RB Global Inc (RBA) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ritchie Brothers Auctioneers Q3 2005 Earnings Conference Call.

[Operator Instructions]

As a reminder, this conference is being recorded Tuesday November 1st 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 Brothers Auctioneers third quarter investor conference call. My name is Randy Wall, the Company’s President and Chief Operating Officer. Also on the call with me today are Peter Blake, our CEO; Bob Armstrong, our CFO; and Jeremy Black, our Senior Manager of Finance.

We’ll be talking today about our results for the three and nine-month periods ended September the 30th, 2005. Our presentation will take about 20 minutes and then as usual we’ll open up the call for questions thereafter.

Before we get started I would like to make a Safe Harbor statement. The following discussion will 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 acquisition, development plans, strategic initiatives, and information system development programs, 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 September 30 2005, which are available on our website at rbauction.com, and on the SEC and SEDAR websites.

I would also like to remind listeners that we will be talking about gross auction sales during this call. 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 are the actual revenue that we earn. Listeners are encouraged to read our periodic filings for a further discussion of the components of our revenue.

I will speak about our recent results then some good news on the property-development front. Then I’ll turn the call over to Peter to comment on our strategic initiatives. Bob and Jeremy will then give you financial overview before I conclude the call and take your questions.

We are now three quarters into 2005 and have so far achieved gross auction sales of $1.5 billion which represents growth of over 20% compared to the same period in 2004. Although the strong market conditions have made it difficult for our territory managers to secure consignments, they have been remarkably successful and our results to date are impressive. We have seen particularly strong sales growth in our American and Canadian markets.

Even in challenging market conditions, we have increased our top line by demonstrating that our auctions deliver a global marketplace for the exchange of industrial assets. This appeals to equipment owners who may have traditionally sold their assets through other channels; encouraging them to take advantage of the large multi-national bidding audiences that attend our auctions. They are demonstrating more than ever the benefits of our model, which matches local supply with global demand.

Our unreserved auctions deliver an international marketplace and this enabled us to attract an increasing volume of used-equipment transactions even in today’s tight equipment market.

Looking ahead to 2006 and the next number of years, I believe that our business will continue to capitalize on this concept to deliver growth, helping us achieve our expected 10% long-term average sales growth rate. Although we expect to be ahead of that rate this year, our long-term growth prospects have not changed. We’ll have some years of better-than-10% growth, and some below that level. But over the long-term we believe that our sales growth will average out in the 10-percent range.

Before I pass the call to Peter to talk about our strategic initiatives, I would like to comment on some of our recent property-development activities. We’ve been busy developing our 75-acre property in Nashville, Tennessee and expect to open that new permanent auction site in early 2006. Construction is going well and we’re excited about our prospects in that part of the United States. We’ve been operating out of temporary facilities in the Nashville area for several years and our existing team in Tennessee looks forward to opening a world-class Ritchie Brothers facility in this region.

Hot on the heels of the national development will be new replacement auction sites in Houston, Texas and Denver, Colorado. We’ve been operating in both those markets for many years and are starting to bump [inaudible] capacity constraints. In both cases we made the decision to start building replacement facilities and have secured two exceptional properties that we expect will set us up for success in these markets for a long time into the future.

The new Houston site covers approximately 125 acres and will replace our existing 54-acre auction site. And the new Denver site is approximately 160 acres, replacing the present 39-acre site. We expect that both new sites will be open for business some time in early 2007.

Another property acquisition that we made in the last quarter was a 62-acre parcel of land in Saskatoon, Saskatchewan. Although this will represent a relatively small investment, it is important because it marks a new concept for us and that is building a modest permanent auction site focused primarily on agricultural sales in the heart of an agriculturally-based equipment market. We see a lot of opportunity for this type of facility and we’re looking forward to watching this investment bear fruit.

We’ve been continuing to look actively in several other markets in the US including the Ohio and New England areas that we mentioned previously. And we ramped up our property search in Europe. We’re looking for suitable properties in the UK, Spain, Italy, France and Germany. And I expect we’ll have more news about these locations in upcoming conference calls.

We’re taking our accelerated property-development programs very seriously and we see it as a critical investment in the future of our business. We could continue to grow our business at a reasonable rate for several more years without building any new facilities. But we know from experience that such an approach would not enable us to continue delivering gross auction sales and earnings growth well into the future. Part of our growth strategy is to stay ahead of the curve, rather than waiting until we’re faced with capacity constraints; and these are long-term investments that will help us accomplish this goal.

I want to mention one other thing before passing the mike over to Pete. We have said many times before that our people are our number-one asset and our ability to attract and train quality people is a critical part of our growth strategy.

Our head count has been steadily increasing over the last few years and our sales force has grown to 211 individuals, which is up by 13 people since the start of this year. I’m pleased with the growth in our sales force and we continue to invest significant resources in attracting, training and retaining talented employees. Now, let me turn the call over to Peter Blake, our CEO.

Thanks, Randy and good morning everyone. I’m going to talk about some recent development in our MO7 strategic initiatives. We’ve been doing a lot of work internally on our strategic plan and I’d like to take this opportunity to bring you all up to speed.

Our overriding corporate goals are very simply to grow our earnings per share by an average of 15% per year, and to maintain our culture. We have historically sought to grow the business by adding auction sites and hiring quality people. If we expand too quickly, experience has shown that it becomes difficult for us to maintain our unique culture and the quality of our customer service becomes diluted. And as a result, our intention is grow at a manageable pace that can be sustained over a long period of time.

We take a long-term view when describing our growth plans because we have our sights set on a future that involves gross auction sales of not 2 or 3 billion per year, but maybe 4, 5, or $6 billion per year. In fact, given the highly fragmented nature of our market it is well within reason to think that we could one day have annual sales of $10 billion or more.

At a management retreat 18 months ago we agreed that our current business process would support our growth for the next few years. But in order to double and triple the size of our business, we would need to rework these processes, making them more efficient, more consistent and more scaleable. This project to revamp our business processes became known as Mission 2007 or MO7 in short.

MO7 has become the third leg of our strategy stool joining our long-term strategies of adding auction sites and adding quality people. MO7 and the ongoing addition of new and replacement auction sites will provide the foundation and capacity we need to grow the business. And adding people gives us the key individuals to establish and maintain relationships with equipment owners.

We have in the past talked at length about our expanding network of auctions sites and our training and development programs for new members of our team. Today I’ll give you some color on that third leg of our strategy, the MO7 project.

To date, there has been little to talk about because the bulk of our MO7 effort has been outside the public eye. It has involved mapping existing business processes, identifying inefficiencies and opportunities for improvement, pulling teams of our internal experts together to craft our vision of future processes, investigating available technology tools and studying the best practices in a number of industries. This is the background work that has been done before anything tangible is delivered.

During the past few months, we have moved into a more tangible stage. We are now in the process of implementing on Oracle ERP system and have engaged IBM to assist us with that implantation. Phase I of our Oracle project, comprising core financial and human resource functions is scheduled to go live in the first half of 2006. Phase II, which will include CRM and sales force automation, is scheduled to go live in early 2007. The Oracle implementation is a foundational step. It will enable us to launch many MO7 projects that would not be possible under our current Legacy business systems.

Following the Oracle implementation we will be rolling out redesigned in-house business systems to support our secret sauce, those processes that our unique to Ritchie Brothers. Where we can use software off the shelf, we will. But much of what we do is so unique we will likely to continue to develop many of our own systems to support that secret sauce part of our business.

Because such projects are not without risk, we have assigned senior Ritchie Brothers managers to oversee this project. Cost-wise there will be capitalized costs for hardware and software development over the next few years. Our previous guidance of average annual CapEx in the range of $50 million includes our anticipated MO7 costs.

Operating cost increases are expected to be offset by operational cost savings, so no additional overheads are projected other than some initial costs incurred during the implementation phase over the next couple of years. But even these are not expected to be material. Our regular guidance will include our estimates of MO7-related costs.

It’s difficult to isolate MO7 as a stand-alone program as it covers virtually all aspects of how we do what we do and how we can do it better. We are establishing metrics to help us assess our progress, mostly at the operational level rather than at the financial level. On future calls we will share the metrics with you if we believe they will be of any value on a macro basis to help you understand our Company.

We believe that MO7, together with our continued drive to add sites and add people, will enable us to continue growing our sales an average rate of 10% every year, and will enable us continue to enjoy operating leverage; translating into earnings growth of 15% per year on average.

Stay tuned for further updates in future calls. We have a lot going on in this front. And I look forward to sharing our expected success with you in the future. I’ll turn the call over now to Bob Armstrong, our CFO.

Thanks, Peter and good morning everyone. Before I begin I would like to draw your attention to the press release that we issued this morning and to our MD&A and financial statements which we also filed this morning; the detail behind the numbers that I’m going to discuss is contained in that press release and in our quarterly 6K filing, which is available on the SEC and SEDAR websites.

All dollar amounts referred to in this call and in our press release and securities filings are stated in US dollars. On our August conference call we indicated that we expected gross auction sales for the third quarter of ’05 would be around 360 million. Actual gross auctions sales for the quarter were right on track at 364 million. Our gross auction sales for the first nine months of this year were 1.5 billion, which is 21% higher than the gross auction sales we reported in the comparable period in 2004.

Most of this growth has come from strong performances in our US and Canadian markets. The Canadian results include the positive effect of the growth of our agricultural auction business which generated gross auction sales of 65 million in the first three quarters of ’05, compared to 35 million during the equivalent period in ’04. Overall we are on track to achieve full-year gross auction sales of $2 billion, which would represent growth of almost 12% over 2004.

Auction revenues were 38.4 million for the third quarter of ’05, and 152.7 million for the first nine months. Our auction revenue rate for the nine months ended September 30 ’05 was 10.16% which is not materially different from the rate of 10.09% that we achieved in the comparable period in ’04 and just above the top end of our expected range.

Direct expenses which include the costs incurred specifically to hold an auction such as wages for temporary staff, advertising and travel expenses for staff to attend and work at the auctions; were 1.23% of gross auction sales for the third quarter of ’05 and 1.24% of gross auction sales for the first nine months of 2005. This is the same as the direct expense rate of 1.24% experienced during the first nine months of 2004 and slightly better than our expected rate.

General and Administrative expenses were 23.9 million for third quarter of 2005 and 68.3 million for the first three quarters of ’05 which is an increase of 12% compared to the G&A for the nine months ended September 30 2004. Our G&A was higher than the equivalent period in ’04 for several reasons; including the impact of the continuing weakening of the US dollar and the continued growth in our business. As our business expands, we incur higher labor costs, advertising and marketing costs and travel costs among others. And this of course contributed to increase in G&A in 2005.

Our income tax rate for the nine months ended September 30 ’05 was 35.3% and our tax rate for the nine-month period was not materially different from our expected rate of 36%. Our tax rate fluctuates depending on where we earn our income as certain jurisdictions in which we operate have higher tax rates than others.

Net earnings for the third quarter of ’05 were 4.6 million or $0.13 per diluted weighted-average share. For the nine months ended September 30 ’05 earnings were 39.4 million or $1.13 per diluted share. Net earnings for the year to date in ’05 include gains of 6.4 million or 4.1 million and $0.11 per diluted share after tax recorded on the sale of excess properties. Excluding these gains which we do not consider part of our normal operations, our net earnings for the first nine months of 2005 would have been 35.3 million or $1.02 per diluted share.

Before I pass the call to Jeremy to update our guidance for the remainder of 2005, I would like to talk a bit about our current CapEx projects and future expectations.

Our total CapEx including maintenance CapEx for the first three quarters of 2005 was 29.9 million. The expenditures in the first nine 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 of land in Houston, Texas and land in Denver, Colorado.

As Randy mentioned, the new properties in Houston and Denver are intended to house new permanent auction sites to replace our current sites that are nearing capacity. We have not yet started construction on these two sites, but expect to be holding auctions in the new facilities in 2007.

For the full-year of 2005 we are now expecting total CapEx including maintenance CapEx to be in the range of 35 million, which is higher than our previous guidance of 25 million. We suggested on our last conference call that our CapEx might exceed 25 million in ’05 if we were able to accelerate our auction-site expansion plans and this is exactly what has happened. Now the same may be the case for the fourth quarter if we are able to find suitable sites ahead of our schedule.

Our board of directors has declared another quarterly cash dividend of $0.18 per share payable on December 16 to shareholders of record on November 25. The total amount that we expect to pay out for this dividend is approximately 6.2 million. I will now turn the call over to Jeremy Black.

Thanks, Bob and good morning. I’m going to update our guidance for the remainder of 2005 and give you some preliminary insight into what we currently expect in 2006. We will be able to give you some more detail on our 2006 guidance during our next conference call in February once we’ve had a chance to get detailed plans of budgets from our field managers.

On our last conference call we told you that we are expecting Q4 gross auction sales to be in the range of 500 million and full-year gross auction sales to be in the range of 2 billion for 2005. As we do at the beginning of every quarter, we surveyed our field managers to ask them to update their estimates and based on this update we are reaffirming our gross auctions sales guidance of approximately 500 million for the fourth quarter and 2 billion for the year.

If you do the math, you will see that our sales growth over the first three quarters of this year was 21% compared to the equivalent period last year and that a forecast of 500 million is actually lower than our Q4 ’04 results. However, that’s the way see it playing out in 2005. If we achieve gross auction sales of 500 million in the fourth quarter of this year, our full-year sales growth will be almost 12%, which is above our expected long-term average growth rate. The fact that we see the fourth quarter being smaller than last year’s fourth quarter is simply a reminder of the lumpy nature of our business. We do not believe that it’s indicative of a trend.

Although it is still early days for 2006 guidance, looking ahead to ’06 we continue to expect an average gross auction sales growth rate of 10%, which means we are still comfortable with gross auction sales guidance in the range of 2.2 billion next year. We will be able to provide more specific guidance once we have surveyed our field managers regarding their thoughts for 2006.

We are also comfortable that our average auction revenue rate for the remainder of 2005 should be in the range of 9.5 to 10 percent. We are also currently maintaining this auction revenue rate guidance for 2006. The 10.16% rate experienced so far this year was slightly above our expected range but it’s entirely possible that future rates could be higher or lower than this amount.

Our direct expense rate continued to benefit from the increasing average size of our auctions and we believe that direct expenses will be in the range of 1.3 percent gross auction sales in the fourth quarter of 2005. We don’t anticipate any major changes in 2006 so we expect that our direct expense rate will average about 1.30% next year as well.

On our last call we told you that we expected full-year General and Administrative expenses to come in between $90 and $91 million in 2005. Our stronger-than-expected performance this year has led to performance bonus accruals that are also ahead of our original estimates. The result is a slight increase in our G&A expectations and we now expect full-year G&A to be in the range of $92 million in 2005.

It’s too early to be speaking with confidence about our outlook for G&A for 2006, but we do expect ongoing growth in the business which will translate into higher G&A expenses. Right now our preliminary expectation is that we will likely see G&A in the range of $97 million which would represent absolute dollar growth over our G&A guidance for the full-year of ’05; however this would result in a decrease in G&A expenses as a percentage of gross auction sales, evidencing the operating leverage inherent in our business.

Full-year depreciation expense in ’05 should be in the range of 13 million and in ’06 we expect it should be about 15 million. Interest expense for the full year 2005 should be in the range of 2.5 million, slightly less than our previous guidance of 3 million. For ’06 we believe that we will experience a similar level of interest expense.

Other income, excluding non-recurring gains of 6.4 million recorded on the sale of excess properties is still expected to be around 1 million in 2005 and in approximately the same range in 2006. Our income-tax rate guidance was in the 36 percent range after our last conference call and we continue to expect our income-tax rate to fall within that range for the fourth quarter of this year.

Our tax rate is sensitive to the jurisdictions in which our income is earned which makes precise estimates difficult. The US has a high-rate tax jurisdiction for Ritchie Brothers and our earnings growth in this market has caused our tax rate to move up in recent periods. Looking ahead to 2006 we think we will continue to see strength in our US markets, leading us to expect that overall our income-tax rate will continue to be in the range of 36%.

The net result of this guidance is that based on the information we have today, we expect that our earnings for 2005, excluding the gains recorded on the sale of excess properties, will be ahead of the long-term average growth rate of 15% that we have been targeting. We continue to believe that 15% EPS growth per year on average is a good number for our long-term earnings growth rate, and above-average auction revenue rate in 2005 creates a tough EPS comp for next year, similar to the situation we experienced in 2004 when earnings were essentially flat after three years of above trend growth. We take a very long-term view of our business and as we always say, we encourage you to do the same.

As Bob talked about previously, it’s important to focus on the long-term average annual earnings growth rate which we still believe will be approximately 15%. And now, I’ll pass the call back to Randy.

Thank you, Jeremy. Before we open the call up to questions I’d like to recap the main points we covered today on this call. Firstly, we ended the first nine months of this year with gross auction sales of 1.5 billion and net earnings of $1.13 per diluted share or $1.02 per diluted share excluding the affects of gains recorded on the dispositions of excess properties that we do not consider part of our ongoing operations; which are both well-ahead of our earnings for the equivalent period of 2004. We are reiterating our guidance of 500 million in gross auction sales in the fourth quarter and 2 billion in gross auction sales for the year, representing sales growth of almost 12% over 2004.

Secondly, we continue to expect our long-term average top-line growth rate will be in the range of 10%, which should translate into average earnings growth in the range of 15%. As always, we encourage you to focus on average and not get too hung up on the years that fall above or below this range.

Thirdly, we have taken some big steps forward relating to our auction site expansion plans with development of our new permanent auction sites at various stages in Nashville, Houston, Denver and Saskatoon. We also have prospects at other parts of the United States and Europe.

Finally as Peter discussed, we are making some important strides in our MO7 strategic initiative and are now into the more tangible of this project. At this time we’d be pleased to answer any questions that you have. Myra, would you please begin the question period?

Thank you. [Operator Instructions]

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

Good morning, how’s it going? I guess obviously everything is pretty much in line but as we go through this period of accelerated capital spending; is there a number that you can kind of give us that would indicate the incremental fixed costs added to the model during the construction period of a new or replacement facility without any matching revenue?

James, this is Bob. Incremental fixed costs; I guess there are two types of costs when we start a project. One is depreciation; it’s long, long term so 20- year depreciation if I recall and it’s only on certain components of it, so depreciation doesn’t have a massive impact. Probably the fixed costs that are more interesting and the ones you’re thinking of would be the additional folks; the people, the property tax and utilities and all that. And the truth is it’s not that dramatic. In most of these cases we’re putting in a facility in a place where we already have a team and so there actually moving from working out of a rented or leased facility into a full-blown facility. In the case of Houston and Denver though, they’ll just change business card addresses. Your utility and property tax increases; sure there might be some change there, but usually it’s not dramatic. We’ve never noticed it as being a blip in the past. It’s not something that I think is a significant amount, mainly because we don’t really put in green field operations. We’re just on a continual evolutionary path getting slowly larger over time in all these regions. So there isn’t a big hit.

Gotcha. And you’re capitalizing all the construction expenses and everything, so.

And the land of course is—it’s all capitalized, the land doesn’t get depreciated. The rest does over the long, long term.

Alright, thank you.

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

Bert Powell. Great, thanks. Bob, I wonder if you could just help me to understand a little bit more in terms of how MO7 costs are flowing through G&A. Like, what is getting capitalized and what’s getting expensed? And maybe in this quarter if you could give us a sense as to how much of G&A was related to some of the MO initiatives that you’ve taken like consulting fees for IBM for Oracle implementation and such?

Sure. I guess the main types of costs we’re talking about would be for MO7 so far will software development and hardware costs and that sort of thing. MO7 itself, maybe to paint a proper picture here, MO7 is bigger than just computers. MO7 is a whole business process project looking at everything we do and a lot of the MO7 initiatives don’t involve our IT group at all.

The first major project that MO7 has spawned is the Oracle implementation. And so that’s where we’ve started incurring some costs that are interesting. Prior to this all the costs have been internal. Pete listed off all sorts of internal work that has been done. And really we’ve achieved that by redeploying existing folks and backfilling a little bit. And that just shows up as salaries in G&A. Now we’re at the stage with the Oracle implementation where we are going to be acquiring hardware and acquiring software licenses from Oracle for example, and then doing some in-house software development. So those first two categories; hardware and related infrastructure and software purchases, that will be capitalized; no money out the door yet. Those payments will be taking place over the next 12 to 18 months I guess. And they will be capitalized as they hit and they’re included in our overall CapEx budget. They are not as big as you might be thinking.

And then the other costs would be our own staff that are deployed on the project plus any consulting costs; IBM for example; that are thrown in there. Most of those are not capitalized because they are to do with sort of ongoing implementation efforts and in fact there are costs that will be incurred over the next 5 to 10 years as we continue to implement and upgrade and change and so on. Again we mentioned and it’s true; we’ll be including that in our G&A guidance because that’s where it will hit going forward.

Costs to date have been pretty limited. IBM has been on board with us to a certain capacity for probably close to a year now, helping us with vendor selection. And now we’re into the implantation stage. So whether you knew it or not, there has been MO7 type costs sitting in the G&A for a while now. But they’re so small compared to the cost of running our business, they don’t really stand out to the extent but if that changes we’ll talk more about it.

Okay. And on the – I mean we’re running nine months now with the switch over for Sacramento. That took over for Paris, correct?

Sacramento replaced Stockton.

Stockton. And how has the switch over been so far, bench-marked against what you guys set out as kind of the return thresholds or I guess there are some upsides probably expected in there as well?

Bert, this is Randy. As always we don’t focus specifically on same-store sales type of numbers and perhaps you might be getting at that. The Sacramento facility is—despite that, it’s going precisely the way that we had hoped and planned and that these things typically do. Once the new facility is opened you end up building the team that’s there and there is an increase in momentum in the local marketplace and we see that now and we’re optimistic that this next sale that that yard will have in December may well be its biggest so far. But we’ll have more on those numbers as the path unfolds.

But—I don’t know if anybody else wants to add anything there. It’s a great facility. And it’s rolling. We’ve got a great manager in place there and we expect good things. But that’s also going to drive deeper customer relationships that will spin to benefit other yards more than just Sacramento. So it’s just really network effect that we have and we don’t see anything either alarming or out-of-line in any respect.

Okay. In this quarter Bob, what was the percentage underwritten?

This quarter on the lower end if I recall, somewhere around 20-ish percent, but still within our normal range. Normal range is 20 to 30.

Okay, and last question; just in terms of what you guys are seeing out there, I know supply has been tight which hasn’t really been entirely playing to your strengths. Is there any change? Are you seeing things loosen up a little bit or is it pretty much the same as what we’ve seen for the first nine months of this year?

Bert the dynamics are different in different regions, but generally I would say similar—we’re expecting similar in fourth quarter as we have for the balance of the year. In some respects the very strong market may cause a vendor or an owner to make a retirement decision a little bit early and take advantage of a strong market. So we’ve seen some of that. In other respects there is very little supply in general so it’s a little bit more challenging to get it. And there’s a trade off plus and minus that we’re seeing and I would have to say that our continuing momentum and our growth of our facilities and people and internet and so on is continuing to add to our momentum to the point where we feel we’re increasing our market share relative to other channels, hence the increase in our sales volume.

Okay, perfect. Thank you very much.

Thank you. Our next question comes from the line of Ben Cherniarsky from Raymond James. Please proceed with your question.

Good morning, nice quarter again. First of all was there anything to disclose out of the Edmonton auction last week? That looked like it was set to be a pretty big event.

No, this auction was normal business for Edmonton. And it did not exceed our $20 million threshold. But it was close [there].

Are you having another one there before the year is out? I think that that site—

Absolutely.

The utilization rate is up to what now on that site in number of auctions a year?

It’s remaining at six but what we’ve also done in the last two years is added a special Ag day in the spring so that in essence, there has been seven auction days last year and this year in Edmonton, one of which was an agriculturally focused day.

There are a few of your sites where your number of auctions are up—I think one in Texas; is it Fort Worth or Houston you’re holding more auctions this year?

Fort Worth specifically has gone from four to five. And that will result in growth for that facility this year. And as our markets continue to mature with these permanent facilities, we do anticipate that creeping from an average today of four up to maybe an average of five in years to come. But we’ll always have brand new yards that might only start out at three.

And I’m going to revisit the same topic I think I bring up every quarter; your expectations now going forward. You’re talking about 2 billion for the year which says a lower than last year fourth quarter for gross auction sales. And yet you have more auctions planned for this quarter than last. You’ve also got SG&A close to what it was last year implied in your number yet you’re going to be selling 10% less equipment. I mean I can’t reconcile where you guys get that number from.

There are two ways to answer the question I guess, Ben; first the easy one which is on the cost side. The SG&A is kind of a fairly fixed number. It doesn’t vary quarter to quarter. Those numbers—that SG&A in the fourth quarter would be the same if sales were 400, 500 or 600 million roughly. So that maybe helps the explanation there.

But I can maybe help you with the—

Sorry to interject there Bob, but certainly your selling costs go up when you sell more equipment and your bonuses do to, which happened last fourth quarter.

Yes, the direct expenses are the variable costs, and they go up and down absolutely, almost in direct proportion with gross auction sales but the bonuses are based on profitability. They could go up or down. You’re absolutely right. But the bulk of your G&A is essentially a fixed number for Q4. The bonuses are the only variable component of G&A I would say. But let’s talk about what I think is probably your more interesting number, just the 500.

There is no question as Jeremy mentioned in the call the 500 number that we’re expecting for Q4 is less than the sales we had in Q4 of last year. That’s just the way it’s coming out this year. We survey our field managers. When we surveyed them three months ago they indicated around 500 million for the fourth quarter and we surveyed them two weeks ago, they once again felt around 500 was the number and so that’s where it comes from. It’s just the way it falls out. Sometimes you have a year where a particular quarter is much bigger than the prior year’s quarter and another quarter is lower. That’s one of the reasons we try not to talk about these 90-day periods. I fully appreciate what you have to do in your job and why it’s so important to you. But you’d be fascinated by how little stress it gives us around the office if Q4 looks to be lower than last year.

We’re totally interested in how big the full year will be and we’re already planning for next year.

Yes, I know how little stress it gives you guys but—[Laughter] – I still don’t see how—I mean what you’re implying is your auctions are going to get a lot smaller this quarter so it will be interesting to see how that pans out because it’s inconsistent with trend; it’s also suggesting that your expenses as part of your gross auction sales go up when they’ve been trending down all year. I mean I suggest you start asking your field guys what they think they’re going to do and then start looking at the numbers yourselves in a different way because it doesn’t seem like they jive. And certainly this year as you know, I mean even in third quarter you were 5 million ahead of what you expected to be. So consistently, you’re coming in higher which is great. Hopefully the same numbers at some point don’t tell you – don’t consistently bring you in lower.

Anyway, it’s hard to complain about a great quarter.

You’re doing a good job anyway, Ben. Just kidding—

You know your comment about 5 million ahead of the third quarter; that is a very insignificant amount. We could have been 5 million high or low; again it’s not a stressor for us. We’re trying to focus on the big picture here and Bob is right. I appreciate your roll in trying to get some guidance of the market in terms of anticipation of what does that mean. What does it mean Ritchie’s is guiding to 500 or at the range of 500 for Q4 verses last year’s at north of that?

But I fully appreciate your starting to laugh at some really tough comps, but it doesn’t suggest that your momentum and the number of auctions you’re holding and the results you generated to date just doesn’t sync and –

[Inaudible] comps – if you look at some of the Q4 sales we’ve got scheduled some of them are a little offsite sales that we’re using consistent with the strategy in the way that we’ve grown the Company for 40 years. We’ve got little sales that are spawning in perhaps new markets or there is a natural sale that should occur in an owner’s yard that becomes an offsite sale. And the truth of the matter is the guys do the very best they can to forecast. We look at it and we do quite a bit of work around those numbers and poke and prod them to see how they [spell] from our point of view, from the corporate side, and then we provide you guys the guidance. And in the past the guys have given us numbers and they’ve been pretty darn accurate. Sometimes they’re being conservative and sometimes they’re not. But overall we think that the number that we’ve given the market is a pretty comfortable number that we think we can deliver to you guys. So we don’t want to create wild expectation beyond that and we don’t want to try to become known as sandbaggers either and it’s fine line that we walk sometimes.

Ben, this is Randy. I’m going to add a couple more comments as well. We don’t—it would be incorrect to imply that we take our raw field numbers from our managers and just hand those out as though they’re the gospel. We absolutely do not. We review those things and massage the number to what we think is going to be the accurate guidance figure for the upcoming quarter.

I just absolutely have to stress what Bob is saying is that it’s the 12-month period that really is of focus and relevance to ourselves and you end up with quite some big timing swings if you have a large owner liquidation; it could be a $30 million auction, it could by 40 or $50 million auctions that can slide from one quarter to the next. And as Bob has mentioned doesn’t stress us. And in 2004 at the end of the year we did see some very large field that came our way as a result of some financial distress situations that had been growing over a long period of time that fell under that quarter.

We’ve also seen so far in 2005 a few fairly significant decisions on the retirement front where people have accelerated what otherwise might have been a year or two years out to take advantage of the strong market. And there it is entirely possible Ben that Q4 could be lower or it could be higher- the number. But we believe on the balance looking at the soft spots and at the strong areas that it’s a pretty fair number.

Okay, well I mean in the end I think you’re right; we’re splitting hairs here because the big picture is so encouraging and thanks for that, and good quarter.

Thanks, Ben.

Thank you. [Operator Instructions]

Our next question comes from the line of Roberto Simpson from William D. Blair. Please proceed with your question.

Hello, guys.

You’re name is not Roberto.

Hey, I just wonder; who is running the property development effort? Is there somebody in particular in charge of that or is that kind of by committee?

Oh no, that’s just; well we don’t control that at all. [Laughter] Of course there is; ultimately I’m responsible for it and we have a very experienced manager that is looking after the day-to-day running of that entire effort.

So in your comments last quarter about accelerating the resources dedicated to this; have you done that? In other words, like have you ramped up the staff for example that focuses on acquiring land?

We are in the process of doing that and our head count on that very small department has increased over the quarter and we will be continuing to do so. We’re also using consultants or project-manager type individuals as well. Our organization is to augment our own staff. We’re quite cautious because all these projects may well be local or regional market specific and the last thing we want to do is build a site in one area and then we can’t reuse that team that’s there. So we try to keep the core full-time staff at a low level and augment with local contract help as well.

And then just a quick question on the agricultural effort and the thought there about making a permanent site. My understanding is that the big component of gross auction sales and an Ag sale is the real estate itself and that they’re a little bit different than the industrial auctions in that you’ve got so many small-priced items that need to be auctioned as sort of an accommodation to liquidate a farm. So I just wondered how that’s consistent with a permanent site. How do you for example, does it limit you that you are selling real estate from a site that’s distant from the actual real estate being sold, for example?

Bruce, this is Pete here and no, this doesn’t limit you certainly. We’ve done that in the past on several occasions. In fact we just did it last week in Edmonton where we were selling—it was an Ag-related deal that we sold at the permanent facility in Edmonton. So the local market understands you don’t necessarily have to be on the farm. There’s always a natural smell to [inaudible] complete dispersal type if the guy is selling his home quarter and surrounding quarters of property along with the tractors and the combines and whatnot. But what we’re seeing now with our growth in the Ag business is becoming increasing momentum from our perspective of being the first choice for people to come to for an Ag auction. And keep in mind that we only got into this – the Ag side, specific Ag focus in 2002 when the folks from Grand Prairie came aboard as part of our all-piece group. And since then we’ve grown through Saskatchewan and we’re starting to implement into Manitoba.

We’ve talked in the past about strategy to grow south into the US. And our thought is that because we’re getting more and more momentum in that area, we’re starting to become known as the guys to go to for remarketing Ag equipment. And in more so even on the dealer side; so the dealers are starting to use us more and more as an outlet for them to start to consistently manage their inventory. And when we start to focus on the major Ag centers like Saskatoon and we’re already doing a permanent Ag sale up in Grand Prairie and we’re doing a permanent one-day sale in [Essington] in April. So that’s consistent with the focus of growth so we can service both sides of the market, one being on the farm, natural complete dispersal type of sales; and the other being congregating the equipment to one location typically a larger sale and probably less frequent than the individual auctions you’ll see.

I think we’re up to about 90-odd individual farm auctions in the first nine months and you may see three or more permanent sales at a permanent facility during that period. We just have to make the math work, so the economics around that are very sensitive and we want to make sure that we’re not spending like dollars on an industrial facility that we would for an Ag that can’t support the anticipated sales volume. So that’s part of the mix as well.

So if I were to go attend one of these auctions it’s likely to be pretty much exclusively farm equipment?

You’ll see more farm equipment than you would otherwise, but what you may see is the odd industrial piece. It’s not the focus of putting those sites in play. But what you probably will see is; you won’t see the big fancy concrete theatre with the big huge refurb facilities that we have in most of our locations that funnel 100 to 200 pieces at every auctions through to upgrade the equipment for resale. You’ll see a more lean version of what we offer customers.

Okay, alright and then switching gears a little bit; in talking about the increase in the discretionary contributions to bonuses that influence the upward revision to SG&A guidance for 2005, help me understand the balance between the leverage in SG&A overall and the amount to which that SG&A line can fluctuate given the performance during the year. It looks to me like with your current guidance of about 92 million, that implies about a 7 or 7.5% year-over-year increase verses the ’04 full-year level which is obviously considerably below the gross auction sales. And yet at the same time it’s 1 to 2 million higher than what you thought it was going to be last quarter. So to what extent can SG&A; would you expect SG&A to fluctuate given this kind of variable performance bonus?

This is Bob. We haven’t talked in much detail about the bonus [inaudible] creations in the past except to say that there’s a portion of the bonus pool; especially the executive bonus pool that is directly tied to the profitability in the Company and in particular directly tied to the actual results verses the targeted results; targeted results being established at the beginning of the year and endorsed by the compensation committee and tied directly to the guidance that we share with the investment community. In other words it’s all focused on average 15% earnings growth. The executive bonus pool and to a certain extent other bonus pools as well, go up or down based on some formulas in many cases depending on how we do against those targets. As Pete says, with a cap; and also one thing we haven’t said is—how big is that as a percentage of the total G&A? It’s not that big; it’s maybe 2% plus or minus of total G&A is variable. The bulk of G&A does not go swinging up and down. Maybe 3 percentage—it’s not very big and the ability for those changes to have a dramatic impact on G&A; it’s just not there. But it is a variable component and we talk about it because it could go up through the course of the year as performance comes in and it’s ahead of target, the amount that I accrue each quarter in the G&A for bonuses, I have to move it up. And if we have some bad quarters and that drags our performance, we end up below target; then I reverse accruals and take them back down again to the point where you might even eliminate the bonus entirely for all of our executive guys. But the component is not that big.

For the way you asked the question maybe the thought was that 10% of our G&A was in this volatile mix; it’s actually a fairly small component of G&A that is subject to these sorts of swings.

So it sounds like perhaps from a dollar bucks?

The variable component; I’ve never given you this number have I, Bruce? But the variable component is probably maybe a little bit above that depending on the—it could be higher or it could be lower than that. That’s kind of the problem, it’s a variable number. It could be zero and it could be quite higher.

Okay, well just what I’m getting at is as we look forward to leverage, for example in this year had you for example if the fourth quarter turns out to be really terrific, might SG&A be appreciably above that or might we think, oh there’s another million that could be in SG&A or conceivably could there be another 5 million in SG&A if the fourth quarter is a real blow out?

It could be higher. It could not be 5 million higher. It could be higher. But maybe the key message here is the formula is such that it would never be so much that it would actually affect your ability to achieve leverage. It definitely goes up but it doesn’t take G&A up at a higher rate than your sales other growth; so your leverage is always maintained. That’s a very fundamental part of our program. If we want 10% top-line and 15% bottom-line, any compensation structure that sits within there has to respect that leverage and this certainly does. So yes, of course it could be higher if we end up with a better-than-expected Q4, but there’s no way it’s up anything like the 5 million. It’s not even in the ballpark.

Okay. Alright, one last question and I promise I’ll ask a question that doesn’t make people sweat and their blood pressure rise quite so much. [Laughter]

The last question has to do with MO7; I mean I generally think of Ritchie Brothers as an extraordinarily well-run and lean organization. But when you’re talking about the tangible applications that can spin out of these best practice studies and the implementation of the software and so forth; can you give us just a few examples of specific processes that you think either can be or need to be made more efficient or can deliver more leverage?

Sure, Bruce; love to, this is Randy. Right now today Ritchie Brothers personnel touch a piece of equipment many times; several times let’s say. Your sales force may view it and inspect it in the field once or maybe even two times. Sometimes we appraise a piece of equipment two or three times before we actually come to a deal with a customers perhaps over a one or two-year period. It comes to our facility and it’s checked in at the gate. We touch it again. It may be going to the refurbishment process and touched yet again, then it’s marshaled and organized in the yard; there’s another touch. Then it’s cataloged and getting into the system at the auction itself; it’s touched again. And then it’s removed from the yard and that may be one or two more touches. And each time there’s room for some errors or there is at least duplications of similar procedures and with technology tools where we can have our sales force inspect an item more quickly, a digitized process that transmits information wirelessly that can avoid some currently clerical input and things like that today. The use of tracking mechanisms where there are bar codes or RFIDs on the machines as they’re in the yard can help to streamline and increase efficiencies. That’s on the equipment-touch side. There is lots of room for improvement.

Then on the customer side there are also tremendous areas for improvement, particularly where your customers come into register at each auction. Right now even though it’s “computerized” it’s still fairly heavily labor-intensive. We can get far better at our customers perhaps in some cases with self-service tools, whether it’s web-related or whether it’s kiosk kind of scanner-type thing as you come in, self-service on the way out to speed their exit process, their invoice generation and as well the payment management system. Right now today our receivable systems are predominantly each site specific and as we get a master ERP system in place, that will help us to manage that a little bit better on the customer-service side.

Does anybody else have some--? Our training session, our HR management systems as well will be included in this. We today don’t really have any HRIS- internal management system for our human resource and there will be some self-service training elements and things that will affect our employee base in an ERP system. And the biggest one really is our customer database and our ability to manage this massive data of customers that we have—so 300,000-400,000 active names in the world and how we can market to those people. And we see huge benefits coming out of this MO7 initiative being able to better manage our marketing campaigns and select our customers with greater clarity or our lingual capacity in our system today; we cannot handle Chinese or Russian or Arabic characters in our current database. And in order to expand to those markets—and so we do a lot of manual workarounds and different ways to continue to service those markets, but it’s far from efficient; and to grow into those marketplaces we need this uni-code customer database that will all be part of an Oracle ERP system.

So you kind of [inaudible] going there, Bruce but it was all very positive—

Well, that’s good. Thank you for the detailed explanation and congratulations on your success.

Thank you, Bruce.

Thank you. Our next question comes from the line of Gary Prestopino from Barrington Research. Please proceed with your questions.

Hey, everyone; a couple of questions. Bob, do you have the ending cash and equivalents available at the end of the quarter.

I do. And I’ll quickly get it here but also the whole 6-K was filed today so anybody that wants all this can find it. September 30 ’05 cash and equivalents 175 million; but I can’t give you that number Gary without giving you the disclaimer that any of our working capital balances need to be looked at as a whole. We don’t look at that number in isolation. When we look at cash we look at net working capital and we view that as cash. So 175 is way out of line in terms of thinking that that’s actually our cash. It’s offset largely by 150 million in auction proceeds payable.

Net working capital including cash, it’s around that mid-[50s] range at the end of the quarter.

And then if I do the math correctly it looks like your gross internet auction sales were about 48 million this quarter; is that correct?

You know what? I haven’t done that number but it’s 200 million for the nine months; I don’t have that in front of me. It could be about that range, but yes, 200 million for the nine months is the number.

I’m just wondering; you’re saying it’s up [50] % on a nine-month basis but on a sequential quarterly basis are you seeing an acceleration in the usage of the internet?

The best way to look at that is the percentage of total sales that’s going to internet and it’s been holding relatively steady through this year. There’s not a massive change up or down percentage-wise. And we’re calling the—the second quarter was a larger quarter than the third quarter so I’m quite confident that my total dollar sales online in Q3 would have been less than total dollar sales in Q2, but that was a much smaller—Q3 was much smaller total gross auction sales quarter.

But Gary we’re continuing to see very, very good participation on the Internet. I wouldn’t say you’re continuing to have this steep increase in participation that we had after the first couple years of launching, but it’s very, very solid, very strong. Different auctions can be quite different in terms of the participation on the Internet. You may have a relatively low percentage and others could be as much as 40 or 50%. We’ve had on occasion where you maybe have a couple of large items that are sold on the net. It’s very much a strategic tool. We’ve had just one very small auction in Europe and where part of our regional development here just last week where we saw what used to be a non-participatory environment that we’re starting to see people use the Internet and it’s just adding to the strategic advantage that we have where we continue to be well-pleased.

Okay then, two other questions; some of the things you were talking about with MO7 as far as reducing touch points and after-customer registration some of the other companies in the auction field that I follow are also doing this as well. Have you kind of put the pencil to paper and said—okay we can capture x amount of dollars by putting in these new systems? And can you share that with us?

I would say that we haven’t done analysis like I think you’re referring to. We’re looking more at our ability to grow the business and thinking that we’ll hit some constraints in our own ability to grow if we don’t become more efficient, consistent and scaleable. So this isn’t sort of a cost-reduction program. This is a growth-enablement process.

Okay, that’s fair. And then lastly, in the past when we’ve had these highway bills passed in the United States; has that given you guys a fairly good tailwind over the ensuing couple of years in the US market?

On occasion it can be, but there’s always large lag between something like that where it’s announced; so it’s put into place and the project is built. And we tend to get volume driving our business as those projects complete and as fleets are being used up let’s say in terms of the new construction of the project and then whether it actually becomes surplus is depending on so many factors as well what are the highway budgets in those future years and is as that equipment redeployed or is it truly surplus? You know the more money that is spent on infrastructure projects globally works to our average advantage for sure but in a short-term basis, if budgets were to shrink drastically then you’d also see a short-term win because people might be reducing their fleet sizes. So I guess we could benefit from both sides Gary, to be honest.

And then I promise, one last question; where do you stand in China right now? Can you fill us in on what’s going on there?

We’re continuing to develop our existence in China and develop relationships with government officials and find our way; wade through the maze of the bureaucracy that exists there. As you may be familiar, there’s no real law in China yet that governs many activities that are out there and that includes the auction industry. So for us to think that tomorrow we’re going to have an auction sale there would be a stretch. But we continually meet with government officials that are involved in the creation of auction law, importation of used-equipment laws, warranties that sort of thing do develop what we believe is the right path. And it’s a very tricky path to go down because you can’t go to the Chinese government as one entity. You have to find a group of you to go together because you can more positively influence them if they see that it’s good for the group as opposed to good for one individual. So it’s an ongoing process. It’s slow and we’re going to continually pursue it.

Thank you.

Thank you. Our next question is a follow-up question from the line of James Gentile. Please proceed with your question.

I just have one question about your fourth-quarter guidance. For the top line usually your fourth quarter is seasonally strongest over the last years it’s matched the June number by a pretty sizeable margin. I was wondering if perhaps you can give us the schedule. Are there any scheduling issues pushing auctions into 1Q ’06 perhaps that is pushing the top line down, or was June ’05 just an extraordinary quarter on the gross auction sales line?

I would say, this is Randy, that Q2 was extraordinary. I would also say that again we’re not really carefully focused on this quarters and it’s really tough to respond because the business is so complex in terms of what causes people to make their decisions and then later on top of that our momentum which is overriding a very tight current marketplace. And if you talk to anyone in the equipment industry today that deals with both new and used but more so the used product, they will quite consistently tell you short supply, short supply, can’t get enough, can’t get enough. And so we’re operating in that same environment in yet still being able to increase our numbers and I’ll go back to my earlier comments that relate to very strong markets can sometimes have the effect of causing people to make early decisions to take advantage of the market and we see that quite regularly in the dispersal side. We handle lots of retirement business. There will be a very significant event this week in Grand Prairie of that kind of ilk. And it is—I don’t have anything more scientific to tell you.

I just wondered—I think there has been some lumpiness just due to scheduling; I was just wondering if there were any meaningful shifts in the calendar, that’s all.

No.

Operator I think we have time for one more question.

Thank you, it comes from the line of Robert Simpson. Please proceed with your question.

Hey guys just to follow up; any impact either in this quarter or anticipated in the near term from the hurricanes? Thanks.

Not really, no. First of all none of our facilities sustained any damage. We had very little impact on our personnel.

One guy lost a garage; that was about it. So we’re lucky there.

But it adds to the environment where equipment is in demand. It’s needed for the clean-up and recovery efforts so it doesn’t hurt the pricing at the auctions. It’s just one more drop in the bucket that adds to strong demand.

It’s just another factor of change Bruce and you know we’ve talked before in the past about change drives the business so whether it’s an increase or decrease in our respect it doesn’t matter. We’re in the middle and we’re trying to manage and be that marketplace to be an efficient guide to fuel that change or to handle on the way through so a hurricane, there’s lots of huge drama around it and a lot of people displaced and all the heartache around that stuff. From our perspective it doesn’t end up being a dramatic win or a dramatic loss. It’s just part of the things that we do every day in dealing with change.

Okay, but it doesn’t sound like in September or October you saw material changes in either supply or pricing in the gulf auction sites like Fort Worth?

No.

Okay, thanks.

Okay operator on that note we should close the call. We thank all of you for your questions and your interest and we’ll look forward to producing some results for the fourth quarter and we’ll speak to you again in February. Thank you very much.

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.