreign currency chart that shows the swings in the most relevant sensu (ph) charge. And reading from the MD&A, which was filed this morning, so if I get my numbers wrong, you can look them up and check me. The average exchange rate in '04 for the Canadian dollar was a 7-percent difference from '03. And the euro was 9 percent different from '03. So between the two of them, an average of around 8 percent that's probably not a bad number to think of using.

Are those year-over-year numbers?

Those are year-over-year on averages, using the average exchange rate for '03 and '04. And the prior year was also dramatic. '02 to '03, we had a Canadian dollar exchange of 10 percent and the euro of 16 percent. And there were fluctuations on a quarter basis within that of course. That is just using very simple annual averages, but it gives you an idea of what we're talking about.

Okay. And then, so I guess a follow-up to that is -- in the guidance for the total SG&A dollars for 2005, if you just put that four ways, it is considerably less than the total SG&A amount posted in the December quarter. What would make you believe that it is going down? Is that a forecast on the dollar or have you taken some steps -- or was there something extraordinary in the fourth quarter that does not repeat itself?

It is not a forecast on the dollar. We have assumed year-end exchange rates. So it's just a -- we're not smart enough to predict the dollar. In the fourth quarter, you had some one-time items, and you also had fairly significant bonus accruals.

We have had that conversation on conference calls before. When our earnings in a given quarter are stronger than our targets for the year -- I shouldn't say in a given quarter, it is on a year-to-date basis. If our earnings are ahead of target, we increase our bonus accruals. In addition, if on a year-to-date basis our earnings are below targets, we reduce our bonus accruals. And in the fourth quarter, we ended up with increased bonus accrual. So that was a contributor along with foreign exchange. But that is also an item that you don't put into your forecast for the next year. Going into the next year, we have a base bonus assumption that we start with, and it will be a lower bonus than what was actually paid or accrued in '04. Because the '04 levels reflect the actual performance of '04, which was ahead of target.

So then, are the targets by which this bonus is calibrated for 2005, the numbers you shared with us earlier in the call, about 12 percent bottom-line growth? Is that the fulcrum around which much bonus accruals will go up or down as '05 rolls out?

Yes, essentially yes -- there are some adjustments for a few things but essentially yes.

And then a different subject on territory managers -- can you give us an update of what the total number of those folks is and some kind of productivity measure? And what you are now thinking about what that should be?

Sure, be happy to, Bruce -- it is Randy. At the end of the year, we had 198 revenue personnel, which is up by 10 over the year. We also have some of the territory manager trainees that we have talked about a little bit in the past. And we had I believe eight of those in the system at the end of April '04 that are not included in the sales rep numbers. And at the beginning of year, I think, we had only two. So here are another plus six. We will see most of those people graduate in the early part of '05 and get up to the sales rep line.

And in terms of productivity, well on a 12-month rolling basis, we are actually over 9 million per head for the first time ever -- well, at least in the last 10 years. And that is tremendous. And perhaps part of our -- call it the "nathemenalshevnue (ph) efficiency issue," -- I would believe that we can be more efficient. And we can get more volumes and productivity from similar levels of personnel, as we look to the efficiency and scalability of our systems. But we are very pleased with the growth in the productivity. We are very pleased with the group of salespeople we have. I think we have talk before about being a bit more selective on the front end. And therefore, we're having better success now. And we have also increased our investment, another G&A item, in our training programs geared toward getting these people more productive more quickly. And all of the things are going very, very well.

Okay. And any sort of target of the percentage increase in that 198 that you would like to have by the end of 2005?

First, consistent with prior years, we do not really manage to that number per se. Although, we would see that it is going up. Our plans do include targeting higher-end people in a variety of our regions and divisions. But we don't use that as a specific metric that we manage to. But I would see it going up, probably in a similar range as we did this year. 5, 10 percent in that range.

And then just last thing, if I had to kind of step back view from 35,000 feet about looking at '04 over '03 as a whole -- and I am not talking about operational milestones but purely the income statement. We had essentially flat earnings on a year-over-year basis. And the yearly auction revenue rate was down about 20-basis points. And I believe that in the past, we have said that that is typically worth about $0.05 or $0.06 in earnings on a full-year basis. That is to say 10-basis points of auctioned revenue rate.

So that says to me that that factor alone was probably responsible for a loss of oh let's say, $0.11 or $0.12, I guess -- actually probably even more because you had an increase in gross auction sales. So given your earlier comments about kind of a net neutral effect on currency, would it be sort of fair to think if you had to sum up '04, we had a slight head wind of something like 11 percent growth to earnings coming out of this declining auction revenue rate? And beyond that, the growth in gross auction sales was offset by incremental SG&A spending?

Just for the comedy factor here, Bruce, we're all trying to understand your question. Everybody is pointing at me, so I get to answer it. Because nobody else knows what it was. And I will work on it.

I'm going to take a guess at what you're asking; I apologize for that. I think if you look at '04 at the highest of level, the main things that jump out of me and I think anybody else in the conference call we talked about as well, the auction revenue rate is lower, which offsets -- excuse me, the gross auction sales were up. The auction revenue rate was lower. And your SG&A was higher, and your taxes were higher. And those all combined to give you a flat bottom line. Did I answer your question?

I'll have to check with myself later to see what the intent of the question was.

Great question, I think, Bruce. But I will try to add a little bit more to it, Bruce. For sure, we have dropped in 15-basis points or so in our auction revenue rate. And you are right, that is big leverage there. And despite that drop in auction revenue rates, we were able to maintain flat bottom line earnings. That flat bottom line earnings were also maintained despite increasing G&A caused by effects but -- and many other things. And really all of the counteractions of that came from increasing revenue. The jute (ph) gross auction sales volume.

Sarah Hughes, Sprott Securities.

One last question on the higher SG&A expense -- I know there is a lot of non kind of growth related expenses in there. But in terms of the growth related expenses, which one were you were more surprised about? Was there any that came up that you didn't think would happen? And therefore, kind of your previous basis of the leverage wasn't -- you had not taken into account for a few of those things -- and therefore the focus on your MO7.

That's an interesting way to ask it, Sara. It is Bob. I would suggest there was no one particular item in SG&A that jumped out and has all having meetings in trying to figure it out. There is a general theme that as we're growing the Company, a lot of expenses are growing, whether it is maintenance costs or insurance costs or all the different travel costs. All the different things that we do. There were very few that jumped out any more so than others. So we're throwing attention on all of them to ensure that all of our spending makes sense.

Is that what triggered MO7? No, the MO7 initiative was one that was kicked off before this conference call. I guess it was about a year ago we had a strategic planning retreat -- all our senior guys. And that was the genesis of MO7. We anticipated a need to focus on our systems long before we ever had spent this much time on conference calls on G&A.

But you raised an interesting point, or at least your question raises a point in my mind. When we look at our G&A, we want to keep it under control. But the real leverage in our business comes on the sales side, not on the expense side. We don't want to -- or we will not just ignore our expenses. They need to be managed and controlled. But if I wanted to find a way to add 5 million to the bottom line, I would not start off a cost control program. I would start off a sales and marketing campaign. That's where the leverage is. It is in the gross auction sales and the auction revenue rate. To take 5 million to the bottom line, it's not easy to do it in sales. But it would be easier to find an additional 5 million in revenues than to hack 5 million out of expenses.

We run this place pretty lean. If you have been to our office here, Sarah, you don't see a lot of people running around. And the same would be in the field. A pretty lean operation -- everybody works very hard. So we do not see huge opportunities for savings -- what we do is see opportunities for control.

And then on the new sites -- in your Ohio site. If things go according to plan, would that be kind of a '07 timeframe that you could see that opening?

Yes, that is their comment, yes. If things go according to plan -- it is early stages, so we have got some land under contract right now. So we are just going through the rezoning and meeting phases with the local councils and things like that. I hope it would be '07. But our experience in other jurisdictions sometimes has been longer. Like in California is an example. So, it's a fair estimate today based on what we know that '07 will be a hopeful target.

And then just on the U.S. market you have opened -- or you have announced some initiatives for a number of new markets compared to the last previous years. And I know New England is another target for you. But beyond there, what other target markets would you have in the U.S.? Or have the ones that have been announced recently kind of cover the near-term growth in new markets?

This is Dave Ritchie speaking. We have opportunity to increase our facilities within 2 to 500 miles with another facility. So over a period of time, that whole North America will be dotted with Ritchie Bros.' yards in about a 500-mile radius. In some areas where we have -- Texas for example -- Dallas and Houston both operate very significant yards, and they are only 200 miles apart. But basically, there is a need for our facilities within 500 miles of each other. Because that relates to about a 250 mile transportation circle. And the arm (ph) population varies from place to place, but we have lots of places to build. We can just keep growing the market.

Okay. And then one last question then -- obviously your agricultural business in Canada is doing quite well in the growth. And you talked a longer term potential in bringing that to the U.S. Where is that today? And what are the plans on bringing that down?

The plans right now Sarah -- we are experiencing a nice clip of growth for sure in terms of nominal dollars, it's not big growth as the rest of the industrial operation. But we look for continued growth for sure. We've got (indiscernible) focus right now a little bit further east into Manitoba, we are eking in there. And we have designs to move into the U.S. I cannot give you an exact date and time of when that is going to happen. But our guys have it in their radar that that's something that we want to do. And they have been cut loose to go and start evaluating and coming up with their own strategy that they can present to us as to how they want to get that accomplished.

Germany and Spain.

Yes, I should mention -- Dave is just mentioning about Germany and Spain. We've got ag operations. We had a terrific agricultural sale over in Germany this year in Mencken (ph), which was very, very successful and converted a whole bunch of people into the Ritchie Bros.' way of doing business in Germany, which we have had some long-term efforts there for many years to try to get the industrial side going. And the ag market for us has been terrific entry into Germany. And we're looking to continue to do that. And those numbers that we gave you on the ag side does not include any of the overseas agricultural activity. We've got some activity going on in Spain right now in the ag markets too. So, there is a huge opportunity for us to continue to grow our ag business, not only in North America, in the U.S., but also in the European theater. I know Randy you might want to add some comments. Randy, was that the Mencken (ph) sale? It was a great experience.

Sure. I will add a few comments. Essentially what is happening in Europe as we try to diversify our product line, we have the same infrastructure goes out and is levering what we use today. And we have been talking with many of the major manufacturers. And some of them have taken the view that you know what, our existing distribution and dealership network is not as well focused on the sale and turning into cash of our used equipment and what it out to be. And we see Ritchie Bros. as a strategic partner to do that.

So we have had a multi-year arrangement with one of those major manufacturers in Spain and Portugal. And we expect this bond continuing agricultural-focused events. At we've also repeated -- already concluded an agreement with the Germany largest owner of agricultural machinery in Germany to do another one this fall again. And so that will be repeating. It was quite an event. We had some -- I think it was about 5,000 people that came out of the woodwork in a little town in Northern Germany that I have never been to before. And I tell you, here in the middle of the countryside -- and 5,000 people show up with their coveralls and their rubber boots on. And it was pretty neat. And virtually, none of them spoke English. And it was a great multi-cultural affair.

The other thing that levers off that -- sorry, Sarah. I just want to also add a comment on Randy's explanation on this OEM and the movement from -- for us to act as more of an outsourcing solution for a lot of these larger companies. And CitiCapital, the event with them was a traffic marketing tool for us. Usetosayhe (ph) is one of the largest banks in the world that have looked at their remarketing needs and decided that we are the most efficient and effective way of doing that. So for us to be able to walk in with an agreement like that under our arms to take guys -- these people have figured it out. They are smart. And they realize that outsourcing this to us because this is the only thing that we do, and we do it very well. And we are going to add net to the bottom line more than they would if they tried to manage it on their own.

So, we're seeing more of that with CitiCapital, more of that with the OEM relationship in the European theater. And we're looking to lever off that -- flag now that we can march into some of these other offices to say, hey guys, you might want to sit down and have a look -- a hard look at the way you guys remarket your equipment. So it is a nice momentum -- shift for us. So that we like to see carrying it forward.

It's also a great financing tool for our customers who come to the sale. And when we can tell our consigning customers that we have this wonderful financial package that we can offer to those potential buyers, that's one of the best-selling tools that we've ever had.

(OPERATOR INSTRUCTIONS). Yvonne Varano, Jefferies & Company.

I do not know if I missed it, but did you break out the number of options auctions that were held in permanent sites versus regional out of the 147 for the year?

No, Yvonne, if you call me later, I'll work it out and answer it for you. But I will take a pretty good guess that in terms of number of auctions, it was probably 85 percent plus or minus. And in terms of dollars of auctions, it's probably around 90 percent. But if you're interested -- if you give me a call later, I can add it up for you.

On the CitiCapital, is that going to be done in a predetermined flat commission type of basis?

Yvonne, it is Randy. The CitiCapital deal, as Pete has mentioned already, we cannot really speak to specifics of any contractual terms that we have. We believe they will be excellent partners. And we're both working together in a very positive way. So I don't really think I can answer you directly.

And then, just in terms of the market -- I know we've talked about it being pretty tight for the late model equipment out there. Has there been any change in that? Or has that tightness shifted your mix at all to equipment that has been of older age?

Not really, Yvonne, the market, as you quite rightly point out, is tight. It was the same throughout 2004. And I really think that what is happening -- and by the way, whether it is new machinery or older machinery, people are busy. They are still building roads, digging holes, building bridges. And if the availability of new is on the low side because of delivery times and manufacturing inventories are down and so on, that means they have to use the used. So it is of equal supply, let's say, up and down the age spectrum.

But throughout 2004, we've had the same dynamic, and we have managed to increase our volume of business quite substantially. And part of it is because of all of the things we have done -- this momentum, the facilities, the people like CitiCapital and the other major finance houses. We have record years in 2004 as well. Despite the fact that those financial institutions had some of their lowest end of term equipment returns and bankruptcies and repossessions and so on than they have had in recent times because of the strong economy. So despite their overall volume as being down and asked us if they have to move, we've got way more from them this year because they're finding excellent value in what we're doing and better positive returns from other alternative channels.

Operator, perhaps we can take one last call before we close it. And for any follow-up conversations, they can call either Jeremy or Bob. And Operator, perhaps one last call.

Charley Brady, Hibernia South Capital.

Well, this should be a quick one. I am just wondering if I can get the total staff member at 12/31/04? I think you gave the average of 615?

In fact, the average was also the end of the year total at 615.

And the reason for that, Brendan, SU (ph) was up a bit during the year and then it came down a bit at the end. So it was 615 average and 615 ending.

Thank you, everybody for attending and listening to Ritchie Bros. 2004 fiscal conference call. We appreciate your interest. And by all means, Bob and Jeremy are open for questions should you have any further details you need answered. As always, Ritchie Bros. is excited and interested in our future. And there are all kinds of things happening. And this tremendous result in Florida last week with 60 countries and 79 million is just, we believe, a barometer of more good things to come in the future. And we will bid you goodbye and go on about our business trying to make you some more money. All right. Thank you, Operator.

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