RB Global Inc (RBA) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ritchie Bros. Auctioneers second quarter investors' conference call. During the presentation, all participants will been in a listen-only mode. Afterwards, we will conduct a question and answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Tuesday, August 1st, 2006. And it's my pleasure now to turn the conference call over to Mr. Peter Blake, Chief Executive Officer. Please proceed, sir.

Thank you, Daniela, and good morning, everyone. Welcome to the Ritchie Bros. Auctioneers investor conference call for the quarter ended June 30, 2006 and thanks for joining us today. I'm Peter Blake, CEO of Ritchie Bros., and I'm joined today by Randy Wall, our President for Canada, Europe and the Middle East, Bob Armstrong, our Vice President of Finance and CFO, and Jeremy Black, our Senior Manager of Finance. We will be talking today about our results for the three and six-month periods ended June 30, 2006, as well as about some of the other significant events over the last quarter and our expectations for the rest of the year. Our presentation will take about 20 minutes and then we'll be happy to take questions at the end.

Before we get started, I'd like to make a Safe Harbor statement. The following discussion will include forward-looking statements as designed by the SEC rules and regulations. Comments that are not statement of fact are considered forward-looking statements. Forward-looking statements include comments about our projected future results of operations and financial performance, growth initiatives, property development plans, dividend payments and other matters. Our actual results may differ materially from those projected in this discussion. Additional information concerning factors that could cause such a difference is included in our periodic filings, including our MD&A for the period ended June 30, 2006, which is being filed this morning.

All of our securities filings are available on our website at rbauction.com and on the SEC and SEDAR websites.

During this call, we will talk about gross auction sales. As a reminder, gross auction sales represent the total proceeds from all items sold at our auctions. It is not a measure of revenue and is not presented in our Statement of Operations. Auction Revenues is the revenue earned by Ritchie Bros. I'm going to make a few general comments about our results to date this year before I pass the call over to Randy to talk about recent market conditions, and then to Bob and Jeremy to give you the financial overview. I'll then wrap the call up and open it to question.

We are now halfway through 2006 and we have so far achieved gross auction sales of over $1.4 billion, which represents growth of 23% compared to the same period in 2005. Just as a matter of interest, our results in the first half of 2006 represent higher gross auction sales, higher auction revenues, and higher earnings per share than from the entire 2002 year. We're excited about the growth we've achieved so far in 2006. We are continuing to enjoy the momentum that we've talked about in recent periods, with increasing number of buyers and sellers choosing Ritchie Bros. and our unreserved auctions because of the value that we create. Looking ahead to the remainder of 2006, we believe that the strategies we have been pursuing will continue to allow us to capitalize on this momentum.

Property gross auction sales records continue to fall and we added four more regional gross auction sale records during the quarter ended June 30, 2006. Equally significant, we continued to expand our international footprint, conducting our first-ever auction in France in May of this year and recently adding Territory Managers responsible for Romania and Russia. These initiatives are important to us because they represent largely untapped markets that hold a lot of opportunity for Ritchie Bros. There are still many countries that have yet to experience the tremendous benefits of a Ritchie Bros. auction.

As evidence that our auction activity in France is off to a good start, we have already selected October 26th as the date of our next auction in the country. And [Colass] one of the largest construction companies in the world, has announced an exclusive arrangement whereby all construction equipment in the [Colass] group in France will now be sold at Ritchie Bros. Auctioneers. This is a major endorsement of the value of our auction services and our European team is, as are we all, proud and honored that [Colass] has made this decision.

We have also been successful in hiring some great quality sales people this year and as of June 30, we had 226 onboard. That's an increase of over 7% since the start of the year. We're pleased with this growth in our sales force because we believe that these revenue-generating employees will help us to achieve sales growth well into the future.

Before I pass the call to Randy, I'd like to give you an update on our M07 strategic initiative. As you may recall, the objective of this program is to put in place more efficient, consistent and scalable processes and systems that will enable us to meet our growth objectives well into the future. We worked through the necessary, but sometimes painful, preliminary stages of planning analysis and design and it's exciting that we're now seeing benefits from various improvements that we have successfully implemented.

Some of the M07 initiatives that have been implemented include the creation of new management structure for our field operations so that our regional managers can focus more on the sales side of the business, revamped curriculum-based training programs for new sales people and out existing management team, new technology at selected sites that allow stationary lots to be sold from the auction theater, and new scorecard-based compensation and performance review procedures that are designed to provide better clarity for employees throughout the organization.

In addition, in mid July, we went live with the HR module of our Oracle ERP system, and as we speak, we're in the middle of going live with the financial module. This will give us the platform we need to implement further modules of the Oracle system, including sales force automation and other technology that will play an important role in future improvement projects.

Our M07 initiatives include both IT and non-IT related projects. On the IT front, we're in the midst of building a new foundation on which our Business Systems will rely for years to come, and the ERP implementation is the cornerstone of this plan. So understandably, we are approaching it with a high level of focus on thoroughness and functionality. While the Oracle financial and HR systems form a key part of this foundation, some of our other secret sauce, which is internally developed systems, will not likely be ready for full use until 2008 or 2009. We are more focused on ensuring the new systems are developed right, with improved functionality and scalability, than we are on rushing out a less suitable product.

On the non-IT side, the M07 mindset is growing into one of continuous improvement that is beginning to pervade all levels of our company. We are very focused on looking for ways to do things better, to allow us to deliver the highest level of customer service possible and insure that we exploit the financial levers inherent in our business model. We are excited about the mindset change that is occurring throughout our organization because continuous improvement should help us to achieve our strategic objectives of growing our earnings and maintaining our culture.

With that key takeaway on M07, I'll pass the call over to Randy Wall.

Thanks, Peter. Good morning, everybody. Our gross auction sales results for the first half of 2006 have been gratifying, particularly considering the tightness we are still facing in the used equipment market in most of our regions. Contractors and other end-users have been busy and their equipment is operating at capacity. This means that the supply of good quality used equipment has been very tight. If people are using it, they don't need to sell it. Although many industry observers might conclude that such a market should be bad for Ritchie Bros., we have been successful growing our gross auction sales throughout this period.

Where is this growth coming from? Well, we believe that our auction results provide convincing proof of the value Ritchie Bros. brings to the sale of industrial assets, which is helping us to earn a greater share of the used equipment market. Although fewer people are buying and selling equipment in this tight market, we have been seeing increasing numbers of buyers and sellers participating in our unreserved auctions.

If we were not able to create value for our customers, we would not be seeing this increasing market share and our gross auction sales would not be growing. The big question on many people's minds these days, ours included, is whether this tight market will continue. All indications suggest a slowdown in the U.S. economy is on its way, and if this plays out as it has in prior cycles, we may see an increasing demand for our services. Equipment pricing has remained strong in recent months in most of the categories that we sell, although it is fair to say that prices in most categories of late-model construction equipment have recently leveled off.

The aftermarket appears quite stable at the present time. The proppiness, if you will, of the past year has calmed down, most likely in response to reduced OEM order backlogs and increasing dealer inventories. It is too soon to say how the market will evolve over the second half of 2006, but we're certainly glad that we have ample capacity to handle whatever opportunities arise.

Let's shift gears a bit and talk about some of our property development activities. We're making good progress on the construction of new permanent auction sites in Houston, Texas, and Denver, Colorado. Both of these sites will be replacement facilities for our existing auction facilities in those cities. We hope to have Denver up and running in 2007, with Houston to follow in 2008.

We're also progressing well in Ohio, where we have acquired about 140 acres of land on I-70 between Springfield and Columbus, Ohio. We're well into the development and construction process for that permanent auction site and we expect that it will open in 2007, as well. We're still very actively looking for sites and other locations in North America and Europe and are getting close in a number of regions. We'll be sure to let you know as soon as we have specific news about any new locations.

And now let me turn this call over to Bob Armstrong.

Thanks, Randy, and good morning. The numbers that form the basis of the following discussion were included in our press release that was issued this morning and are in our quarterly MD&A and intrafinancial statements, which are being filed this morning and are available on the SEC and SEDAR websites. All dollar amounts referred to on this call and in our press release and securities filings are stated in U.S. dollars.

During our last conference call, we told you that we were expecting gross auction sales for the second quarter of '06 to be in excess of $700 million. Gross auction sales actually turned out to be $830 million for the quarter, surpassing even our most optimistic internal expectations.

So far this year, we've generated gross auction sales of $1.4 billion, which is 23% higher than the gross auctions as reported for the first half of '05. Our growth has come from strong performances in our United States and Canada markets in 2006, and can't be attributed to any particular region or auction. This above-trend growth is being driven by the momentum that Randy just described.

Included in gross auctions sales for the first six months of '06 are ag sales of $99 million from 92 unreserved agricultural auctions that we held during the period, which compares to gross auction sales of $53 million from 73 agricultural auctions in the first half of 2005. Second quarter auction revenues were $78.7 million in 2006 and were $134.7 million for the first half of 2006. Our auction revenue rate for the first half of '06 was 9.60%, which is less than the 10.03% we experienced in the first half of '05 but squarely in our expected average range of 9.5 to 10%.

Our second quarter rate was 9.47% in 2006, compared to 9.62 in 2005. While the 9.47% rate is the lowest quarterly auction revenue rate that we've experienced since the second quarter of 2002, it does not cause us any alarm. As in prior periods, the main contributor to the volatility of our auction revenue rate was the performance of our underwritten business. In this year's second quarter, our underwritten business, which is made up of guarantee and inventory contracts, did not perform as well as it had in prior quarters. However, we do not see this as being indicative of a trend.

We've been saying since the beginning of 2004 that we expected our average rate for future periods to be in the range of 9.5 to 10%, and while we enjoyed superior results through '04, '05 and into '06, we resisted the temptation to call those rates sustainable, having learned through prior experience that rates would inevitably return to our expected average range. And before anybody starts ringing the alarm bells, we still believe that our auction revenue rate is sustainable in the 9.5% to 10% range on average. We will be sure to tell you if we see signs of a trend outside this range.

Direct expenses, which are comprised of the costs incurred specifically [pulled] at auction, were 1.37% of gross auction sales for the second quarter of 2006, and 1.27% for the first six months of the year. The year-to-date rate is slightly higher than the direct expense rate of 1.24% during the first six months of '05, mainly because of the relative mix of size and location of auctions held during the period. The direct expense rate is influenced by the size of auctions held in a particular period and by whether auctions are held at permanent auction sites, regional auction units or at off-site locations.

Larger sales and sales held at permanent auction sites are more cost efficient and generally result in a lower ratio of direct expenses to gross auction sales.

General and administrative expenses were $26.6 million for the second quarter of 2006 and $52.7 million for the first half of 2006. Our G&A was higher than the equivalent period last year for several reasons, in particular, the continued growth in our business. For example, labor costs made up approximately 63% of our total G&A for the first six months of this year. And our full-time employee headcount increased by 15%, to [748] employees at June 30, '06 from 653 at June 30, '05. It is important to note that our Q2 G&A experience was in line with our expectations.

Other income for the first half of 2006 included gains of $1.8 million recorded on the sale of excess property in Tampa, Florida, where we had previously held auctions. This compares to gains of $6.4 million recorded last year on the sale of excess property in Fort Worth, Texas, and Prince George, British Columbia. None of these properties were being used in our business.

Our income tax rate for the first half of the year was 36.6%, which is roughly consistent with the 35.9% rate we experienced in the first half of 2005. Excluding the impact of after-tax gains of $1.1 million recorded on the sale of excess property, our adjusted net earnings for the second quarter of '06 were $23.4 million, or $0.67 per diluted weighted average share. And for the six months ended June 30, '06, adjusted earnings were $36.6 million, or $1.05 per share, which is approximately 19% ahead of the adjusted net earnings in the first half of last year, excluding the $4.1 million after-tax effect of last year's gains.

Before I pass the call to Jeremy to update our guidance for the rest of the year, I want to tell you a bit about our CapEx spending so far this year. Our total CapEx for the first half of 2006 was $22.6 million, including maintenance CapEx. The costs incurred in the first six months of 2006 related primarily to the completion of work on our new permanent auction site in Nashville, Tennessee, the commencement of work on our permanent auction sites in Denver and Springfield, Ohio, expansion of our yard in Orlando, and capitalized costs relating to the implementation of our ERP system.

For 2006, we're still expecting CapEx, including maintenance CapEx, to remain in the range of $50 million for the year, although we may exceed this range if we're able to acquire some of the land needed to accelerate the auction site expansion plans that we have previously described. Looking ahead, we still expect that our annual CapEx program will be approximately $50 million per year for the next few years, but actual expenditures could be more or less than this amount, depending on the availability of suitable expansion opportunities.

Regarding dividends, our Board has approved a quarterly cash dividend payment on September 15 to holders of record on August 25 in the amount of $0.21 per share, an increase of 17% over the prior quarterly dividend of $0.18 per share. The Board has restated their belief that we should use our cash flow first to reinvest in the business where there are prudent investment opportunities, but once those opportunities have been funded, excess cash should be returned to our shareholders.

And now I will turn the call over to Jeremy.

Thanks, Bob, and good morning. I'm going to take a few minutes to provide an update on our guidance for the remainder of 2006. On our conference call at the end of Q1 this year, we indicated that we were expecting gross auction sales for the full year to be in the range of $2.35 billion in 2006. We have surveyed our field managers, as we do at the beginning of every quarter, and based on their input and our actual results for the first half of this year, we now believe that our full-year gross auction sales for 2006 will be in the range of $2.5 billion. This would represent growth of approximately 20% compared to 2005.

We're expecting that gross auction sales for the third quarter of this year will be in the range of $500 million. We'll be able to give you a better sense of fourth quarter expectations on our next conference call at the end of October.

Bob has already talked about our auction revenue rate performance for the year to date, so I'll just reiterate that we expect the rate to be in the range of 9.5 to 10% for the full year. On our last conference call, we indicated that we were targeting a long-term earnings growth rate of about 15% per year on average, and that earnings growth in 2006 was likely to be in the range of 10 to 15%. Excluding the impact of the gain on sale of excess land in Tampa, we believe that this is still a reasonable expectation for the year and we will likely be at the upper end of that range.

Our corporate strategy is focused on long-term earnings growth and we still believe that we can deliver average annual earnings growth in the range of 15% per year. As we work our way through some of our M07 initiatives to lay a solid foundation for future sales growth, we're increasing some expenses, most notably G&A, at a higher than average rate. However, we've been able to keep our expense growth rate at or below our revenue growth rates, thereby maintaining a gap that has allowed us to enjoy operating leverage, even during this period of deliberate infrastructure expansion. It is through a combination of sales growth and this gap between revenue and expense growth rates that we expect to be able to deliver continued earnings growth.

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

Thanks, Jeremy. I have one more piece of news to share with you today before I recap the call and open it to questions. We are excited to report that Ed Pitoniak has recently been appointed to our Board of Directors. Ed is the President and CEO of Canadian Hotel Income Properties Real Estate Investment Trust, otherwise known as CHIP REIT, and brings a wealth of experience in marketing, brand management and product development, along with strong people development skills, to our Board. Ed is an Independent Director and has also been appointed to the Audit Committee of our Board, taking the place of Russ Cmolik on that committee. So welcome to Ed.

Now let me recap the main points of the call we covered today here. First, we ended the first six months of the year with gross auction sales of $1.4 billion and net earnings of $1.05 per diluted share, excluding after-tax gains of $1.1 million, recorded on the sale of excess property, which is an increase of 19% over adjusted net earnings for the first half of '05. We are expecting continued strength in gross auction sales for the remainder of 2006 and have increased our guidance to approximately $2.5 billion for the year.

Secondly, our M07 strategic initiative is evolving from both an IT and a non-IT perspective, as a continuous improvement program that is becoming an integral part of our company. Although there will be some large projects, primarily IT related, such as the Oracle implementation that's currently going live, we're striving to make continuous improvement a way of life at Ritchie Bros. now and long into the future.

Thirdly, our Board has approved a 17% increase on our quarterly cash dividend from $0.18 to $0.21 per share per quarter. We continue to believe that excess cash should be returned to our shareholders once we have funded all prudent investment opportunities available to our business.

And finally, we welcome Ed Pitoniak, CEO of CHIP REIT, to the Board as a new Independent Director with particular expertise in marketing and brand management.

Now I'll be pleased to answer any questions that you have, so Daniela, would you begin the question period?

Absolutely. Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Bert Powell, BMO Capital. Please proceed.

Thanks. Auction revenue rate in the quarter I know is just a hair below the low end of the guidance range. Wondering, Bob, if you could update us just in terms of what the percentage of the underwritten business was in the quarter. Was there any particular deals that stand out, in terms of having performed worse than expectations in the quarter? And also be interested to know how the rate has been on some of the more offbeat stuff, like the Jody Nelson and some of the apartment building things that stand out as perhaps not mainstream for you guys.

Good thing I was taking notes during your barrage of questions, Bert, but I think I've got them all. The at-risk percentage during the quarter was 31%, which is at the high end of a range, but still within the range where it's normally been over the full year. We still think it will probably be around 25%, which is kind of the median number it's been hovering around. But it was 31% during the quarter. [INAUDIBLE] for new folks on the call. The amount of underwritten business isn't the factor that has influence on the rate, it's the performance of that business, and during the quarter, the underwritten business did not perform as well as at prior quarters, and that's what we noted.

Your second question, Bert, was were there any particular deals that had a real influence there? No, not in particular. We had lots of auction during the quarter. It was obviously the largest quarter in our history and a number of those auctions had a combination of deals that blew through the roof and also performed poorly. It was very much a standard Ritchie Bros. program, but there were a few more, let's call them under-performers than over-performers, and that was the case. But I can't think of anything that stands out as having been a significant material impact on the rate all by itself. In a quarter this size, it's very, very hard for any one or two or even five deals to have a material influence.

And then you asked an interesting question I can't really answer. You asked about the rates on any of the offbeat sort of transactions. We don't get into specific discussion of the contract terms on particular deals, but I can tell you that we haven't changed our business model. We're not doing unusual type transactions with different rate structures.

Randy or Pete, anything you want to add to that?

Well, sure, I'll add a little bit. This is Randy, Bert. Nothing unusual there, that's the short answer. Everything's good.

31% seems like a high watermark, in terms of mix for underwritten -- and Bob, fully acknowledge your comments that it's the performance, not the percentage, but that mix seems high. Is that part of more missionary work, in terms of making folks more comfortable with the Ritchie Bros. model?

Bert, it's Randy again. You know, we don't really manage our business to falling within that range. We really provide a variety or a menu of choices to our prospective clients on these larger packages. And to a large degree, it's up to them whether they to choose whether they prefer a guarantee or a straight commission. So we're not totally in control of it. In many cases, it falls on one side of the fence or another. In addition to that general comment, we've been coming through times of the market where it's been very, very strong, very, very competitive and in many cases, we need to use the underwritten aspect of our business menu as a catalyst to obtain business to come through the door.

You know, other than that, I have no other -- there's no alarm bells. It's not a concern to us.

Okay, last question just on the tax rate for the quarter. Looks a little higher than what we had been expecting. Bob, what's a good number to use now, based on what you guys see in terms of your mix for a tax rate going forward?

I'm still modeling 35, 36%. And I give a number -- a range like that because it's tough to predict. As in prior periods, the actual rate will very much depend on where we happen to be earning our income. I have an idea where I think we'll earn it, but the profitability of the Canadian versus the American versus the European business is tough to nail, so I think 35 to 36% is a reasonable rate for the rest of the year.

Okay, so it's 37.5 this quarter, just perhaps anomalous?

Yes, I think so. If you look at the rate for the first six months, it's 36% and that's far more meaningful.

Okay, thank you.

Our next question comes from the line of Ben Cherniavsky, Raymond James. Please proceed.

Morning, guys.

Morning, Ben.

I appreciate that you added some color to the direct expenses as a percent of sales. And you indicated that it was up because of mix and that you know, typically smaller auctions cost you more money to run. That all makes intuitive sense to me. The one thing I don't quite understand is -- maybe I'm looking at the numbers the wrong way -- but when I look at your gross auction sales and the number of auctions you held and the number of days you held auctions, all those ratios are up. Your gross auction sale per auction is well up. Your gross auction sale per auction day is up over 10%. Your average size of auction and days is up over the second quarter.

So how do we -- where does it show up that your auctions are actually, on average, smaller? Because based on the data that you disclosed and that I'm looking at, it looks to me like they're actually bigger.

Fair enough, Ben. If you just do the math, I think you're right. What's kind of lost in there is the number of small ones, the number of big ones and where they were held. It comes down to the mix. The numbers were meaningfully out of line. I guess we would probably try and slice and dice it a bit further to try and explain why that might have been the case. We look at it and it seems quite reasonable. It's not something that's trending away from us. It's not something that's even trending. The overall auction size, by raw averages, is exactly as you described it, but they're within a number of small guys, large number of auctions in off-site locations.

Pete's reminding me the second quarter is heavy on ag sales, which have a higher direct-expense component than others. It's just a number of different mixes going on. So your numbers are correct, but I guess we haven't really given enough information for you to peel deeper and see the full story.

But I mean, you look at all those really big record-breaking auctions, certainly the leverage you get out of those big auctions should more than offset the drag that you get out of the smaller, more missionary auctions.

Anyway, that's -- I just throw that out there because I can't quite reconcile it intuitively, but I understand you guys have more information than I do.

The other question I had was that -- I suppose on the same point. None of the direct expenses than reflect initiatives with this M07 goal that you have?

That's correct, yes.

So that's more in the SG&A line?

Yes.

And is it -- the M07 label for that, is it implying that you still think you'll see some -- like when do you think the earnings leverage from these initiatives will kick in? Do you have a timeline for that? Is it 2007, as the name would suggest?

No, the original pick-me of '07 was when we thought a bunch of initiatives themselves was wind up. And as Pete described, we've evolved that into more of a mindset for continuous improvement. So the '07 label wasn't a target for when earnings goes up. That was more when we thought the bulk of some of the key projects would be completed.

To answer your question about when we think earnings would be effected, it's a long-term concept. Our view of M07 is a number of initiatives that will enable us to maintain operating leverage and to provide a foundation for growth for many, many years. So it's not a one-time hit. It's not like a restructuring, that all of a sudden pays off in one year. I think that probably starting this year, we're definitely already seeing some of the benefits. Can I quantify them? No, because it's just continuous improvement. Some of the major initiatives that will roll out later this year and into '07 and into '08, some of those will have more significant benefits, but it will be hard to measure those precisely, as well. It's more a continuous improvement, maintaining the operating leverage, ensure that we can maintain the growing revenues faster than your [cost] program.

Okay, one other question is -- I know we've split hairs before over your guidance and everything, but you're implying now that you'll see some deceleration in your gross auction sales on the back half of the year. Is there any reason in particular why you're saying that? Is that just because that's what your field guys are saying or have you dug a little deeper? Is it maybe because the frothiness in pricing has come out of the equation a little bit, or last year's numbers were just so big, there were some specific deals in there you won't see repeating? Or what gives you that kind of a reason to temper your gross auction sales growth for the back half?

Randy and I are both wanting to answer this, so I guess I'll go first and Randy can go second. I guess you could -- rather than saying we're tempering it for the last half, I'd say, "Wow, wasn't that exciting in the first half?" You are absolutely right, Ben, it's based entirely on what the guys in the field are seeing. They obviously had a great first half of the year. They have increased their expectations for the second half of the year and this is currently what they see. It's a lumpy business. 23% in the first half doesn't mean 23% growth in the second half. Last year itself was also lumpy so it really is just us communicating to you what we are currently seeing based on our grass-roots analysis. You accurately identified all the vagaries of trying to pull this off consistently, but I'll let Randy add color to that.

The one comment Bob said that I like -- I like them all, I really do -- but what I picked out of there is that our feeling emanating from the grassroots up is, in fact, stronger than it was earlier. And our field management has actually increased the amount of sales that they see coming in the back half of the year, compared to what they originally forecast at the beginning of this year. So they're not saying I've got this much in the bag and then I'll stand pat on my annual number. They're actually increasing the back end of the year, as well. So my overall feeling is that there's good strong momentum and we're comfortable with the increase in our overall guidance and as always, Ben, we're going to do everything we can to try to exceed those numbers.

Okay, great. Thanks very much, guys.

Our next question comes from the line of James Gentile, [DB&C] Capital Markets. Please proceed.

Good morning, how are you guys doing?

Morning, James. Good, thanks.

Just wanted to -- I missed the very beginning of your prepared comments, Peter, with regard to the geographic location growth areas. I thought I heard Russia or something along these lines.

I'll just repeat for your benefit, James, the announcement really was that we hired some Territory Managers, one in Romania, one in Russia, and that's just a sort of a continued -- our thought here is that continued expansion on the frontier markets is necessary just to put those little seedlings in the ground and water them. We've got a big garden behind us we've got to worry about tending there, but it's important that we maintain our front in Europe. For us, we've talked about it in the past as being a growth market for us probably in the, you know, sort of in the mid-term. Near-term we see the U.S. as being a good growth driver. And Europe will probably follow that and with Europe in mind, that's why we're going into the permanent auction site expansion in some of those markets we mentioned earlier. And also, making sure that we access the frontier markets within Europe by starting to invest now and putting people and little droplets in place out there to make sure we're moving forward.

Got you. And is the only remaining land purchase in the U.S. in terms of a newer market, would that still be the Boston, New York corridor?

Short answer to your question is no.

All right, what about a longer answer? [LAUGHTER]

We've got a lot of possibilities left in North America, James. When we're ready to be more specific, we will, but as you can imply from our increase in our CapEx guidance from last year to this year, we are pursuing more opportunities. We believe that there exists more in North America than what we've communicated so far, as well as several overseas, particularly in Europe. And when I get more detailed specificity, we'll let you know.

No problem. And then just the Ohio construction you mentioned in '07. Is that going to be in the beginning or in the end?

It's probably mid to late year.

Okay. Great, thanks.

Thanks, James.

Our next question comes from the line of Sarah Hughes with Sprott Securities. Please proceed.

Hi, guys, just one question. In terms of increasing your amount of sales people have on board now, it was a bit bigger than I kind of was expecting. Any particular area you're focusing on, in terms of the hiring? Or is it broad based?

It's very broad based. We have plans to grow virtually everywhere, Sarah. And there's new sectors -- not new, but sectors that are getting increased focus, it's ag, transportation, and to a lesser degree, real estate. We've got lots of initiatives in different places and so no specific area, very broad based.

And would it be in response to a potential -- you guys see maybe the market loosening up a little bit and getting ready for that?

Sarah, it's Pete here. I think we're always trying to be ready for anything that's coming at us. Our plan is really more of one of continuous growth, so we're not trying to rush to get sales people onboard because we see this wave of equipment coming out. It's just the market turns down and interest rates go up in the U.S. and all those other things that drive that. But I think it's really more our plan is to continue to grow this network effect and the network of momentum that we're seeing through the market and increasing number of people attending the auctions is just more impetus for us to continue on the same path and executing the same strategy that we've had in place for some years. Just measured growth.

We wanted to make sure that we hire these guys on and make sure they get dipped in orange in a proper way, so we've beefed up our training and our programs to allow these guys to get more productive faster. And Bob mentioned earlier about sort of that productivity and the operating leverage that we rely on. That exactly goes hand in hand with why we're bringing these guys onboard and investing in them deeper and longer than we have in prior years.

And then just lastly, on the ag side of your business, is it still predominantly Canadian in terms of the sales?

Yes, predominantly Canadian, but we are focusing efforts in the U.S. of course, and we have the [Baliski] team that was acquired early in the year. So that will -- yes, predominately Canada, but U.S. is growing.

Great, thank you.

Our next question comes from the line of Yvonne Varano of Jeffries. Please proceed.

Thanks. Just in Europe, can you give us an update. I thought you were looking for a permanent site in Spain, how that's coming along? And have you planned any auctions in the Eastern part of Europe yet or were just in the beginning stages, adding a territory manager there and building up the business?

Yvonne, it's Randy. We have in the past communicated Italy, France, Spain, and the U.K. all as being countries that we are actively pursuing land acquisitions in. France is the most advanced of those activities. And we're looking at other countries, as well, in addition to those. So there's lots of irons in the fire.

In terms of auctions in the Eastern countries, no, that would be premature today. These, as Pete says, are little seedlings and what we tend to see in the frontier markets is a drive to capture new buyers -- new customers in fledgling areas that really have no idea what an auction is or who Ritchie Bros. is. They begin their experiences typically by a visit to a foreign auction site and then they participate as a buyer and they start bringing equipment into the frontier and these places tend to be more consumption markets in the early years. And they are buying the older smaller valued product and there's not a preponderance of equipment in many of these places ready for an auction.

So typically you start small. Buyers tend to drift towards consignors and a number of years in the future, we tend to see auctions. And some markets are bigger than others. We may get an exception that crops up on us here that we could tell you about as an when some things might happen.

Great. And then just on domestically, I know the contractors are quite busy right now, but has there been any indication that down the road, there's potential slowing of business?

There's lots of chatter out there, Yvonne. Everybody's asking the same kind of question and we're just staying mindful of the dynamics at play. We look at every auction after it's completed and analyze the pricing. And overall, there are economic signals, with rising interest rates and the newspapers are full of housing starts down. You know, these things all have dynamic effects on the economy. The great thing about it all is that Ritchie Bros. benefits from any change. And any one of these changes, up or down, tends to drive a transaction. And a transaction in a growth-oriented construction sector, or a shrinking one, all drive business that we benefit from. So typically, as we've said many, many times in the past, we're indifferent and same holds true this time.

But you're not hearing any rhetoric right now that there are a backlog of businesses beginning to slow?

It would be fair to say that OEM order backlogs have lessened and that there seems to be indications that inventories of new equipment at dealerships is rising, which indicates a loosening of supply.

For most categories. We've seen some categories that are still pretty hot. The non-res market is still pretty good. Cranes, as an example, are very strong pricing-wise.

Okay. Great. Thanks very much.

Our next question comes from the line of Bruce Simpson, William Blair.

Good morning, guys. Hey, Randy, you mentioned using the guaranteed piece, or option, as a competitive differentiator and I wonder if you could just kind of comment on competitive landscape, if you're seeing any changes out there.

It's dynamic, Bruce. It changes every week and month. We've come through a couple of years of extreme competitiveness or tightness, let's say, in the market. I mean, I think it's quite accurate to say that we've had to pursue premium equipment with vigor in order to obtain a supply of that for the auction channel. And I think that we're going to continue to see a heavily competitive footprint as we look forward, but people are -- they're in a state of cautiousness, let's say, in where we put the numbers on that product.

You know, we'll continue to be opportunistic as deals present themselves and whether we pursue them aggressively. We've always looked at any large spread of equipment or trucks or other assets in the dynamics of the auction cycle. And if it's a large package that's either premium equipment or a great mix or early in the auction cycle that we use as a seed package to ensure that the rest of the auction builds around it, those dynamics have always been a part of our business and will continue to be that way.

You know, as the equipment supply loosens, no, I think that we're still going to be within our 20 to 30% range, but you could see a slight drift down from 31% back into the meat of the range.

How about specifically within the auction competitors not competing against dealers and brokers and so forth? Are you seeing any changes there, entrance of new players or a tightening or loosening of competitive landscape?

Bruce, this is Pete. Not -- nothing really. If anything, we see ourselves continuing to stay ahead and apart from competition. And keep in mind that we do business very differently than some of the other guys do. Everything unreserved and the integrity level for us is paramount. And you know, I'm not seeing any new entrants or any changes that surprise us in any respect, whether it be live auction or online or whatnot. I don't see any traction being gained by any of the major guys that we sort of track on a regular basis and watch what's going on.

Okay.

And I'll just add one last comment to that. I believe that we're growing and I don't believe that the auction sector is growing at the same rate that we are.

I tend to agree with that, for sure.

And then I wonder, is it possible that the drop in auction revenue rate over the last six months, particularly this quarter, is positively correlated with a softening in pricing?

I'm going to say that it's not necessarily the case. There is always the same dynamic, as I mentioned to you, about pursuing each and every package of equipment individually. And no one package, no one deal, no one auction stands out as an out-lyer, where you might say, "Oops, we got that category of equipment in this particular contract wrong as the market tended to plateau or even drop a little bit in some categories." So not necessarily.

I'll just add to that, Bruce. I think you and I and others have chatted about this before. When we enter into our underwritten business, there's like a 30 to 45-day timeframe typically -- it could be longer or shorter, but that would be typical -- from the day we do the deal to the date of the auction. So in essence, we're exposed to price changes during that time. When we do our pricing, we're thinking about what we think it will sell for 30 to 45 days out. And if in fact prices were to correct in a material way during that short period of time and we hadn't anticipated it, then yes, you might see some kind of impact on that. But we go to such great lengths to mitigate that, in particular focusing on that short period of time and the relatively low volatility in the equipment markets that while you're correct that it could have an impact, I would agree with Randy. I don't think that it had a material impact.

Okay. And my next question has to do with the Sarbanes-Oxley 404 compliance. Pete, last time around, you gave a fairly cautionary tone about, you know, we think we're going to be able to do that as well as the Oracle implementation, but we realize they're at the same time. And so give us an update there, please.

Peter Blake. The update on SOX 404 for us internally is that all systems are green lights everywhere. We're quite happy with where we're at. We've just gone through our sort of quarter-end navel gaze with our directors and auditors and whatnot, and everybody's got smiles on their faces. There's a lot of work ahead of us, no question about it, but we've just recently beefed up our internal team, as well, to make sure we're moving along the path, but I feel very good and I sleep very well at night, not worrying about SPX 404 at the end of the year.

Then with respect to Oracle, in fact today, August the 1st, we're going live with the whole Oracle financials. It's too soon to say success or not success, but it certainly appears everything's good. We appear to be on time and on budget with that project, which is kind of fun for a project of that scale.

Okay, thank you. And then the last thing just has to do with the rate of D&A, which I'm surprised is actually not increasing sequentially very much at all, despite opening new sites and so forth. Can you give some idea about what you think, from either a dollar amount or a percentage of gross auction sales, that is moving towards?

Firstly, Bruce, the reason it hasn't jumped up recently is because the preseason doesn't commence on new billings until we put them into operation, so there's lots of spending taking place on billings that will open in '07 and '08. Depreciation will kick in on those. Until that time, any capitalized software development costs on Oracle and M07 initiatives, they also don't start depreciating until they kick in -- until they [start] putting into operation and that's happening like today for Oracle. So you'll see depreciation sneaking up in the next little while.

I would suggest not looking at it as a percentage of gross auction sales. It's more an absolute number, and I think we'll see fairly meaningful increases as we head into '07, just because we'll have a number of things begin depreciating in '07.

Yes, so just to put a tiny bit of quantification on that, fairly meaningful increase means instead of a 3 million a quarter, what, it might be four or five?

That's right.

Okay, thank you, guys.

And our next question is a follow-up question from the line of Bert Powell, BMO capital. Please proceed.

Thanks. Bob, just wanted to look a little bit closer at the M07 expenses that are flowing through the G&A line. As these projects -- and I understand you're capitalizing some of the expenses -- but as these projects, some of the bigger ones, start to wind down into '07, can you give us a sense for at least the balance of this year, what the G&A impact is likely to be from M07 initiatives? And to the extent possible, maybe give us a sense of what G&A would have looked like excluding M07 expenses in this quarter and for the first six months of the year?

I would say, Bert, to think of the G&A going forward, I wouldn't expect any meaningful M07 related increases in quarterly G&A over the rest of the year. I think most of the additional staff that have come on -- M07 related type activities -- are on and they're already sitting in your Q1, and in particular your Q2 G&A. So no, I don't think you're going to see dramatic increases in quarterly G&A for M07 related reasons going forward. And looking around, everybody else is nodding and shaking the same way.

Okay, so kind of the seasonal Q4 G&A bump-up as you guys true up the year-end stuff, but Q3 may be looking similar to Q2?

You've got a kind of loaded question there. The Q4 doesn't always have a bump-up. It doesn't always have a true-up. I think what you've seen in the last few years is Q4 has had a surprisingly strong profitability level, so we've to accrue additional bonuses, and that's perhaps the true-up you're talking about. That only happens if in fact we have a surprisingly large Q4. If Q4 comes in as expected, then there wouldn't necessarily be that kind of spike. And what I'm suggesting -- what I'm saying is that the M07 related expenses in Q3 and Q4 I think will be very, very similar to what you've seen in Q1 and Q2. So M07 would not be a reason to look for G&A variance in the next few quarters.

Okay, thank you.

[ OPERATOR INSTRUCTIONS ]

Operator, if there are any more questions, we'll take one or two more and then we'll carry on here.

Okay, actually we do have two more questions on the line. One is coming from the line of [Anna Nikolai], Excel Capital Management. Please proceed.

Hi, can you tell me what the cash flow from operations number was in the quarter, and also where did inventories end up, please?

Anna, it's Bob. I think as we're on the call, the whole 6K has just been published, but I have just looked for it right here. And I'll give you cash flow of operations, but I advise you that that's a number we don't actually pay any attention to. My preference in looking at cash flow from operations is to take my net income and add back depreciation and say that's what it is, because all the working capital balances. However, given my disclaimer, cash flow from operations for the three months ended June 30 appears to be 49 million -- 49.2 million, and inventory at the June 30, '06 is 2.8 million.

Okay, thank you.

And our final question comes from the line of Bob Mitchell, Conestoga Capital Advisors. Please proceed.

Morning, gentlemen. I just had one follow-up question about Peter, I think you talked about the exclusive arrangement with the French construction company. I was wondering if you could talk a little bit more about that.

Well, you know, I'll let Randy do it because Randy's our European chief here.

Okay. Bob, we've been working with this company for many, many years and we've done lots of business with them and in recent times, have been fortunate enough for them to realize that this is a channel that they need to use for the disposal of all their assets. And they're starting with the French operations. And so we're well and truly into the servicing of this giant of the world construction market by handling all their remarketing of excess construction equipment in France.

Did this involve them -- do they have their own remarketing department that they're gradually winding down?

I would probably say it's unfair to think they have an entire department, but certainly they have individuals who are responsible for disposal of assets. And if I remember correctly, it's a massive organization consisting of some 800 subsidiaries worldwide, most of which are very, very decentrally operated, and as a typical function and way that they would handle their assets would be one individual or two individuals within each one of those companies. So very decentralized. Very much a behemoth that will take a lot of time for us to work our way through systematically, in a global fashion. So no big department shut-down like in CitiCapital. Probably just the redirection of duties of specific individuals internally.

Thank you very much.

Okay, well thanks, everyone. Appreciate your attention on the call and we're going to get back to work. We've got a sale going on at National today and lots of stuff coming at us through what used to be a slow time in August and now it's getting busier. So we'll look forward to speaking to you again in late October for our Q3 results. Thanks.

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. We thank you and have a good day, everyone.