RB Global Inc (RBA) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ritchie Bros. Auctioneers fourth-quarter 2005 earning call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded, Wednesday, February 22, 2006. I would now like to turn the conference over to Mr. Peter Blake, Chief Executive Officer. Please go ahead, sir.

Thank you, and good morning. Welcome to the Ritchie Bros. Auctioneers Incorporated investor conference call for the year-ended December 31, 2005. I am Peter Blake, CEO of Ritchie Bros. Joining me today on the call are Randy Wall, our President of Canada, Europe, the Middle East; Bob Armstrong, Vice President Finance and CFO; and Jeremy Black, our Senior Manager of Finance.

We will spend about 20 minutes today talking about our results for the year ended December 31, 2005 and then we will open it up for questions. Bob and I are currently in Orlando, Florida, where we are in the middle of an incredible five-day auction sell with over 5,000 lots being sold and Randy is presently en route to Buxton, North Dakota for our first agricultural auction of the year with the new staff joining us from the Biliske team. Before we get started I'd like to make the Safe Harbor statement.

The following discussion will include forward-looking statements as defined by the SEC rules and regulations. Comments that are not statements of fact are considered forward-looking statements. And include comments about projected future results and performance, growth initiatives, property development plans, and others. Our actual results may differ materially from those projected in this discussion. Additional information concerning factors that could cause such a difference is included in our periodic filings, including our MD&A for year ended December 31, 2005 which are available on our website at rbauction.com and on the SEC and SEDAR websites.

In this call we will be talking about gross auction sales. As a reminder gross auction sales are the total proceeds from all items sold at company auctions. It is not a measure of revenue and is not presented in our statement of operations. Auction revenues are the revenue earned by Ritchie Bros. and are composed of among other things the commission we earn on the sale of consigned assets and the net profit or loss on the sale of equipment that we occasionally purchase. I will make a few remarks about our overall performance before I pass the call over to Randy to talk about our property and development initiatives. Bob and Jeremy will then give you a financial overview before I conclude on the call and open it up to questions.

2005 proved to be an amazing year for Ritchie Bros. With gross auction sales of over $2 billion, 17$ ahead of 2004, our expectations were exceeded. We have been growing at a rapid pace over the last several years, more quickly than we expected frankly. Throughout this time, though, we have remained committed to providing the very best customer service and building long-lasting customer relationships based on trust and integrity. This commitment is an important part of our culture and it's more than just words to us. It is something that we have been working hard to maintain in the face of growth as we add people to our team, add auction sites, and extend our geographic reach. As we grow our company, we remain dedicated to two very simple objectives, maintain our culture and grow our earnings. Our view is that if we don't achieve the first objective, we won't be successful with a second. Our culture is all about doing what's right and maintaining the highest level of business integrity. Not surprisingly, this leads to stronger customer relationships, and that has been and will always be the cornerstone of our growth.

Our commitment to these core values was one of the factors that enabled us to exceed our earnings growth expectations in 2005. Most equipment markets were very tight in 2005, our customers were busy, and equipment manufacturers had a tough time keeping up with demand. Most would agree that the type of environment we experienced in 2005 should have been more -- should have been a more difficult one for Ritchie Bros. to grow in. If everyone is working and there's less equipment changing hands and therefore less equipment being sold through all channels be it by auction, through dealers, or by owners themselves. Yet we increased our sales by 17% and set volume records in 12 of our regions. We worked with more customers than ever before.

We believe this tells us that our growth came from an increase in our market share. Even though there is no objective data available, we reasonably conclude that in this tight equipment market, the greater number of those equipment owners that were selling chose to sell through Ritchie Bros. auctions.

We have often said that we are able to grow at all points of the economic cycle and our strong growth during this tight equipment market of 2005 was certainly proof of that. However, before we get ahead of ourselves, let me say we still believe that the 10% topline growth is our sustainable long-term average growth rate. While it will be a real challenge for us to achieve 10% sales growth on the heels of growth we have just seen in recent periods, we are going to do our very best to achieve it.

Before I hand the call back to Randy -- over to Randy, I want to give you a brief update on our Mission 2007 initiatives. As you may recall, the purpose of this initiative which we call MO7 is to develop more efficient, effective, and scalable processes to enable us to achieve our growth objectives. We made significant progress in 2005, and so far in 2006, that progress has continued. We are well on our way to implementing Phase I of our Oracle enterprise resource planning system and are setting the table for further phases of Oracle and our inhouse developed Ritchie Bros. operating system which we like to call our special sauce.

Other examples of the projects that have been germinated by MO7 initiatives include an overall of our employee compensation systems, new auction site policies and procedures, new reporting structures, and enhanced training programs for our sales, management, and operations staff investing in growing our own people. We are excited about the changes being made as part of MO7, and we are particularly excited by the positive reaction to these changes that we are seeing throughout our company. Because we have been growing steadily for the past 40 years, change has become part of our genetic make-up. I think this is why all the MO7 changes we are rolling out are being so well received throughout the Company. We fully expect to have challenges along the way and the Oracle implementation like any new software implementation will no doubt create some stress, but we'll meet these challenges and I fully expect us to come out the other side a better company. One that is poised to continue to take advantage of our dominant and growing market condition.

And now over to Randy, whose new title reflects one of these MO7 related changes we have made. Randy and Rob Mackay are now both Presidents dividing our world roughly in half. Randy has responsibility for all operations in Canada, Europe, the Middle East, Africa and part of southeast Asia. Plus very importantly, he assumes the main responsibility for us to acquire and build our permanent auction site network. While Rob has responsibility for United States, Central and South America, Australia, and the remainder of Asia plus, again, importantly, he assumes a more direct connection to many of our MO7 initiatives that impact auction site operations. The job descriptions haven't changed dramatically but their new titles reflect their significant responsibilities, and they will likely alternate in participating on these quarterly quarter end calls as we move forward. Now Randy, over to you.

Thanks, Pete. And good morning, everybody. We have talked previously about our accelerated capital expenditure program, and I am happy to report that we have made significant advances in this regard in 2005. As a reminder, we announced on a prior conference call that our Board has endorsed a $250 million program over the next five years to build the foundation for our long-term growth well into the future. The bulk of these funds will be invested in land and buildings as we expand our International network of auction sites.

We were able to make a quick jump on this program in 2005 and we acquired a number of properties on which we intend to build permanent auction sites. We have talked in the past about Nashville, Tennessee and I am pleased to report that our local team recently moved into this new facility and is preparing for its inaugural sale on the 23rd of March of this year. We are now moving dirt on our new property in Denver. And we are finalizing development approvals in Houston. We expect to have these new permanent auction sites open in late 2006 and later in 2007 respectively. These new properties are much larger than our existing sites in those locations and they will provide us with significant additional capacity.

On the agricultural side, our recent acquisition of the assets and auction business of Dennis Biliske Auctioneers has provided us with a new facility in Buxton, North Dakota and we have an excellent piece of land in Saskatoon, Saskatchewan on which we intend to build a modest permanent auction site focused on agricultural equipment sales. We expect to be holding auctions on this site later in 2006.

I am also happy to report that we have finally negotiated the regulatory maze in Ohio, and we expect to close very soon on 137-acre parcel of land on Interstate 70 near Springfield, Ohio. This site is being fast tracked and once we have closed we will be going to tender with a construction contract soon thereafter. With hopes of being up and running in that Springfield site in 2007. We are continuing our search for suitable property in the New England area as well as in several other areas in the United States and in Europe. At present, we have only one permanent auction site and two regional auction sites in Europe. There is tremendous opportunity in that part of the world, and I am confident that we can find suitable properties in several countries, most likely starting with France, Italy, the UK, and Spain.

Closely linked to the expansion of our auction network is our goal of increasing the geographic scope of our operations. Before Jeremy gives you the financial update, I want to comment briefly on some of the people we added in new regions in 2005.

Of particular note, we appointed territory managers in Finland, Poland, and Switzerland during the past year. We currently do approximately 10% of our gross auction sales volume in Europe. Most industry observer would say agree that the equipment population in the European Union is roughly equivalent in size to that of the United States where we generated almost 60% of our 2005 gross auction sales. With time, we believe there is an equivalent opportunity for Ritchie Bros. in Europe. This is why we are looking to invest in auction sites and add people in Europe now.

We continue to expect that most of our growth over the next five years will come from the United States and Europe. We have good capacity in the United States, but we have not yet provided a strong network of European auction sites to support the efforts of our European team. We have watched our unreserved auctions grow in popularity in Europe, just as they have done in North America. So we are excited to be planning further expansion in this market. Now over to Jeremy.

Thanks, Randy, and good morning, everyone. Hope you all have even our earnings release this morning. I'll also draw your attention to our MD&A and audited financial statements which we filed this morning and are available on the SEC website. The numbers that form the basis of our discussion today are included in our earnings release and annual filings. All dollar amounts referred to on this call and in our press release and securities filings are stated in U.S. dollars.

As Peter mentioned we achieved gross auction sales of $2.09 billion in 2005, for 17% higher than our gross auction sales in 2004. Our fourth-quarter gross auction sales were 590 million, well ahead of our expectations for the quarter. The strong growth that we experienced in the first part of the year in the U.S. and Canada continued unabated in Q4, and the momentum generated by some of our auctions surprised us. This explains our performance ahead of our expectations. One example of this momentum would be the $47 million Canadian auction in Grand Prairie Alberta in November.

If someone had told us even a couple of months earlier that we would be celebrating our largest-ever Canadian auction in November in Grand Prairie, we would have not believed them, but our team in Alberta worked hard to build a good sale and once the core of the sale was in place, the auction developed its own momentum. It was a series of auctions like this that led us to a much stronger fourth quarter than we had been expecting. It was a great way to finish off the year.

Our Canadian results in 2005 included gross auction sales of about 75 million from the 99 unreserved agricultural auctions we held during the year. This compares to just over 45 million from 93 agricultural auctions in 2004. Auction revenues were 212.6 million for 2005, which was about 17% ahead of 2004. Our auction revenue rate for 2005 was 10.16% for the year which was pretty close to the 10.19% rate we experienced in 2004 and only slightly above the top end of our expected range. Both our straight commission and underwritten business performed well in 2005 with the underwritten business being responsible for the better-than-expected performance.

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 1.29% of gross auction sales for 2005 which is virtually unchanged from the 1.31% rate we experienced in 2004. General, and administrative expenses were 94.7 million in 2005, this was about 10% ahead of our 2004 G&A. The biggest single factor affecting our G&A in 2005 compared to 2004 was the growth of our business, including the addition of employees to our team. Our labor costs, including salaries, benefits, stock compensation expenses, and employee performance bonuses represented just over 60% of our total G&A expenses in 2005.

While I am talking about our employee base, I will tell that you our total employee account at December 31, '05 was 670 people including a sales force of 211. These numbers are up from 615 and 198 at December 31, '04 respectively. These are increases of 10% and 7% respectively reflecting our ongoing infrastructure investments.

We believe that the best way to think about our G&A is as a percentage of our annual gross auction sales. In 2005, our G&A ended up being 4.5% of gross auction sales which was slightly better than the rate of 4.8% that we experienced in 2004. Our G&A reflects a significant infrastructure expansion of recent years and the costs we have added to our system in order to provide increasing levels of customer service. The benefits of these additional expenditures include our ability to hold larger auctions, the increased capacity that we enjoy and our ability to achieve higher commission rates.

Our effective income tax rate for 2005 was 35%, which compares to 40% in 2004. Excluding nonrecurring tax charges in 2004, our income tax rate would have been approximately 37% last year. Our net earnings for 2004 were 53.6 million and our diluted net earnings per share were $1.54. This figure includes after tax gains of 4.1 million recorded on the sale of excess property in 2005. If we exclude these gains which we don't really consider part of our ongoing operations our net earnings would have been 49.5 million or $1.43 per diluted share in 2005. Excluding the impact of nonrecurring income tax charges, net earnings for 2004 would have been 37 million or $1.07 per diluted share. Strong gross auction sales growth combined with lower direct expense, G&A and income tax rates contributed to the increase in earnings in 2005.

Before I pass the call to Bob to talk about our guidance for 2006, I would like to talk briefly about our CapEx in 2005. Overall, our CapEx, including maintenance CapEx was 42.7 million which is higher than the updated guidance that we provided at the end of Q3 but in line with our expectation that we would increase our spending on new and replacement auction sites as suitable acquisitions were identified. The largest expenditures in 2005 were related to the completion of work on our new permanent auction site in Sacramento, California and the construction of our new permanent auction site in Nashville, Tennessee. We also spent about 13 million acquiring land in Denver, Houston, and Saskatoon, Saskatchewan. Going forward, over the next five years, we are expecting CapEx including maintenance CapEx to average approximately 50 million per year, depending on our success in identifying and acquiring properties suitable for the construction of new auction sites.

One last thing before I pass the call to Bob. During January, our Board of Directors declared another quarterly cash dividend of $0.18 per share payable on March 17, to shareholders of record on February 24. Total amount we expect to pay out for this dividend is around $6.2 million. Now over to Bob.

Thanks, Jeremy and good morning. I would like to start by talking about some changes we are making regarding our financial guidance. In the past, we have provided more detailed guidance than many other companies and while we intend to continue providing guidance to help the investment community understand and follow our company we are changing the level of detail we provide. Given the inherent lumpiness and event driven nature of our business we believe it is most appropriate to talk about the longer term and to avoid focusing on 90-day periods. Having said that, we will still talk about our quarterly expectations for gross auction sales but we know and you know that it is not possible to predict our quarterly auction revenue rate with any accuracy.

Our strategies and growth initiatives are all geared towards achieving and maintaining average top line growth of 10% and average bottom line growth of 15%. We have had this as a target for several years and it continues to be our target. I'm careful here to use the word target and not forecast. And it's a targeted average growth rate. If you look over the past five years you'll see earnings growth of 28%, 25%, 33%, 1%, and then last year 34%. It has been strong, but it's volatile. In 2006, we are following a tough comp so I wouldn't expect 15% earnings growth this year. We are still targeting an average annual earnings growth rate of 15%, but in any given year it could easily be higher or lower than that depending largely on growth auction sales volumes and our auction revenue rate.

Gross auction sales in 2005 were just shy of 2.1 billion which was 17% ahead of 2004. We were surprised by the strong performance, especially in light of the tight equipment market. When we went out to our regional managers for their 2006 forecast, I was expecting a growth forecast of less than 10%. But our guys are expecting another strong year. Feedback from the field suggests that gross auction sales in 2006 will be about 10% ahead of 2005, putting our expectations for the full year in the range of 2.3 billion. Breaking down a quarter is always a challenge but I'd expect sales of at least $500 million in the first quarter.

We continue to believe that our sustainable auction revenue rate is in the range of 9.5 and 10%. But we have learned through experience that our actual auction revenue rate can't be predicted with any accuracy on a quarterly basis. As I mentioned earlier, we remain focused on achieving an average earnings growth rate of 15%; however, there are two factors that will likely see a lower growth rate in 2006.

First is the tough comp. Even flat earnings in 2006 will provide an average of 15% when combined with 2005 growth. Second are some incremental new G&A expenditures that we think will add 3 to $4 million to our G&A in '06. Our MO7 initiatives are starting to roll out in earnest and the first tangible step is an Oracle ERP implementation that is scheduled for deployment in 2006. This will result in increased G&A expenses, primarily personnel but is expected to contribute to our operating leverage in the future. So while our operating leverage will suffer a bit in 2006, our expectation is that the Oracle and other MO7 initiatives will ultimately allow us to continue growing our sales and earnings with the same operating leverage we have enjoyed in recent periods.

Also impacting G&A in 2006 are several changes to our incentive programs for our sales and administrative personnel. In response to our analysis of the market and an employee satisfaction survey conducted last year, we have retooled a number of our compensation programs. We have improved the retirement planning tools available to our staff. We have increased the employer contribution portion of our employee stock purchase plan for long-serving employees. And most significantly, we have enhanced the incentive component of our sales force compensation.

Our sales force has always been compensated on a salary plus bonus basis, not a commission basis, and that is not changing; however, we wanted to add clarity and some predictability for our sales force and the changes have been very well received. Our new compensation structure will provide excellent bonuses for the home run hitters and lower bonuses for the guys who don't live up to expectations. A large portion of their bonuses will still be tied to nonvolume factors because our account share and our standards for customer service depend on teamwork. However, we have increased the incentive opportunity for our sales personnel who have great years.

Taking into account the additional MO7 and employee compensation expenditures and some increased appreciation related to new properties, we expect that earnings growth in 2006 will be probably be closer to 10% than 15%. Once MO7 has wound its way through the system, we would expect to return to our 10% topline and 15% bottom line target. In fact MO7 remains a key part of our strategy to achieving that operating leverage in the future.

One new piece of information I will provide today is the pretax earnings target that our compensation committee has set for us. The target is 82.5 million, and it represents the level of pretax income we need to reach before the base level of our executive bonus pool is earned. It is also relevant factor for some of our revised employee compensation programs. Of importance to you is that if this target is not reached, our executive and employee bonus accruals will be ground down. And if the target is exceeded, the bonus pools will be increased. This serves as a bit of a self-correcting mechanism on our G&A, but it is not too dramatic as incentive compensation is still a fairly small part of our total expenditures.

Even if we -- even if actual earnings are significantly over or under this pretax earnings target, it is unlikely that bonus accrual changes would have more than a 2 or $3 million impact on G&A over the course of the full year. I need to stress that this pretax target is just that, it's a target and not a forecast. And I am being very careful to make this distinction as it would be a mistake for to you think that this is our forecast for the year. It is simply the target that our compensation committee has set for bonus purposes. And now I'll pass the call back over to Peter.

Thanks, Bob. One more topic that I would like to mention before I open the call for questions is a recent change to our Board of Directors. Ed Moll has informed us that he intends to retire from the Board and does not intend to stand for re-election at our annual general meeting of shareholders in April. Mr. Moll is in his mid-70s and has been a dedicated member of our Board and Chairman of our audit committee since 1997. He has made a great contribution to the Company over the years and we thank him for that and wish him well in his future. At our Board meeting this week Bob Murdoch was appointed to the Board effective February 20, 2006. Mr. Murdoch brings extensive experience to his new role with the Company. He was the President and CEO of Lafarge Corporation and remains a Director of that company. He is also a member of the International Advisory Board of Lafarge Corporation 's majority shareholder Lafarge S.A. Paris as well as a Director of Sierra Systems Group, Inc., Lemond Inc. and Timber West Forest Corp. We are very pleased to have Bob join our Board.

Now I will recap the main points that we have covered off in the call. We had a banner year in 2005 breaking many regional records and ending the year with gross auction sales of over $2 billion, a 17% increase compared to 2004. In spite of our more rapid than expected growth over the last several years we have not lost sight of our core values and we remain dedicated to the same principle of doing what is right and maintaining the highest level of integrity, building enduring customer relationships. These are the values that we expect will help us grow in the future.

We have made good progress on our five-year, $250 million CapEx program and are opening soon in Nashville, building in Denver, and Houston, getting ready to close in Springfield, Ohio and are actively pursuing opportunities in Europe. In 2006, we are forecasting gross auction sales in the range of $2.3 billion for the year which is in line with our long-term expectation of 10% topline growth. We expect earnings growth that will be closer to 10% in 2006 than our long-term earnings growth rate of 15%, but reasonable considering that the much better than expected earnings growth rate for the last several years. And finally, we are pleased to welcome a new independent director to our Board. We'd be happy to answer any questions that you have. So would you please begin the question period?

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Bert Powell from BMO. Please proceed with your question.

Thanks. Peter, when you talked about the market being tight for you guys this year and should have been a bad market yet you grew because of market share. Have you seen that change a little bit towards the end of the year? I mean we've got a lot of new equipment went out this year, interest rates are a little bit higher. Are you seeing the average age of equipment go up? Are you seeing things a little bit freer than perhaps in maybe the second half of last quarter than you saw in the first part of 2005?

Yes, Bert, it is Peter here and I will invite Rob Mackay or Randy Wall to -- Rob is here in Orlando with us as well. From my perspective and from what we understand of the marketplace in talking to our customers, it's still quite a long lead time in many of the product categories that the guys are looking for. Tires are still an issue in terms of their availability, so I don't think that there's been a loosening up certainly of supply to the latter half of the year. We haven't seen much other than continued strength in equipment prices.

We are not really certain we are going to see a whole massive rise this year certainly and I know the OEMs are working hard to catch up on their lead times, but overall, I think the age of the equipment that we are seeing has not changed that dramatically, still finding near new equipment very hard to come by and when you do come by it, the prices are very firm. So maybe Robert or Randy you might have a comment. Rob, maybe first.

We are starting to see a little bit of a change in the market. Those manufacturers out there that were outsourcing a lot of the product that goes into their -- their manufactured products are starting to get more inventory to the products than others. Those that outsource parts and components of the machines are still lagging behind, but there is a slow catch-up that is occurring there. As we look around the country in the U.S., we see various pockets where that is maybe a little more prominent than others, but for sure, in our crystal ball during '06, late model equipment is going to be in big demand. Contractors look for that because manufacturers manage to get in a couple of price increases. So there's a bit of price sensitivity there when looking for new equipment, and it forces more of them to even go into the late-model market.

Randy, any comment?

You guys have covered it all pretty well. I think it is well said. Not a whole lot of significant change in Q4 from my perspective. But we are keeping our eye close to the dynamics as 2006 unfolds.

So '05 was pretty much a market share gain story?

We believe that, Bert. We are getting more customers. We are selling more equipment. Of course, the volumes of sales and the bottom line is going up. These guys have an opportunity or they have a choice of choosing a distribution channel when they need to market their equipment, and the more people that we gain, the more exposure that we get, that momentum that we've always talked about over the last several years just continues to steam ahead in our favor and we are trying to pay attention to the simple basics of our business and it's customer service-oriented and making sure that we are responsible in doing what we do in committing risks in terms of risk deals, building out our permanent site network and making sure that we are doing it right by getting high exposure on proper high-end freeways. As I talk to you I stare out over the I-4 in Orlando and cars stream by here every day and they look at this massive fleet of iron that we have on the market and being auctioned over the next few days. Those are the kinds of things that just help you penetrate the market more and deeper, and we still think that the market is huge and we are just a tiny player. And although we are dominant, there is lots of room for us to keep growing.

Okay. Bob, just on the incentive changes, when were those -- or when are those effective.

Bert, most of them are effective January 1, of this year. A couple of them kick in April of this year. The effect is essentially a full-year 2006 effect.

Okay. If I go back to the guidance that you guys talked about for G&A for this quarter -- or sorry, for this year, relative to what you reported given the exceptional quarter you guys posted in terms of gross auction sales, the delta looks like it is about 2.3 million. Is that all incentive-based compensation that was in there for this quarter that took the number up to where we see it at the end of the year.

That's incredible. You are talking about Q4.

Yes, I am talking about Q4. The last -- I think the guidance for -- the G&A for this year was kind of 92 million. That was based initially on 500 million for gross auction sales. Clearly the fourth quarter was better than that. And the -- which would apply I think the G&A for the quarter of kind of 24. And it looks like we are 26 and a bit. So the delta over the initial guidance is 2.3. Just trying to figure out how much of that is just -- well, we had a great year, our accruals were under 4 instead of base compensation in this quarter. Is that all the delta on -- off of the initial guidance?

Thanks. I understand your question now. So I'll go back, my first answer, it's when the new compensation programs kick in, the new things that I talked about in my portion of the call, they are the '06 related programs. The answer to your question about '04 though -- or '05, excuse me, Q4 of '05, you are pretty darn close to the answer. You are right. The biggest swing, the biggest variable from expectations of Q4 G&A has to do with compensation programs, these are the old '05 programs. In the fourth quarter, sales and volumes were far ahead of expectations, that lifted up our expectations for the full year and as has happened in the past, that triggered increased bonus accruals for executive and employee bonus pools and that happened in Q4, the effect was felt in Q4.

So there is nothing in there that related to MO7 kind of stuff that was higher than expected? It was all incentive-based comp.

Primarily incentive-based comp if there was an MO7 affect it was insignificant.

Okay. Looking ahead to '06, I think the guidance prior was kind of 97 million. You have now said 3 or 4 higher because of M07 kind of stuff which would put us 100, 101 for the year and that includes the changes in the incentive-based compensation kind of stuff. What do you expect in terms of your Oracle expenditures? Is that going to be skewed more in kind of a big step up in Q1 or is that going to kind of trickle in over the year?

I need to back you up a little bit. I think you have misinterpreted what I tried to say about G&A.

Okay, good.

I actually didn't give a G&A guidance number, but I did indicate that there were incremental new expenditures which would be on top of any just typical standard G&A growth, incremental in the range of 3 to 4 million. So whatever kind of G&A growth we might have just through the regular expansion of our business, and hiring new people, and regular salary increases, and that kind of stuff. We are saying that on top of that there's probably another 3 to 4 million and this is in fact the answer to the second part of your question. That's our estimate of what we think these new incentive programs plus all the new MO7 and Oracle infrastructure that is hitting -- hitting us this year. We think that is what the incremental hit will be in '06.

Okay. And the guidance that you had given for G&A for '06 on the last call was 97 million?

Okay.

So is that -- is that still a valid number?

[Multiple speakers] -- guidance going forward so -- we are focusing more on the bottom line on this but I am suggesting from whatever it might have otherwise been, we are saying there is 3 or 4 more and that's not -- I'm not providing any relationship to the 97 that we would have talked up previously.

Okay. So the new kind of guidance structure, we just throw that out.

Okay. [ LAUGHTER ]

Okay. Last question and I will ask somebody else to answer. Is just -- for tax rate going forward, what's the expectation?

We have about a 35% this past year. And -- the tax rate is also another thing that we have found tough to predict because it's so dependent on where we end up earning our income. But there's no reason to think that 35 is a bad number to use going forward but we have learned and you have seen that it could be higher or lower so again we are trying to -- we are not going to stick our neck out and pick a number because we just don't know where the income is going to be earned. So you won't be far off -- the range of around 35 is probably a very reasonable assumption for that.

Okay. All right, thanks a lot.

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

Good morning, guys.

Good morning.

I won't ask you if you are sandbagging anymore because sounds like you have got some good targets for '06. Simpler question. What was your salespeople count at the end of the year?

I think it was 211.

I am sorry, 211?

Yes.

What are your hiring plans for the year?

It is the same -- maybe I will let Rob and Randy answer that because they are directly operational focused guidance here so.

Ben, it is Randy. Same answer as in previous quarters and years. We continue to have a need in many markets. We continue to be focused, however, on identifying and recruiting quality staff. We don't want a repeat of five, six years ago where we had a ramp-up in bodies but not of production. We are north of $10 million in sales head in productivity now. We want to endeavor to maintain that strong showing. So you will probably see somewhere in the growth similar in '06 as what we saw in '05. We are not targeting to a particular body count other than find good people and get them on board.

Okay. Actually Randy, you spoke to another issue I wanted to raise, and that -- I don't want to look too much in the past here, but the last time you guys had an accelerated CapEx plan, I guess that was four or five years ago, I remember you had your SG&A increase considerably in earnings. In fact I think they dropped. It sounds like this time around you are sort of setting the stage for something similar, which is -- which makes sense to me, but at the same time, sounds like you are also doing things a little bit differently. Maybe you can just elaborate on the second part of that comment and what you learned from the last expansion you went through and how you think you can manage this one more carefully?

Okay, Ben, I will take a stab and then you guy can have a go at it. First and foremost, we are starting to benefit and have been benefitting from that investment already. In other words, those previous investments have filled our pipeline and in some cases these sites are just now really starting to benefit us so the pipeline effect and production is hitting the income stream now. The guys are in Orlando, and that is looking to be a tremendous auction this week, and that's one -- just one example. That site opened two, three years ago, and I think that we will be -- I don't expect to see as significant a change as we had last time because the pipeline is fuller and producing benefits. Many of the sites that we are identifying now we've been looking at and trying to get projects underway anyway over the last two and three years, and we are seeing as a result of some of that work that we are able to see success in getting projects on stream coming at us in the next two years whereas before we were -- it took a while to get this momentum going, to find these sites, and for sure, we've got good visibility into these markets, and we are planning on putting these investments where there is going to be very, very good returns. Maybe Pete or Bob, if you have got anything to add to that.

I'd like to add one thing and that is looking back to the period you refer to Ben in the past where our earnings growth slowed down and even went negative for a bit. I think the biggest factor there was the declining sales growth rate. We had sales growth less than 10%, I think it was 4, 5, 6% for tow or three years in row. That happened to coincide with the increases in infrastructure spending and increases in G&A and I am not sure that it was really causal. It happened at the same time and I remember talking at the time saying, oh, shoot, if only our sales had grown at its usual pace during that period we wouldn't even have to have these conversations. But the truth is our sales were soft, sales growth was softer than usual at exactly the same time that we were consciously spending more money and I believe that was the perfect storm that caused the problem there. I sense in your question perhaps a causal thing. I would agree with Randy. If there is any causality, it's that the spending we believe will help trigger additional auction sales in the future.

Okay. That makes sense to me. Finally, Again, I guess, just going -- looking back a little bit. For the longest time I can remember you guys have targeted that 10% gross auction sales growth, 15% earnings growth. But over the years, a lot has changed. You have implemented this Internet technology which you presumably didn't see when you first went public. You got into a number of other product lines. You have done some acquisitions. You are getting into Ag auctions and all of this.

My question would be do you think that -- do you think -- do you think you should -- have you ever considered revisiting that 10% gross auction sales growth in light of all of these changes? I mean if I do the math, that takes you to about $6 billion within ten years. One could draw a scenario. You guys have talked before how your relative share in Canada versus the U.S. could get you 3 billion alone in the U.S. over time. I mean, no reason why you couldn't do the same in Europe. Do you think that you may have the potential here to do more than that over the long term?

It's Pete and there is always potential and I think we are well positioned in the market to be able to take advantage of if there is faster growth to be had for sure. I think as we sit today, the way that we operate the business is very methodical and very principled in terms of how we would like to add people, the fundamental ways we add sales to the top line are adding sites and adding guys. So we are quite methodical in the way we bring these guys in because if you hire too quickly, you dilute the quality of service that you are providing your customers so we are pretty principled about that.

But at the same time, you are right. You look over the past few years and the Internet thing has been great for us, it's allowed us to really effectively increase our auction revenue rate and you think if you look back over prior years, our rate used to be 8.8% and now we're 9.5 to 10% and a couple of structural pricing increases through that mix but a couple of guidance increases through the mix as well. And the Internet being the primary reason why that number has firmed up some, because it took the bottom out of a lot of the potential grief that you would get at an option because of the wider bidding audience. So with all that stuff combined, I am feeling pretty good about the Company. I think we are well-positioned, we have got an amazing group of guys and all the good things around it. So Dave is handing off a pretty nice package to the rest of us guys to carry on and build it. But if we can grow it faster than 10%, we are not going to certainly say no, but at the same time, we are trying to work within what we believe to be the right strategy.

Do you think it's more -- do you think it is more likely you can grow faster than 10% now without maybe changing that target explicitly? I mean the way the business has evolved I'm assuming you wouldn't have foreseen a lot of that and yet you sort of stuck with the same targets. It seems to me that it is more realistic that you could have a number that is higher than that over time the way the business has gone for you and the way that -- the kind of changes you have implemented.

We try to keep it on a long-term view and a long-term average basis. And today we sit at 2 billion, and you mentioned the $6 billion number and that is a great number to shoot for and everything that we do every year continues to build that momentum to get more distribution share -- share of the distribution channel I guess if you want to call it that. So you obviously never say never but I think we are trying to give you guys realistic and what we believe to be achievable guidance on the way through in terms of earnings and top line and sure we revisit that number and we look at the -- in the context of competitive and market and share and all of those other things that you try to make intelligent decisions around, and ultimately, we are going to do everything that we can to make sure we grow it and if it goes higher, than that's great. Is there a chance of upside? Sure, absolutely, but we are trying to deliver what we think is meaningful and achievable targets for the market.

Okay, thanks very much.

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

Hey, I just have a quick question. I notice that you took on some long-term debt probably from the acquisition of the plots of land in Denver and in Houston. What is the weighted average cost of debt associated with the borrowing?

James, it's Bob. We actually didn't take on any new debt. We have less long term debt than before, but we refinanced the existing debt. I think what you are probably seeing is a movement of current long-term debt to long term so just a refinancing.

Okay. I got you.

Sorry about that.

No worries. Did you get -- did you fix it or is it floating?

Almost all of it is fixed over five years. The bulk of it is sitting at 5.61% and a bit of it is at 4.42%. I am just reading from the financials that are just -- I think just hit the SEC website today.

Good, thanks.

Thank you. Our next question comes from the line of Avi Dalfen from Blackmont Capital.

If we look at the big picture, what is really driving the market share gain. If it is largely exposure as you indicated earlier, perhaps you would you achieve even better market share gains by spending more on advertising. And, yes, you talked about the Internet. Clearly when you started the Internet bidding, you didn't expect to see a lot of your customers bidding on the Internet, and I think at the time you thought it would be more of a fringe market. Clearly the advance of technology has changed that, but I mean is that playing the big role here? Or is there something else going on?

Obviously, it's Pete, -- I don't think it would be -- it would be a tough thing to try to isolate just one thing that is going on. I think -- we have been doing this for 40 years and the level of integrity and customer relationships that you have to have in order to gain the trust of people to bring this equipment to an unreserved auction sale, it doesn't happen overnight and it is continuous. It is methodical. If you put your reputation and integrity on line every day that's what's built the Company and the momentum that we are experiencing is good. So market share goes where it goes. We still think of 2 billion of 100 billion, there's lots of room for us to grow that share if you want to call it. Ultimately the way we look at the business is you look at a customer who owns equipment and he has a choice. He has a choice if he needs to sell it. It's his determination when he needs to sell it. We are not going to create that determination. The market will help him decide that in terms of what is going on, his personal circumstances. Lots of reasons why somebody wants to seel equipment. But when that guy is ready to sell, he has a choice and we have to make sure that we're involved in that decision by creating a relationship with him so that he knows us, and he trusts us, and he likes us.

But given all of that and certainly with the advance of the technology, I mean, doesn't it make sense that you are going to get more bang for your buck by advertising what you have achieved and your reputation rather than spending more capital to grow the business?

It's Bob. I have got two thoughts and I will hit my background comment first and then I will try and answer your question directly. My background thought is one of the reasons we are doing well, having good growth, momentum et cetera is in fact a trend that we've talked about before in the marketplace towards more transparency, more information being out there, more efficiency in the marketplace. We had a cocktail party last night for all the guys we had here and I was talking to a number of the folks there, many of whom said, there are no bargains at the auction anymore. And they were complaining if they were dealers and they were excited if they were sellers. What they are telling me is that everybody has information these days. It's a complete turnaround in the marketplace from where we were five years ago. Certainly ten years ago. People are just looking for the most efficient way to exchange their goods. We offer a marketplace where buyers and sellers can get together. It's more efficient than other channels and that in itself I believe is attracting volume just like a stock market.

Exactly. So again, given that model, you probably need less physical locations.

Hang on a second. I have not answered your question still. Your question was -- given all that, wouldn't it make sense to spend more marketing. What I didn't give you in my story there was to get someone to consign to our sale in large numbers is still a relationship game, it's a relationship business. It's still an unreserved auction. People are still taking a risk albeit I believe a significantly lower risk than it might have been 10 years ago but they are still placing a bet with Ritchie Bros. They're still giving us their equipment and then going home and trusting that they will get the very best possible price for them and they will receive a check. It's a bit different than going to Starbucks and buying a latte. This is a really significant decision that people are making. They don't often make these decisions more than once or twice in their lifetime, and I agree with everything Peter said, the growth of this business still depends on us physically making relationships with people at least with the bigger contracts.

I am going to jump in here. It is Randy. Keep in mind that we have got somewhere in the guesstimated range of 2% global market share and equipment turn per year. That's tiny. And while marketing -- in fact, Avi, we are doing more marketing and that's included in our G&A and expenditures but it's this whole network effect and momentum that the guys have talked about and the relationship necessity to build and grow is critical and we are expanding into new geographic markets and into new sectors where they don't know us and where we are not in many cases the number one alternative. So we are not nearly to the level in our maturity growth. Where a focus on increasing marketing dollars would be the appropriate business driver at this point.

I'd like to just add to that guys, that in a way we are spending our marketing money by adding new territory managers in developed areas. And we have a mature market with six or seven or eight territory managers working in it in order to develop more business in that marketplace, we continued to -- to redesignate their territories and add another one or two or a number of territory managers into that. Those area managers go and do our marketing for us.

And the sourcing equipment?

It is all done at the same time.

Public relations.

Okay, thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from the line of Bruce Simpson from William Blair. Please proceed with your question.

Good morning, guys.

Good morning, Bruce.

Questions for Randy and Rob, and it has to do with where we are in terms of the total capacity utilization of existing facilities. It seems like a couple of years ago you used to say on an aggregate, you were probably only using about half of facilities. Now it obviously had tremendous growth, but at the same time, at least a little bit of incremental increase in the actual number of facilities. So if you had to look at those facilities that have been open a couple of years or more, are you getting at all above this 50% level? Do you feel like you are hitting capacity at major landmark sites? Even if you were to stop investing in new sites today, would you be able to grow for several years with the existing capacity?

Rob, you want to go first.

Sure. I don't think that at any of our sites that we are bumping anywhere near capacity. We do have events that occur at various auction sites that we own that test the ability of a facility on one -- maybe one auction a year. The other three auctions would not reach the full capacity or site at the yard. In those areas we have three or four sales a year that is pushing the capacity of the yards. We typically are pushing our guys in the field to add another auction sale to that facility. You may go from 3 to 4 to 4 to 5 or 5 to 6. So in the event that that facility is taxed by its sheer usable acreage we look to add another auction into the cycle of that division or that region.

That's right. A small thing to add to that is that as sites have become at their limitations being, for example, Denver and Houston where we have gone out ahead of the curve and invested in new to raise that up yet again. Many of the sites that we have run online in recent times we have not developed the entire acreage that we have owned and say Chicago would be a good one where -- that's probably about the right time to hard stand and develop additional acreage in that facility that we have been holding in reserve. So we still have lots of upside capacity built into the system today.

Okay. And tying that into a comment that was made during the main part of the call. You mentioned in addition to the existing sites. You have talked about the new sites opening in the United States. I think you said you are looking in New England and potentially other places in the US of A. So my question is, as you have been able to knock down development in places like Nashville and Southern Ohio and so forth, other than New England, do you have your sights set on other physical locations in the U.S. or should we expect simply replacement of existing auction sites in this country with larger sites.

Well, we do have our sights set on certain other markets within the U.S. that would be new facilities that are not replacements. We are not yet -- and they are included in our long-term CapEx plan that we have not disclosed or got to the point of providing any particular information on that yet.

Okay. So but I guess 2 to 4 new permanent sites per year. That is the target, isn't it?

Yes.

I would say, Bruce, it is probably in -- yes, maybe 2 to 4. You might have a year that's below that or above that. We are not going to be able to predict with certainty. They will come in bunches, they might come slowly but probably an average of 2 to 4 would be about right.

This is really targeted to Rob Mackay. Looking overseas into the emerging markets, are there any changes in real growth areas, East Asia, Latin America so forth? In terms of site development.

Not on the immediate horizon. We are looking at Australia, as potentially another facility down there. Could be in Sydney. Could be in Melbourne. We have a temporary site today in Melbourne that we rent and we are basically studying to see whether that is where we would look to put another facility or whether it be better put outside of Sydney somewhere. You would have to get a fair lease out of that city before you could afford any land.

Constantly looking at the market in Japan trying to ascertain a way to get in and play in a market that is highly competitive management of Japanese manufacturers themselves. Mexico, we have an off-site facility, a rented facility just outside Mexico City. We have got a big push on there with some more management power to our Mexican operations and possibly down the road you could see another site somewhere in Mexico but nothing on the drawing board immediately today. Randy, you may comment on the rest of the world.

Well, most of the rest of the world, we have -- we've given specific commentary to in Europe, and the only commentary that hasn't been added would be perhaps into Eastern Europe. We are looking at -- if land prices are interesting today in a market that we really believe we are willing to bet on in the future, we could get to a point of banking some property at a very cheap price in one of those marketplaces but we are studying that now.

Okay. So if we thought about -- if you really add two to four new sites over the next five years, that's sort of, let's say mid-teens total new site openings over that five-year period and would we think that perhaps what, a third of those are in the United States and the balance are elsewhere?

That's probably -- probably realistic, yes.

It would be fairly close to that, Bruce. Not more than half, but not less than a quarter for the U.S.

And you know looking -- looking ahead our best crystal ball sees a leveling off once again after this five-year push.

Okay.

So it could be a reduction in the rate of CapEx after that.

Okay. Then just for Bob, working capital, when you back out sort of fluctuations of year end -- or I am sorry with quarter end. Is there a benchmark level that you are using that you think is kind of the target to run operations?

No. The number that we need to run operations is truthfully quite a bit below what we have on hand right now. So we are not in any danger of that. We are not looking to repay our debt very quickly. We don't have very much of that. We are focusing on spending the money on our capital expenditure program, paying dividends and our thought is that our working capital probably maintains itself maybe comes down a little bit, maybe goes up a little bit but roughly maintains itself for the next several years. And that's a very comfortable amount and it's more than we need really.

And that's sort of 20 to 40 million?

We are probably double that right now.

Okay. And then just last thing, we've talked a lot on this call about share gains and I wonder if you could be a little bit more specific about who is the party who is losing share to you primarily. Is it particularly local brokers and I would be interested to hear you answer that, not just over the last couple of years but looking forward over the next couple of years.

Sure, Bruce. It is Pete here. I believe that that share has come mostly from an education process that the owners understand they can use us and gain value. Rather than sell it themself. It is funny and almost counterintuitive but the primary competitor that we see through most of the channel is the owner of the equipment himself. Trying to sell it himself through various means, and it's like the old adage, if you are not adding value you are not saying in business and you're not growing certainly either. So we are convincing more and more guys that we are adding value and we're proving it by doing what we do. So the more and more people understand that the more they embrace the concept. And I think if you have -- again there's no objective data this is kind of the sense and feel that we get in the market.

Sure there are lots of consolidations going on and there's tons and tons of little auctioneers and tons and tons of little brokers and tons of big brokers and lots of big dealers. All those guys provide different value-added levels of service to their customer base. They provide part/service warranty and the dealership network. We don't compete with that because that is not our business. We're just the distribution channel that we've created and it's a global audience that we provide to assess the value off the equipment and set the market.

So we've been -- I think we have been just convincing more and more people through the same principled way that we have been doing things for forty years that integrity is everything. Customer relationships are critically important so we just continue to develop those and carry on doing what we are doing. And it is not rocket science but we are just going to do it every day and obviously we are dominant because we are good at it, and this is the thing that we are going to stick to is this is our business and we are just going to carry on building it.

What I was hoping to pin you down on was where would that owner have sold it three years ago instead of selling it through Ritchie Bros. Would he have taken it into a local OEM dealership or would he have gone to his brother-in-law who was a local broker. What specific channel do you think is being harmed most by your growth in share gain.

This is Rob. My guesstimate would be that typically that individual would be trying to sell it on his own, through his own advertising program, word of mouth, local neighborhood. Maybe with the assistance of a couple of brokers in his neighborhood. But continually as we have these sales, and we draw an International audience to our auction sales and people come here and see 700 people sitting in a theatre and a person either on the Internet or in person outbidding everybody else and taking motor greeters to Kuwait or farm tractors to South America, whatever it may be, they see the value added there in using us to reach further and further into the marketplace and achieve better results for themselves. So it is a typical we can do more for them than they can do themselves. Whether they're doing it on their own or doing it through some other channel

The only way you convince them of that is by continuing to do what you do and continuing to build those relationships with your customers.

I agree. The owner selling it himself would be the primary channel that we've impacted. And to a lesser degree. The independent guys.

Thanks, guys.

Thank you. I think we have time for one more question.

Thank you, our next question comes from the line of Yvonne Varano from Ritchie Bros. Please proceed with your question.

Yvonne, you work for us now.

You guys didn't know. From Jefferies.

Happy to have you aboard, Yvonne.

Not from Ritchie Bros. Let's be clear.

I just wanted to see if you could comment, Randy, a little bit on any obstacles if any you might be finding in acquiring land over in Europe?

Okay. Europe generally is a higher price marketplace. Greater population densities typically have driven that. And then all the rest seems to be very, very similar. Some jurisdictions are pro business and seem to be able to come to the approval stages more rapidly than others. Some are a long-term program just like in North America. No, I don't -- we haven't -- it is really quite similar environment. Environmental sensitivity will be greater in certain markets and less than in others, but the primary one would just be cost. And the probable reaction that we will take to that is to acquire sites that are smaller than what we have been doing in the U.S. Right now it is that 100 to 150-acre size that we are looking for in the U.S. And in the European arena, what we are trying to do is more in that 40, 60, 70-acre size and then acquire options on additional land so that we can control additional land lock in the pricing upfront today and add our option over some next period, perhaps next five years that we can exercise as the growth catches up.

When you look at it, are any countries that are easier to get permitting or land that size relative to others? Do you see it--?

Well, we have mentioned the UK, Italy, France, and Spain as areas that we are actively pursuing right now. Early -- early indications are that France might be a little bit more rapid than the others.

Great, thanks very much.

Okay.

Thanks everyone and thanks for handling all the questions here. I appreciate your dialing in and we are going to get back to work here in Orlando, and I presume that you will be seeing some media attention on this event here some time next week. We are concluding the sale here on Saturday, and we will let you guys know how it went early next week. But thanks for your continued support. If you have any questions you can always call Bob or Jeremy and myself, or Randy, Rob. And we will talk you in the quarter. Okay. Thanks.

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