RB Global Inc (RBA) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ritchie Bros. Auctioneers 2005 Q2 Earnings Conference Call.

[Operator Instructions].

As a reminder, this conference is being recorded Wednesday, August 3rd, 2005. I would now like to turn the conference over to Randy Wall, President and Chief Operating Officer. Please go ahead, sir.

Thank you, Myra. Good morning, everybody, and welcome to the Ritchie Bros. Investor Conference Call for the quarter ended June 30th, 2005. My name is Randy Wall, President and Chief Operating Officer of Ritchie Bros. Auctioneer, and today I'm joined by Peter Blake, our CEO, Bob Armstrong, our VP of Finance and CFO, and Jeremy Black, our Senior Manager of Finance.

In addition to these illustrious gentlemen, we also have Dave Ritchie, our Chairman, and Rob Mackay, our Executive VP, who will be available for questions following this conference call. Today, we'll be talking about our results for the three and six-month periods ended June 30th, 2005, as well as our future expectations, including our capital expenditure and dividend plans. Our presentation will take about 20 minutes, and then we'll be accepting your questions.

Before we get started, I'd like to make a Safe Harbor statement. The following statement ill include forward-looking statements as defined by SEC rules and regulations. Comments that are not statements of fact are considered forward-looking statements. Forward-looking statements include comments about our projected future results of operations and performance, growth initiatives, property development plans, dividend payments and other matters.

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 MD&A for the quarter ended June 30, 2005, which are available on our website, at rbauction.com, and on the SEC and SEDAR websites.

During this call, we'll talk about gross auction sales. As a reminder, gross auction sales represents the total proceeds for all items sold at our auctions. It is not a measure of revenue, and it is not presented in our statement of operations. Auction revenues is the revenue earned by Ritchie Brothers. Listeners are encouraged to read our periodic filings for a further discussion of the components of our revenue.

I'm going to give a few general comments before I pass the call over to Peter, who will talk to you about our recently approved growth initiatives, and then over to Bob and Jeremy, who will give you the financial overview. I'll then wrap up the call and open it up to questions.

I'm very pleased with our performance to date in 2005. The growth of the prior year has continued, and so far this year we've set a number of new company records, including our largest-ever auction at our permanent site in Orlando, Florida, and our largest-ever sale in Canada at our permanent auction site in Edmonton, Alberta.

With gross auction sales of $682.7 million, the second quarter of 2005 delivered the largest quarterly gross auction sales performance in our Company's history. And the first half of the year, at 1.1 billion, was our largest-ever half year gross auction sales performance. We draw this to your attention because gross auction sales growth is, in our view, the best indicator that our strategies are working.

Of all he metrics that we follow, this is the one that means the most to us. Our ability achieve 10% top line and 15% bottom line growth is dependent on our ability to grow our gross auction sales. We are particularly proud that we have continued to grow our business in spite of very challenging market conditions.

The high level of construction activity in the United States, in both our residential and non-residential sectors and the prolonged period of low interest rates have been great for contractors, but when contractors are busy and their equipment is in use, the supply of good-quality used equipment becomes very tight. Most industry observers would conclude that such a market should be bad for the intermediaries, including Ritchie Bros., because in such an environment, there will be fewer equipment transactions.

However, we have been growing throughout this period. While the pie has been getting somewhat smaller, we have been getting a larger piece of that pie. We attribute our improving market share to the increasing transparency of the market and to the momentum created by our unreserved auctions. Sellers are attracted to our auctions because we are able to deliver large global bidding audiences.

Bidders participate, because we deliver the biggest selection of equipment. The fact that we have been able to grow during what is arguably a very tough environment for Ritchie Bros., gives us the confidence in our ability to grow through all points of the cycle. This is a key message to take away.

Our ability to match local supply with global demand sets us apart from other channels and has allowed us to increase our market share. Before I pass the call over to Peter, I'd like to give you an update on our Mission 2007 strategic initiative. As you may recall, the objective of this project, which we call M07, is to put in place more efficient, consistent and scalable processes that will enable us to meet our growth objectives well into the future.

We are making good progress and are already starting to see benefits from some initial improvements we have successfully implemented. The big changes, however, will come over the next year or so as we look to take advantage of technology to enhance our efficiency. I'll keep you posted on this as we move forward. While we don't have any specific details to share with you today, I can say that we are pleased with our accomplishments to date on this project.

Now, let me turn the call over to Peter Blake.

Thanks, Randy, and good morning, everyone. I'm going to steal a bit of Bob's thunder and talk about some CapEx decisions that were recently approved by our board of directors. They are very exciting because they are a solid endorsement of our business strategy, and will help solidify our ability to continue to deliver earnings growth well into the future.

Our board has approved a plan to accelerate our capital expenditure program and at the same time, dramatically increase our quarterly dividend payments. We have been working over several months on a strategic plan that maps out our plans and objectives over the next 5 to 10 years. Our growth strategy is not changing. We still intend to grow our business, as we always have, essentially by adding auction sites and by hiring excellent people.

And we have decided to accelerate our property development efforts, so we can take advantage of significant market opportunities in the United States and in Europe. We believe, that over the next 5 years the majority of our sales growth will come from these 2 markets. It appears to be an increasing challenge for us to get our property development projects off the ground at a pace that we want, due to finding suitable locations, zoning, permitting, licensing and other hurdles.

So, for the 5 year period from 2006 through to 2010, we are planning to add to our property development team, and increase our capital expenditure budget to an average of approximately $50 million per year, which is roughly double our current budget. While this budget amount includes maintenance CapEx, the vast majority is for new auction sites, and in some cases, replacement auction sites.

The actual amount spent each year will depend on our ability to acquire and develop new sites. We hope to be able to open between 2 and 4 sites per year in each of years 2007 through 2010. We do not currently have plans to continue investing at this level in subsequent years, and would expect at that time to return to lower levels of annual investment.

This network expansion, coupled with our M07 process improvements will, we believe, allow us to continue achieving our average annual objectives of 10% top line growth and 15% bottom line growth for the foreseeable future. After providing for this new level of capital expenditures, our projected cash flows will still be more than sufficient to meet our operating needs. And so, rather than maintain excess working capital on the company's books, our board has decided to return the projected excess to our shareholders by way of a significant increase in our quarterly dividend payments.

The board has approved a quarterly cash dividend payment on September the 16th to holders of record on August the 26th in the amount of $0.18 per share, an increase of 64% over the prior quarterly dividend of $0.11 per share. The board has consistently said, and it continues to believe, that we should use our cash flow first, to reinvest in the business where there are prudent investment opportunities, but once those opportunities have been funded, any excess cash should be returned to our shareholders.

Having completed a capital expenditure planning process, management and the board are satisfied that this 5 year CapEx plan will yield excellent returns to our shareholders, by providing the capacity to support continued growth well into the future and that the excess cash can and should be paid to our shareholders. We are proud to be able to fund our growth and still return such a substantial portion of our earnings to our shareholders.

We do not expect to be announcing dividend increases of this magnitude in future years, and would suggest that it would be reasonable to expect that future dividend increases will most likely be more in line with earnings growth rates. We're very excited about the prospects in front of us, and we're looking forward to continuing to enhance our network of auction sites and to pursuing our growth objectives.

Now I'll pass the call over to Bob.

Thanks, Pete, and good morning. I hope you have all seen our press release this morning. The numbers that form the basis of the discussion that follows were included in that press release and in our quarterly MD&A and interim financial statements, which we filed this morning, and which are available on the SEC and SEDAR websites. All dollar amounts referred to on this call and in our press release and securities filings are stated in US dollars.

During our last conference call, we indicated that we were expecting gross auction sales for the second quarter of 2005, to be in the range of 625 million. We actually achieved gross auction sales of 682.7 million for the quarter. So far this year, we have generated gross auction sales of 1.1 billion, which is 22% higher than the gross auction sales reported for the first half of 2004.

We have seen strong performances in our United States, Canadian and European markets in 2005, and this has been responsible for most of the growth. Included in the total gross auction sales for the first 6 months of '05, are agricultural sales of 52.7 million from the 73 unreserved agricultural auctions we held during the period, which compares to 29.3 million for the corresponding period in 2004. We are very pleased with the growth that we have seen in this relatively new market for us.

Auction revenues for the second quarter of '05 were 65.7 million, and were 114.3 million for the first half of 2005. The year-to-date auction revenues represent growth of 22% compared to the auction revenues reported in the first half of 2004. Our auction revenue rate for the first half of 2005 was 10.03% , roughly equivalent to the 10.05% we experienced in the first half of 2004, and slightly above our expected average range of 9.5 to 10%.

However, the quarterly rates were 10.65% in Q1 and 9.62% in Q2. While the 9.62% rate is within the range that we have been telling people to expect, it is lower than the unusually high Q1 rate and is in fact, the lowest quarterly rate experienced since 2002. Before any of you get the urge to ask, why was the rate so low, I must take this opportunity to say I told you so. Since the beginning of 2004, we have been saying that we expect our average rate for future quarters to be in the range of 9.5 to 10%, and as we enjoyed superior results through 2004 and into 2005, we repeated that we expected our average rate for future quarters to be in the range of 9.5 to 10%.

Our consistent message was not always well received in the face of what, to many, appeared to be a trend of rising commission rates. However, we stuck to our message, because while the above-average performances were great, we did not expect them to repeat. We treated them as unexpected windfalls. There are many factors that have had a positive influence on our auction revenue rate, and we have spoken of these in the past.

The addition of certain fees, the impact of internet bidding, our increasingly international bidding audiences, the maturity of our sales force, the momentum inherent in our business model, the increasing transparency in the marketplace that to continues to drive more buyers and more sellers to our unreserved auctions, and the ability of our sales force to negotiate rates that truly reflect the value of the service we provide.

These are all great for Ritchie Bros., and we have taken them all into account in arriving at our expected average rate of 9.5 to 10%. However, due almost entirely to the performance of our underwritten business, our auction revenue rate is volatile when viewed over a period as short as 90 days. In Q2, the underwritten business did not perform as well as it had in prior quarters, and the result was a lower auction revenue rate. We don't think that this lower level of performance is indicative of a trend.

We are comfortable with the fact that our auction revenue rate will fluctuate over the short term, and we believe that it will remain relatively stable over the long term, and we continue to expect our average auction revenue rate for future quarters to be in the range of 9.5 to 10%. Direct expenses, which are comprised of the costs incurred specifically to hold an auction, were 1.26% of gross auction sales for the second quarter of 2005 and 1.24% for the first 6 months.

This compares favorably to the direct expense rate of 1.33% during the first 6 months of 2004. 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 offset locations. Larger sales and sales held at permanent auction sites are more cost efficient and generally result in a lower ratio of direct expense to gross auction sales.

The average size of the industrial auctions we held in the first half of 2005 was approximately 14.1 million, compared to 12.5 million in the first six months of 2004 and 12 million for the full year 2004. This high average auction size contributed to our lower direct expense rate in 2005. General and admin expenses were 21.9 million for the second quarter of '05, and 44.5 million for the first 6 months, which is an increase of 12% over G&A for the first half of 2004.

Our G&A was higher than the equivalent period in 2004 for several reasons, including the impact of currency fluctuations and a continued growth in our business, which has necessitated higher expenses. As an example, labor costs make up approximately 65% of our total G&A costs, and our full-time employee headcount increased by 6%, to 653 employees at June 30, 2005, from 616 at June 30, 2004. This led to higher salaries and wages, as well as other costs associated with bringing new employees on board.

Overall, the higher G&A primarily reflects the ongoing growth in our business, and our Q2 experience was in line with our expectations. Other income for the first half of 2005 included gains of 6.4 million, recorded on the sale of excess properties in Fort Worth, Texas and Prince George, British Columbia. Neither of these properties were being used in our business. Our income tax rate for the six months ended June 30, '05, was 35.9%, which is roughly consistent with the 36.1% we experienced during the first half of 2004, and in line with our expected rate of 36%.

Net earnings for the second quarter of 2005 were 20.1 million, or $0.61 per diluted weighted average share, and for the 6 months ended June 30, '05, they were 34.8 million or $1.08 per diluted share. If you exclude the impact of after-tax gains of 4.1 million on the sale of excess property, our net earnings for the first 6 months of '05 would have been 30.7 million, or $0.89 per diluted share, which is approximately 41% ahead of net earnings in the first half of last year.

Before I pass the call to Jeremy to update our guidance for the rest of the year, I want to talk a bit about our CapEx experience in 2005. Our total CapEx for the first half of '05 was 14.8 million, including maintenance CapEx. The costs incurred in the first 6 months of '05 related primarily to the completion of work on our new permanent auction site in Sacramento, California, the commencement of work on our new permanent auction site in Nashville, Tennessee, and the acquisition in April of approximately 125 acres of land in Houston, Texas, which is intended to be the home of a new permanent auction site in that city, replacing our current site, which is a 54-acre site that is at capacity. We have not yet started construction, but expect to be holding on auctions on the new site in 2007.

For 2005, we are still expecting CapEx, including maintenance CapEx, to remain in the range of 20 to 25 million, although we may exceed this range if we are able to acquire some of the land needed to accelerate our auction site expansion plans as Peter described. And now, I will turn the call over to Jeremy.

Thanks, Bob. Good morning. I'm going to update our guidance for the remainder of 2005. At our conference call at the end of Q1, we indicated that we were expecting full-year gross auction sales in the range of $1.95 billion for 2005. Based on our better-than-expected performance in the first half of this year, projections for the remainder of the year coming from our field managers, we are increasing our guidance to the range of $2 billion for the full year in 2005.

This would represent growth of approximately 11% compared to 2004's gross auction sales. We expect to see gross auction sales in the range of $360 million in Q3 of this year, which would put us at nearly 1.5 billion for the first nine months of 2005. Bob talked at length about our auction revenue rate, but I will reiterate that we expect an average auction revenue rate for the remainder of the year in the range of 9.5 to 10%, most likely coming in at the upper end of that range.

We continue to expect that direct expenses will be in the range of 1.3% of gross auction sales for the remainder of 2005, because we don't expect our average auction sites to remain at the unusually high level experienced in the first half of this year. Based on our experience to date, we estimate that our full year general and admin expenses will likely end up in the range of 90 to 91 million. Full-year deprecation expenses in 2005 should be in the range of 14 million, and interest expense for the full year should be in the range of 3 million, both of which are unchanged from the previous guidance.

You will note in our press release that we have separately identified the 4.1 million, or $0.12 per diluted share, after tax effect of the gains recorded on the sale of excess property in Texas and British Columbia. We have done this because we do not believe that these gains should be reflected as part of our normal, recurring operations, and most of the analysts following our stock have excluded this amount from their models, which we believe is the appropriate treatment.

On our last conference call, we indicated that our income tax rate for 2005 was expected to be in the range of 36%. Our performance to date this year has been consistent with our guidance, and we continue to expect that our full-year rate will be in the range of 36%. The net result of this guidance is, that based on the information we have to date, we expect that our earnings for 2005, excluding the gains on the sale of excess property, will be better than the long-term average growth rate of 15% that we have been targeting.

And now I'll pass the call back to Randy.

Thank you, Jeremy. Before we open up the call to questions, I'm going to recap the main points that we covered on this call. Firstly, we ended the first 6 months of this year with gross auction sales of $1.1 billion and net earnings of $0.89 per diluted share, excluding the after-tax gains of $4.1 million recorded on the sale of excess properties.

We are expecting continued strength in gross auction sales for the remainder of 2005, and have increased our guidance to approximately $2 billion for the year. We are expecting above average earnings growth for the full year. Secondly, our board of directors has approved an expanded capital expenditure plan that should see our capital expenditures increase to an average of $50 million per year during the 5 year period from 2006 through 2010.

Thirdly, our board has approved a 64% increase in our quarterly cash dividend, from $0.11 to $0.18 per share. We continue to believe that our excess working capital should be returned to our shareholders once we have funded all the prudent investment opportunities available within the business. And, finally, although we are excited about the number of gross auction sales records that have been set over the last number of quarters, we remain focused on the fact that our business is all about matching local supply with global demand, and to do this, we need to do more than simply hold big auctions.

To continue growing the business, we need to consistently exceed our customers' expectations and conduct the best industrial auctions in the world, which means we need to keep working hard. As we like to say, we need to have those running shoes on every day. Now we'd be pleased to answer any questions that you have.

Operator, would you please begin the question period?

Thank you.

[Operator Instructions].

Our first question comes from the line of Ben Cherniavsky from Raymond James.

Good morning, guys.

Hi, Ben, good morning.

Nice quarter. Look, first of all, a housekeeping item, maybe you didn't mention it, but I didn't catch what you expect the tax rate to be. Is it still above 36% for the year?

Yes.

Okay, on the gross auction sales, you're looking now at $2 billion. Actually, let me back up there for a minute. In your third quarter you say you expect gross auctions sales around 360 million?

That's right.

Last year there was a big Moerdijk auction which fell into the second quarter, I think because it straddled June 30th and July 1st. And I know you discourage all of this kind of same-store sale things, but it's also a fact that your results have been affected by how you move auctions around in your schedule. Is that factored into your 360 million? I mean, I would think that maybe the third quarter might end up being a bit light because of that. That was a big auction, too. I think it was about $30 million last year.

I guess there's a few things going on here, Ben, and maybe we're doing it just to confuse you guys, but we've changed the schedules at a number of our sites, including Moerdijk and Fort Worth to go to a 5 auction cycle this year, so their auctions aren't necessarily falling in the same months they did last year, when those sites held 4 auctions, so that's part of it.

The 360 million estimate is based on a bottoms-up, so a zero-based approach. We really don't look at the prior year, we've simply looked at what the individual sites in our network are telling us they expect to do during the third quarter.

I think the way the numbers play out, Ben, you'll actually end up having 2 auctions in Fort Worth in the third quarter, one we had in July and a number one we'll have in September.

Last year you had your Moerdijk auction in the second quarter, and now you've got one scheduled again for September if I'm looking on your current schedule right, which you didn't hold last year, you're saying, in September.

Well, there was a Moerdijk auction in Q3 last year, and there will be a Moerdijk auction in Q3 this year, and you're going to see 2 Fort Worth auctions in Q3 this year, where you only had 1 last year.

Okay, all right, well, anyway, I'll stop splitting hairs there. But just generally speaking, your gross auction sales, at $2 billion, like last quarter you guys had 1.95. Clearly that was way too low. I think you're probably -- if you take 360 million and put it in your third quarter and you use your $2 billion, you're implying 500 million in your fourth, which is actually down 10%.

What are you seeing that would suggest that you're going to see that kind of a quarterly break in trend, and why last time were you so hesitant to use a number that was higher when clearly your business and your auction schedule was looking very, very promising?

Our message, Ben, is at the end of each quarter is to go to all of our regional managers and say, guys, we have to give some guidance to the investment community in a few weeks time, what do you see coming up? And they give us their estimates based on their expected auction schedule, and more important what's happening with the customers in their region and what sort of consignment they see coming at them, and then we write it down and we read it out to you guys.

It definitely will show variations quarter by quarter due to what's happening in different regions, what's expected to be happening, the auction schedules the guys are going with. And the result this year appears to be big increases, if I just look at 90-day periods, in the first couple of quarters in the year, and less so, or even possibly reductions in the second half of the year.

But you said the same thing last quarter. I mean, I'm not trying to be rude. You guys have done a great job, but why should we believe you now that you're going to end up at 2? I think, wouldn't it be fair to say that you're going to be a bit higher than that?

It's be nice to be scolded for doing better than we expect, or what we communicate. Ben, we're always hesitant in this respect to predict particular quarters and so on. We do look at the year in a macro sense, and sometimes customers accelerate decisions based on market factors, and we've seen some of that, perhaps, in the first half of the year, because the market has been so strong, that people have been taking advantage of some of those dynamics to make their retirement decisions or what have you, clearly on a market cycle that's beneficial to them.

During the course of our discussions and our forward-looking review of our revenues, we were listening to our managers. Our managers are in the field, they're talking to their customers, and a lot of their customers have needs and equipment turnover and trade-ins and renewal of fleet that they plan and know that has to happen in the next calendar year, and they don't always stick to the same quarters.

And I think we've seen perhaps some of that this time, and it could be, Ben, that we exceed 2 billion, but we honestly think that's a pretty solid number. And we're moving some auctions to a 5 year. Fort Worth being the notable one, so you'll see an extra auction there that happened in July that didn't before. The Moerdijk one, I think we flipped to the third quarter -- you're right, it was in Q2 this year and Q3 last year, but the Fort Worth will balance it out. But there's s a lot of factors, and honestly we think 2 billion is a pretty solid number.

Solidly conservative in my view, but I'll let the numbers be the judge of that in the end. Can you make any comment on '06 yet, beyond saying it should be in line with your long-term 10% gross auction sales growth? I mean, in terms of gross auction sales, I'm thinking.

No, appreciate your comment there, Ben. The only thing we've said so far and will continue to say for a while is 10% average top line growth. The truth is, I have not gone out to ask the guys in the field for their specific expectations of the quarters for next year, because it's too soon to make that call.

Okay, thanks very much, guys.

Thank you, Ben.

Thank you. Our next question comes from the line of James Gentile from Sidoti & Company. Please proceed with your question.

Good morning, gentlemen. Peter, I missed the first portion of the conference call.

That was the best part, James.

I was listening to a call of a much lower-quality company, 50 million in CapEx for 5 years, this is resulting from your M07 mission there? So we should pick up then our permanent auction investments to 2 versus 1 a year?

We're saying we expect to open between 2 and 4 per year.

2 and 4 per year, okay.

2007 and 2010. We're going to start ramping up the CapEx now, but we won't get them open until '07 at the earliest.

Got you, definitely. And even with that higher CapEx, you're still able to pay a much bigger dividend, so that's exciting. And, also, your 5 auctions in Fort Worth, are we going to move to 5 or 6 auction schedules at other locations, the stronger ones being Moerdijk and Dubai and other areas. I mean, is this something also in the mix?

I think it's our issue, and that, James, is one of when the market can support it and we're ready to move to a modified auction schedule. We've seen that as a site matures it grows in size. Edmonton does 6 a year right now. Some sites do 3, move to 4, move to 5, so it's a natural evolution for a permanent site, and you're seeing that in Fort Worth as the example here.

So can't give you exact, specific timing of each site, but sure, over time, as our ability to handle more and more of the market grows, and more and more people lock into the concept that this is a very efficient marketplace for them to utilize, we'll continue to handle more and more equipment and we'll do that through more and more auctions.

Have you guys found any land in the Boston corridor over there, or certain other of the areas that you focused on? Was it Livorno, Italy, Spain, the Netherlands, et cetera?

Yes, there's a bunch of different initiatives that are underway. The New England market for us has been particularly challenging due to the fact that we have, of the land that we've looked at 3 or 4 sites that are particularly hot right now, but there's always the challenge of the amount of wetland, trying to get proper highway exposure, and zoning, as well.

We're quite particular about what we're looking for, here, so we don't want to just settle for anything that's less than our standard, so we're just continuing to look. We've got people in the area that are experts in that marketplace that are looking as well. We've got 3 or 4 locations presently that we're poking and prodding for our use. The other location that you mentioned, there's varying degrees of work being done in each of those locations.

Got you, and then one last question, given the accelerated CapEx schedule through 2010, is there an end point in terms of gross auction sales that you have out there. No one will hold you to that guidance, but following this, after 4 years of 3 or 4 new auction sites, are we going to see $10 billion in gross auction sales? Is that kind of the nugget that you're looking at?

And you promise not to write this down? It's a good question, James, and the truth is we don't look out that far. I'll come back to my favorite way of looking at the market which is...

...10% gross auction sales growth.

It's very large, the market, and we have a very small percentage of it, and we're growing it at a pretty decent, steady clip, and none of us really have an end in sight. Clearly, there is an end. Nothing goes on forever, but given the size that we are today and the size of the opportunity, as far as we can run our spreadsheets, it looks pretty good.

Of course.

In terms of potential, right? There's no promises or guarantees.

Oh, obviously.

So, it's very promising.

Always a pleasure.

Thank you. Our next question comes from the line of Bert Powell from BMO Nesbitt Burns. Please proceed with your question.

Thanks. Peter, when you look at the evolution of an auction and how it builds, I guess we'll call it the old days, which isn't that far back, but you'd see the auction as the auction progressed, things built up, there was more excitement and things kind of filled in towards the end. When you look at some of the variances that are happening in these quarterly numbers, is there some sort of phenomena that's going on here, success begets success, and in the last month or the last 3 weeks, there's just an inflow as things build? Or have you guys really dug down in to see what's going on?

That's a good question, Bert, and it kind of goes to the core of the momentum in the business that we enjoy and experience, and I think the better that you get at anything, the more people recognize how good you are, and the more people are trusting that this is the right method for them to use.

I'll share an interesting story with you. We had some management meetings here a couple of weeks ago, and one of the guys that was speaking was one of our chief auctioneers, and his comment to the guys was try to imagine the emotion that guys experience when they're at an auction, buying and selling, and we spent a bit of time talking about that.

And it's a very emotional experience. We have to understand that when guys are selling and retiring, they're selling their family, effectively, so the more emotional an experience it is, the more you have to rely on that element of trust that you build through relationships in the marketplace, and a lot of that trust is built on your reputation.

So, for sure, auctions build and you have a reputation for conducting good, solid, honest, open business and bringing the global market to the local supply of equipment. That continues to build and you get a name for yourself, and that's helped us tremendous to grow our business in terms of seeing the clip that we're on, and that's what we want to continue doing. Of course, with strategically placing these permanent auction sites in high-profile locations and marketplaces where you can build the local supply and provide that global marketplace.

So, it's the formula that we've used and that Dave and his brothers started with back in the early '60s and we've continued to rely on and obviously proven, and nicely growing and outpacing any other alternative that guys can consider in terms of what other auctions might be there for them when they're looking at ways to maximize selling their equipment.

I'll just add a couple of comments. Bert, this is Randy. The old-fashioned auction dynamics, I think, as you mentioned it, I think are still alive and well. There's all the usual emotion that Pete went through, quite rightly so, that factor into these events, and one of Dave's favorite words is momentum. And we clearly are seeing that now, that all of the success of these auction sites and of our internet bidding and of our growth and our sales force and the geographic expansion into new markets and the world and deeper into other asset sectors in the ag and the trucking and so on, is all joining together to create some synergies that are effective and are greater than the sum of the parts.

And we're enjoying that and we'll just carry on, but I think the old-fashioned dynamics, they're alive and well and in each and every auction those emotions and things are quite normal.

These virtuous circles can take a life of their own. I'm just trying to get a sense as to have you guys lost the ability to forecast on the upside, just these things are always surprising you, or you expect a few surprises, you get them, and it kind of works out, or are you seeing it kind of broad based across the board that our sales guys did this, here's what they thought they'd get in, 10% again we beat on another auction? Is it pretty spread across the board? Is the dynamic playing out in a fairly universal way?

Well, it's not consistent across each and every region or auction site. There's always some that outperform expectations, and there's always some that are under, and it's been the same way for the last 17 years since I've been around the company, that this year you have a couple of divisions that are very, very successful beyond the expectations, and others that fall behind, and then the next year it may be that that laggard blows by the numbers.

The Company results are very similar to a particular auction result and you go and have a discussion with a customer and plan out what his expectations will be for a package of equipment, and invariably you have 25 items that are worth, say, $1 million, and there are going to be some of them that go over and some that go under. And it's the pot at the end of the day that we counsel them to look at, and I suppose we're saying the same for you, but it's quite difficult to say that we've lost the ability to predict on the upside, and I suppose the auction revenue rate is the best example of that.

We believe that 9.5 to 10% is a good number. Yes, we've overachieved, but we also know from experience that these things can turn around, and I think that GAS upside is possible in that respect, as well, but I think 10% average top line is the right number.

And in the quarter, I know the Citigroup contract must be ramping fairly well. Was that a significant contributor to the gross auction sales this quarter?

Reasonably so, but keep in mind that the cycle has been very strong and that repossessions and end-of-lease return rates are down substantially, so the amount of financial sector business that we're receiving, not just from Citi but from other major financial institutions, would be lower than we'd expect in a different marketplace.

Okay, 2 last questions, then I'll get off. What was the percentage of gross auction sales that was underwritten this quarter versus the year ago, and what's the sales headcount at the end of the quarter?

We are flat within norms, right around 25. Bob, what was the exact at risk percentage in that?

Bob Armstrong; Jeremy's just looking it up, but I believe it was right around 25. Jeremy's just coming up with it.

So very normal, not anything out of expectation, and headcount for salespeople was 207 I believe.

Great, thanks a lot, and outstanding quarter, guys.

Bert, it was 23% for the first 6 months.

Thanks, Jeremy.

Thank you. Our next question comes from the line of Errol Rudman from Rudman Capital. Please proceed with your questions.

You announced a quarter of a billion dollar CapEx program. Could you give us what the expected internal rate of return is on those capital expenditures? And can you trace through for us what period of time the CapEx will be depreciated? And how much depreciation will be up in each of the out years, assuming that you make it, those expenditures, and whether there were any other expenses hitting the income statement?

And I also wanted to understand, will there be a proportionate increase in the headcount going forward as you expand? That is, if your sites are roughly -- if the capital amount of the sites are doubling, what rule of thumb should we use to increase headcount? And then, I'm not sure if this question was asked, but I didn't hear it, could you outline for us how much the Internet source business is increasing over a period of quarters for you?

Sure, Errol. It's Bob Armstrong. I'll try and attack those in order. Those are all excellent question. You're correct. The CapEx program that Peter outlined, 50 million per year over 5 years, adds to 250, which is, I guess, double the annual run rate that we've been playing with so far. The rate of return is not easy to identify for you. These are all long-term investments, intended to fund the infrastructure, I guess, or create the platform for our growth for many, many years, 20, 30 years, so the immediate impact of these investments, exactly the same as all of our prior investments, will not be felt overnight. Should I say, there will not be an immediate impact. It will be a longer-term impact. And so, when we make these investments, we're looking at far more than just sort of a short-term financial return.

But I think you should expect to see similar returns to what you've seen for the Company for all its prior investments. The goal here, Errol, is to fund the foundation, to build the foundation, to allow us to continue to grow our top line at 10% and our bottom line at 15% on average for the foreseeable future, and I'm being pretty vague on that, because this expenditure should create sufficient capacity for us to grow at that pace for as long as we can make our spreadsheets run out.

In terms of depreciation, I think you'll see a fairly gradual increase. A fair bit of the expenditure goes to land, which does not depreciate, and the bulk of the rest of the expenditure goes to buildings, which we depreciate over extended periods of time, 20, 30 year periods, so the annual depreciation charge will increase quite gradually, but quite gradually over time. It's not the kind of thing that's going to throw anybody's models off.

Headcount, excellent question. Yes, it definitely will grow, although no different than if we hadn't made these expenditures, in my view, or at least not materially different. We anticipate our headcount to grow in the range of 5% to 10% per year going forward. And a way to think of that is if we're looking at growing our top line sales in the range of 10% per year, or a little bit less than that, and have the average sales per person grow. And it's that combination of headcount of our sales force and sales force productivity that we believe will be growing by the combined rate, on average, 10% per year.

This is getting a lot of information in one answer, but the M07 issues that Peter and Randy have spoken of are designed to allow us to increase the efficiency of our sales force and the rest of our team, so we expect to be growing the non-salespeople as well, but hopefully not at the same pace as we're growing the sales force. So, I think you'll see total headcount continue to grow in the range of 5% to 10% per year for the foreseeable future.

And your last question, good thing I was writing them down, was what you call internet source to business, and maybe I'll clarify that the internet for us, in terms of the ability to bid into our auctions, is simply an enhancement to the live auction, so it's not a separate stream of auctions. I think you know, because we've talked before about that, so I'm just clarifying for others on the call. The internet bidder participates in the live auction as if he was at the auction live. He's participating in real time against the bidders who are present on site. It's not a separate series of auctions.

Having said that, the internet buyers are now purchasing in the range of 15% of what we're selling online, and the internet bidder is either the buyer or the runner-up on between 15 and 20% of all the lots offered, so having a positive impact on the pricing on 15 to 20% of the lots.

And I'll just add one thing, Errol. This is Randy. Regarding the headcount, I would expect that your TM productivity, your sales force per head, essentially, will continue to drift upwards, and that you won't (inaudible) that 10% range to our added sales force, they'll be at a lower rate.

Just to paraphrase what you said, if the sales -- and this is a hypothetical question, if the sales were to wildly exceed your expectations, as they did in this quarter, you're suggesting that the headcount will not be increasing materially for the next several quarters based on one or two quarters of increase above your suggested ranges?

That's a good way to put it. If in fact it's just 1 or 2 quarters above the range, then you're right. That would be a short-term blip. If we have a structural increase in the amount of sales, which over time we hope to grow our gross auction sales base every year, then your sales force would grow with that. But sales force, that's a long-term concept for us. It takes 2 or 3 years for a fellow to join our sales force and mature, so it's not the kind of thing we adjust and tweak on a quarterly basis.

And I had one last question about competition that you're seeing. Are you finding that -- I know that you don't talk about individual sites, but maybe as a group are you finding that your sense of the market, your penetration of the market that you said you're in is rising gradually over a period of time?

Rob, why don't you take that question?

In some markets, that would be a fair comment. What we've seen in recent times here, particularly in the first 6 months of this year, is that the competition views our auction results as a gauge of the market, and the competition that's had a bit of a lag in their sense of there the market is, and in some of the regions where we operate in, our competition has become more aggressive on some of the deals that are out there, and hence has made some of our underwritten business more competitive.

That lag in the market, or their knowledge of the market, we believe that they've caught up to where the market actually is today, and hence, going forward, they may be more aggressive or they may settle down in their pursuit of some of the business that's out there.

Okay, can you give us the names? Are there any larger companies that we can use as references to measure competition?

Errol, it's Peter. Probably the answer is no. There are lots of different guys and lots of different areas, and we're larger than our next 40 competitors combined, so looking at one particular guy will give you an inaccurate view of what's going on in the marketplace. We're still on a percentage basis -- the biggest competitor truthfully that we have is the owner of the equipment himself and trying to sell it himself. In a rising market, the for sale by owner stuff, they tend to think that they can sell it on their own and get the top price, but ultimately, they give us a shot and they realize that the market has gone way past their expectations.

So, the biggest competitor that we face truthfully in the market today is the equipment owner and convincing him that we can add value to him. But trying to isolate competition, direct competition, in terms of the industrial marketplace and auctions, there are so many little guys out there.

Well, I just wanted to thank you very much for your planning and for your execution and the excellent job that you're doing.

You're most welcome. We'll try to keep pace here.

Thank you. Our next question comes from the line of Bruce Simpson with William Blair. Please proceed with your questions.

Hey, guys, good morning.

Good morning, Bruce.

I wanted to drill down a little bit on the expansion of CapEx and so forth. Bob, do you have a first half number for cash flow from operations?

I guess I do, technically. The 6-K is filed, it's with the SEC, and so it's on there, but my suggestion to anybody would be, rather than looking at the statement of cash flows for a cash flow from operations number would be to take net income and add back depreciation. I believe that's a purer measure of our cash flow from operations. It doesn't have all the working capital gyrations that make our particular statements look funny.

So, that sounds like it's between 35 and 40 in the first half, maybe?

About 37, 38.

And then you spent about 15 of that on CapEx and paid out maybe another 7 in a dividend. I think, year to date.

Those numbers sound right.

So, as you think about this expansion of the CapEx, do you think that this is all going to be internally financed?

Absolutely. Well, hang on, that's the plan. We obviously have quite a bit of debt capacity. If we needed to on a short term or even a longer-term basis, we could access debt, but the forecasts that we're working with are based on funding it from operations and our existing excess working capital.

And are there significant changes going on in the working capital fluctuation and is it sort of flattish? I know that it can actually be negative with your growth? What's happening there?

Do you mean in terms of what we're expecting?

Yes.

Well, I would expect, absent this CapEx program, and even with this CapEx program, we'll see a buildup of working capital. In fact, it's a fair question. This is the exact exercise that management went through and then we presented to the board and walked through with them. Absent the dividend increase and the new CapEx program, we'd see a significant ramp up in excess working capital. So, what we've done is lay out in terms of a strategic planning process, that Pete led, where do we want to invest over the next few years, what does that cost? And that's the capital expenditure program we've been discussing.

Take that off, the excess working capital and see what's remaining, it's still a significant number, and so we say, okay, you guys, seeing as we have identified the intelligent investment opportunities and allocated funds to attack those opportunities, whatever's left beyond what we need to just to maintain the business, which is a pretty small number, let's hand it over to the shareholders. And that's how the board arrived at the dividend increase.

So, I see the working capital at last year end was 37 and then at midyear 2005 it's 51, so it seems as if it's expanding quite materially, and that is just sort of the negative working capital nature of the business, along with growth. Is that right?

More the growth. I mean, the negative working capital is a fact, but the main contributor there is simply the growth in business. As we grow our earnings, really, that's earnings plus depreciation, it's almost entirely free cash flow, because our CapEx has been fairly controlled. Even the expanded CapEx will only chew it up to a certain extent.

Well, for example, how much of that 51 is cash?

I guess I would put it to you that it's all cash. If we ran the business for a couple of months without holding an auction, and I'm simplifying it here, but the vast majority of your working capital balances would go down to zero. All of your payables would go away, your receivables would go away, it's very short term. If you run the company for any extended period of time without holding auctions, your only current asset would be cash, and you would have no current liabilities. And so, when I look at net working capital, I view that as cash.

Okay, so where I'm going with all this is I think I understand now the sources of your confidences in being able to fund all this internally and at the same time double your CapEx allocation and yet raise the dividend at the same time. And now turning sort of from the source to the allocation, help me understand how you're not changing your longer-term growth rate at the same time that you're doubling the forward capacity.

Is that an indication that you are somehow reaching capacity at existing plants, or is it just kind of a law of large numbers that you need to double the number of sites that you open in order to be able to still hit 10% growth in gross auction sales?

Actually, I think it's a third. I think it's neither of those 2, Bruce. I believe it's simply our desire to create capacity for as long as we can see. Right now, we have significant capacity at a number of our sites, but we don't have any capacity at some. Houston's a good example there. That yard is full every time they have an auction, so we have acquired land that's more than twice the size of where they are now, planning to develop a replacement site. All of the plant in Peter's CapEx program, all of the targeted areas, are areas where ewe are currently underserving the market and see growth opportunities.

But we don't have the ability to just flip the light switch on and have sales there tomorrow. We have to start the process now in order to have a site open and operating within 2, 3, 4, 5 years. So, the CapEx program will fund future growth, and that's why you don't hear us talking about a new rate of return. The return on these investments will not appear in the next couple of years, it will appear over time. So, it's more of a purchasing of capacity for the future, providing the foundation for all the future growth.

Unlike some businesses, if we were Starbucks, we could open a store, and you'd have people lining up to buy stuff. For Ritchie Bros., we open up a store and that's the beginning of the process of growing -- taking the region to the next level.

Well said, and that makes a lot of sense to me, but I'm still trying to reconcile how, for example, I thought that the long-term plan is 1 to 2 sites a year. Today, it appears that the long term sites is double that, and yet there is no change in the long-term growth rate. Were you in error yesterday in thinking that you could grow at that rate with only that additional capacity?

No, but we were correct in saying that we could grow at that rate, but not forever. The 1 to 2 sites per year would have allowed us to continue growing for many, many years -- many years. Let's not say many, many, just many years. By going from 1 to 2 sites to 2 to 4 sites for a 4 year or a 5 year period, we'll extend our ability to grow and improve our ability to take advantages of opportunities in some markets where we just don't have capacity right now.

Europe's a good example, where quite a bit of the CapEx program we believe will see us spending money in Europe, which is an area that's growing fast for us, and yet we're operating off of a bunch of lease operations and temporary sites, which, as you know, is not as efficient or cost effective for us, and makes it harder for us to attract the very best candidates to join our team.

Part of it, Bruce -- this is Pete here. Part of the answer, too, lies in the long-term view of how we intend to grow the business, and Bob is right when he talks about the opportunities in Europe for us are many. We only have one permanent auction site in that whole area and there's 400-million-plus people there. So, you can see that over a long term, when we look at our strategic planning opportunities and the growth targets, the US in the next 5 years and Europe is probably going to be the growth engine of the company in that second 5 year chunk, if you want to put it that way.

So, we have to line our ducks up to make sure that those sites are ready to roll and we're in those marketplaces, operating today. There are opportunities for us to seize today. We know we're going to be there on the long term, so rather than wait five years and then start looking around in the European market to take advantage of opportunities, let's not put them in front of ourselves today and take advantage of those today so that we're ready to maintain the growth of the company on the long term.

I'd also like to add something that we probably should have stressed during that prepared part of the conference call, that our growth is funded or fueled, excuse me, exclusively by adding sites. It's by adding sites and adding people, and the 10% growth target is based more on our people than it is on any specific capacity in our sites.

Today I believe, quite confidently we have 40 to 50% capacity in our existing network and we could continue to grow our sales for several years at a 10% rate without adding another single site to our system, just continuing to add quality people in the right areas where the opportunities lie. But we'd hit a wall in X number of years, and hitting a wall is not on our list, and it takes a long time to recover from that, because it takes us a while to get these sites going.

So, I think the long-term growth that we've been targeting, 10% top line and 15% bottom line, is as much predicated on our ability to grow the team as it is building the sites. The sites you have to have. You can't have the sales without them, but I believe the real gating factor on our growth has been and continues to be, the sales force side.

Yes, I want to add a comment as well, Bruce. This is Randy. In our crystal ball, if you want to call it that, of where we need these sites down the road, I think what we've done in the last few months is had a harder look, and perhaps one thing that we've come to realize and determine that, okay, we want to take action now, is that these sites really are difficult to bring on-stream, with environmental issues, the size of the sites, the economics that we need to find the site that we can afford within our business model, the visibility.

All of those things takes some effort and quite some time to bring them on. And we thought it would be the right thing to do to increase and accelerate some of those attempts to bring sites on board, even before we might otherwise have been ready in the markets. And what we've done is we've looked at some of these markets that we're in now, and Bob talked about some of the more futuristic ones being a lot of the European areas. We know those markets can support bigger operations, we just know that.

And when is the right time to bring a site onboard or not, and that's what we've had to look at. There's a lot of cultural changes there. We're pioneering a new business model, so it takes much longer in these overseas markets to get to the 40 million plus hurdle that we traditionally have looked to. But we're exceedingly confident that we'll get there.

Meanwhile, it never gets easier to develop one of these sites, and typically land values keep escalating. So our belief now is, let's do a little bit more forward-thinking and perhaps even have a site in our back pocket that we'll have bought and zoned and perhaps the buildings may not get laid on this site for a year or 2. Something like that. And it's more of a recognition of the challenges in bringing a site on-stream to say, look, let's accelerate some of that today.

And our best crystal ball sees this as a blip, that we don't expect to maintain the 50 million CapEx for infinity. It's more of a 4, 5, year, 3, 5 year blip, where it's going to expand and then contract again.

I see. And so is it safe to think, did I understand you correctly, that probably over the 5 years, the majority of those new sites, at least in the early part of that, will be United States, and then perhaps in the later half, Europe?

That's correct.

And given the delay in acquiring these sites, we probably should accept this accelerated opening schedule of 2 to 4 year until at least 2007, of not 2008?

Yes, I think 2007 is probably pretty realistic, but '07, '08, to the second half of it.

Okay, and then just switching gears, a quick question on SG&A, and I know you gave us kind of a disclaimer that you really didn't want to talk about M07, but it seems as if it's quite impressive to have put up this kind of gross auction sale that you did, or it was actually a second consecutive sequential decline in SG&A, so congratulations on that. And is that in this quarter -- is that indicative, do you think, of some early benefit of Mission '07, or is that unrelated to that?

I guess we could take a small amount of credit, but not a huge amount, Bruce. The M07 initiative, we have done some initial things that are more focused on the HR side of life, performance measurement and so on, and bringing in -- we're continually, for the last several years, trying to focus on the quality of he people coming in. We're always trying to navel gaze and determine whether we're having the most efficient practices. So I guess some of it, yes, but also part of it is the continuing belief that we should have, and do have, leverage in our system, so the G&A should not rise as fast as the top line. I don't know if that's going to help you at all, but we think some of it is M07 related, but some is not.

Okay, thank you guys very much, congratulations.

Operator, I think we have time for just one more question.

Certainly. The last question comes from the line of Gary Prestopino from Barrington Research. Please proceed with your question.

Hi, good morning, guys.

Hey, Gary.

A couple of -- just some quick questions. I guess it's safe to assume that most of what you're going to be doing in Europe is going to be replacing temporary sites with permanent sites. Is that a correct assumption?

Yes, it is. We've got a couple of leased facilities that are relatively small and not huge, long-term leases, so 2 of those markets will get replaced with new sites, and a couple would be brand new.

Okay, and then in the US, can you give us some idea of what new areas of the country you'd like to be in?

We have mentioned Ohio and New England in previous conference calls. Those areas, we're continuing to search actively and aggressively right now for potential sites. Houston is a replacement site. Denver, we just succeeded in gaining a rezoning and the board approved to move forward with a replacement site in Denver. That's new news. That's about a 150-acre site. So, that probably will be closing this coming quarter. And it could be New Orleans in the Gulf Coast area. That would be a few years out, maybe 3 years, 4 years out, is sort of our planning there. We could use a replacement site in Minneapolis.

In doing what you're going to be doing as far as in the US, is your challenge finding the sites or actually finding the people, the resources, to commence this business plan of accelerated growth? The zoning has got to be a problem, isn't it?

It's a challenge, you bet it is. The people and the sites are both equally important, the people continuing to challenge us. It's a tight market for equipment. It's also a tight market for people. Employment opportunities are good for those really quality people that -- they never have a hard time to find a job, particularly in the cycle that we're in now. But we're adding people where we need them, irrespective of the status of our sites. So even though Houston or Denver sites are at capacity today, we still continue to invest in our sales force.

And then independent of that, we're also out there investing in these sites, where we believe the market opportunities exist, and I would say that both of them are gating factors and neither one would be more or less of a problem or of a challenge, and the zoning issues have always been there. And when you are only looking to add one site, it looks like it's only this big of an issue, and when you're looking at maybe 4 or 5 potential areas and they're all like that, it kind of appears a bigger issue in your mind.

Thank you very much.

Thanks, Gary. Operator, with that, we'll conclude the conference call, and I'd like to just recap once again. We had the largest quarter that Ritchie Bros. has ever experienced. We're very proud of that. We're going to continue to follow our growth strategy of investing in people and in sites, and that people growth rate should be similar to what we've seen in the past, whereas our capital expenditure and site investment program will increase significantly, as we've outlined on this call, over the past several years.

Despite that, our cash flows and our earnings are such that we can also return a lot more money to our investors by way of increased dividend. We hope that we're able to receive similar criticism in the next few quarters about exceeding our GAS targets, but for now we believe we're on the right path, and we thank you for your interest in the company and look forward to some more strong quarters as we move forward.

And with that, operator we'd like to conclude the call. Thank you.

Thank you. Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.