RB Global Inc (RBA) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ritchie Bros. Auctioneers Q3 2006 earnings conference call.

[OPERATOR INSTRUCTIONS.]

I would now like to turn the conference over to Peter Blake, Chief Executive Officer of Ritchie Bros. Auctioneers. Please go ahead, sir.

Thanks, Julia. Good morning, everyone. Happy Halloween, and thanks for joining us today on the Ritchie Bros. Auctioneers investor conference call for the quarter ended September 30, 2006.

I'm Peter Blake, CEO of Ritchie Bros., and am joined today, in Ritchie, here with Rob Mackay, our President for U.S., Asia, and Australia, Bob Armstrong, our Vice President of Finance and CFO, Jeremy Black, our Senior Manager of Finance, and Chuck Croft, who I am pleased to introduce to you as the incoming Chairman of our Board of Directors. Chuck will take the helm effective November 30th, 2006.

Today, we will be talking about the results for the three and nine months periods ended September 30, 2006, as well as about some of the significant events over the last quarter, and our expectations for the rest of the year. Our presentation will take about 25 minutes, and then we'll be happy to take your questions.

Before we get started, I would like to make a Safe Harbor Statement. The following discussion will include forward-looking statements as defined by SEC rules and regulations. The comments that are not statements of fact are considered forward-looking statements that involve risks and uncertainties, and include statements about our projected future results of operations and financial performance, growth initiatives, property development plans and other matters.

These risks and uncertainties include the numerous factors that influence the supply of and demand for used equipment, fluctuations in the market values of used equipment, seasonal and periodic variations in operating results, actions of competitors, conditions in local and regional markets, and other risks and uncertainties as detailed from time to time in the company's SEC and Canadian Securities filings, including the company's management discussion and analysis of financial condition and results of operations for the period ended September 30, 2006, which has been filed this morning and available on the SEC, SEDAR, and company's web sites. Actual results may differ materially from those forward-looking statements. The company does not undertake any obligation to update the information contained in this script which speaks only as of today's date.

During this call we will be talking 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 speak about Dave Ritchie's retirement, and then make a few general comments about our M07 strategic initiatives before I pass the call over to Rob, to talk about recent market conditions. And then Bob and Jeremy can give you the financial overview. Chuck will then say a few words, and I'll wrap-up the call before we open up for questions.

Many of you have seen the news this morning that effective November 30th, 2006 Dave Ritchie has been appointed to the honorary position of Chairman Emeritus, and Chuck Croft, who is currently our Vice Chairman, has been appointed Chairman of the Board.

For those of you who don't know, Dave and his two brothers, Ken and John, founded Ritchie Brothers in the 1950s. And after 50 years in the business, Dave retired from the role of CEO in 2004, and has now decided to retire from the position of Chairman of our Board of Directors, and stepped down as a Director of the Company. Dave wants to take advantage of the fact that he is 70 years old and in excellent health. He has plans to travel extensively for the next several years, however, we know that we will still see him at lots and lots of auctions.

On behalf of all Ritchie Bros.' employees and customers I want to thank Dave for his vision, dedication, friendship and leadership. While Ritchie Bros. has certainly evolved from the little auction company that started out of necessity in a furniture store in the 1950s, our core values remain unchanged. And by sticking to these basics we believe that we'll be able to continue to grow this company well into the future and realize the full potential of Dave's vision.

Dave currently intends to maintain a significant ownership position in the company, and with his name still on the door we know that he will be keeping an eye on us. In recognition of his pivotal role in the creation and the success of Ritchie Bros., the company's Board has appointed Dave to be the Honorary Chairman Emeritus of Ritchie Bros.

We're very pleased that Croft, currently Vice Chairman of our Board and a Director of the company since our IPO of 1998, has accepted the appointment to Chairman effective with Dave's retirement on November 30, 2006. Chuck has a diverse business background, having been involved in several industries, including mining and drilling, and spent 15 years as President and CEO of the Tonto Group of Companies. Chuck is going to say a few words later in the call.

I'd now like to give you a quick update on our M07 strategic initiatives. As you may recall, the objective of this program is to put in place more efficient, consistent, and scalable processes that will enable us to meet our growth objectives well into the future. We've been working through the necessary but sometimes painful preliminary stages of planning, analysis and design, and it is exciting that we have successfully completed the major implementation of foundational steps that will lead us to enjoy benefits well into the future.

The first of those foundational steps occurred back in July when we went live with the HR module of our Oracle ERP system. In August we then went live with the core financial module of Oracle. These two steps 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 the future improvement projects in the company. We are very happy with the Oracle implementation so far. The first two modules went live on time and on budget.

Our M07 initiatives include both IT and non-IT related projects. On the IT front the Oracle ERP system is the foundation, and our work is now focused on some of our secret sauce internally developed IT systems which will not likely be ready for full use until 2008 or 2009. On the non-IT side we have implemented several customer touch process improvements, and the M07 mindset is growing into one of continuous improvement that now pervades all parts within our company.

We are very focused on looking for ways to do things better and allow us to deliver the highest level of customer service possible, and ensure that we exploit the financial leverage inherent in our business model. We are excited about the mindset change that is evolving throughout our organization because continuous improvement should help us achieve our strategic objectives of growing our earnings and maintaining our culture.

I guess what I'm saying is what's important to take-away from the call is that the M07 project, being a focus on continuous improvement does not stop in 2007, rather it is that continuous improvement mindset that we plan to carry forward and expect will help us fuel our growth well beyond 2007.

With that key takeaway, I'll pass the call over to Rob Mackay.

Thanks, Pete. And good morning, everyone.

I'm happy to report today that the sales momentum we have been experiencing in recent periods has continued, and with three quarters of 2006 under our belt we have achieved gross auction sales of over $1.98 billion, which represents growth of 32% over the same period in 2005. I'll be the first to admit that we did not expect to realize this level of growth when we went through our planning process at the end of last year. This above trend growth suggests to us that an increasing number of buyers or sellers are choosing our unreserved auctions.

We are starting to look ahead into 2007, and we believe that market conditions are shaping up well for us. However, we do not expect to experience this level of gross auction sales growth next year. As we've talked about in the past, several years at above trend does not mean that this is our new normal. We're very aware of the fact that our growth rate is likely to moderate as we go forward.

That being said, we think it's important to comment on recent media stories about the state of the U.S. economy and what affect that will have on our business in 2007. As you probably know, the U.S. accounts for about 60% of our gross auction sales. Investors often ask about our sensitivity to macroeconomic trends, so we thought we would say a few words.

We are starting to see some cooling of prices in our major markets from the elevated pricing conditions that we have experienced in the past couple of years. In general, resale values from many categories of late model and older equipment have moderated. But supply and demand have come more into balance than they have been for some time. Many equipment categories that were in short supply in recent periods are now more readily available and dealers are starting to experience inventory growth of new and used product.

It is clear that the U.S. housing market is under pressure, the severity of which depends on which part of the country you are considering. In general, the sunbelt markets that experience the greatest run-ups have been the first to fall away from record levels. Some of the equipment most commonly used in housing projects have been the first to show diminishing values. However, aggregate [construction] in virtually all models have experienced including highway and nonresidential construction have remained strong.

So what does this mean for us? To be honest, we expect that these market dynamics will be positive for us and will provide continued opportunities for us to grow our business. Our recent record results have seemed to support this view. But the supply of equipment is beginning to lose [inaudible], and we are expecting to find it less challenging to secure consignments to our auctions. We probably won't be repeating the growth we enjoyed this year, but delivering our targeted growth of 10% should be easier than it has been in the tight equipment markets of the past few years.

Interestestingly, as we have seen in prior cycles, the equipment pricing is not as volatile as commodity in stock markets, so while supply increases, experience tells us that we should not expect this to be offset by equipment price decreases. There always comes a time when the balance shifts, and if we are to believe what we hear from our customers we are starting to see a shift.

We've been here before, and we're looking forward to growth opportunities as this balance shifts. We have in place a solid infrastructure and a highly skilled team, and we are excited about the opportunity to capitalize on changing market dynamics.

I will now take a minute to update you on some of our property activities. We are making good progress with development of new permanent sites in Columbus, Ohio, Houston, Texas, and Denver, Colorado. Houston and Denver will be replacement, permanent auction sites for existing facility in those cities, and Columbus will be an entirely new permanent auction site. We hope to have Denver and Columbus up and running in 2007, with Houston to follow in 2008. We are still actively looking for land in other locations in the United States and Europe, and are getting close in a number of regions. Our priorities continue to be the New England area of the U.S., as well as France, Italy, the U.K., and Spain and the European market.

Bob is going to give you an update on our CapEx spending, but before I pass the call to him, I want to say that these property development initiatives are an important part of our focus right now. We are dedicating resources to these activities because we believe strongly that our future growth depends to a large degree on us having a well developed network of auction sites.

Yes, it's true that we could continue to grow sales for the next few years without spending money on auction site development, but we believe that this would be a poor strategy. We've been in this position in the past, it doesn't take long to absorb the excess capacity. If we keep developing auction sites now we're much less likely to face capacity restraints that would interfere with our growth prospects in the future. That's why we intend to devote attention to these property development activities and to continue to lay the foundation for future growth.

And now, over to Bob Armstrong.

Thanks, Rob. And good morning.

The following discussion is based on the results that were presented in our earnings release issued this morning and in our quarterly [MD&A] and interim financial statements which were filed this morning and should now be available on the SEC and SEDAR websites, although the amounts referred to on this call and in our press release and Securities filings are stated in U.S. dollars.

Gross auction sales for the third quarter of 2006 topped 518 million, which is higher than we were expecting. For the first nine months of this year we have generated gross auction sales of 1.98 billion, which is 32% higher than the gross auction sales reported for the first nine months of 2005. Our growth has come from strong performances in our U.S. and Canadian markets in 2006, and can't be attributed to any particular region or auction. We believe that the momentum of our business model and our success penetrating deeper into existing and new markets is driving this above trend growth.

We have often said that we expect long-term sales growth to average approximately 10% per year. However, over the past four years, we have grown at 13%, 15%, 17%, and this year we are anticipating growth in the range of 25%. While this is exciting, it is not consistent with our expectations for the future, and it has necessitated faster than expected increases in our general and administrative expenses, as we have added people throughout the company to keep up with the volumes.

We may be able to grow faster than 10% for the next couple of years as the equipment market loosens, but longer term we still think that 10% is an appropriate and respectable target growth rate.

Our gross auction sales for the YTD in '06 included agricultural sales of nearly 117 million, from 127 on reserved agricultural auctions that we held during the period, compared to 66 million in the first nine months of 2005. This segment of our business has certainly been growing very well.

Our auction revenue rate for the first nine months of 2006 was 9.60%, which is less than the 10.16 we experienced in the first nine months of 2005, but within our expected average range of 9.5 to 10%. Our third quarter rate in 2006 was also 9.60%, compared to 10.56 in '05. The main reason for the fluctuations in our auction revenue rate continued to be the performance of our underwritten business. As we've discussed on prior calls, we continue to believe that our long-term average rate is sustainable in the range of 9.5 to 10%.

Direct expenses, which are comprised of the costs incurred specifically to hold an auction, were 1.4% of gross auction sales for the third quarter of '06 and 1.31% for the first nine months of this year. These rates are higher than the comparable direct expense rates 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 period and by whether auctions are held at permanent auction sites, regional auction units, or at offsite locations.

In 2006 we had several other factors contributing to the increase in the direct expense rate, the increasing proportion of our gross auction sales attributable to agricultural auctions, which have a higher direct expense rate than industrial auctions held at permanent sites, and the higher number of offsite auctions held in '06 compared to '05, which have a relatively higher direct expense rate than auctions held at permanent sites. Also, higher advertising and marketing costs incurred in '06 to attract real estate bidders to our industrial auctions, because of the increased volume of real estate items sold at our auctions in 2006.

Although the proportion of our gross auction sales from real estate auctions has increased in '06 compared to '05, these items still make-up a small percentage of our total sales, but because we are selling more than in the past we are putting in a greater effort to ensure that our customers are aware of these real estate items in our auctions.

General and admin expenses for the third quarter of '06 were 28.9 million and for the first nine months of '06 were 81.6 million. Our G&A was higher than the equivalent periods last year for several reasons. In particular, the need to add people to deal with the above trend and higher than anticipated growth in our business. Our work force has grown 19% since September 30, 2005. Labor costs have represented approximately 63% of our total G&A costs so far this year, and the cost of adding people to support growth has had a big influence on our G&A. Other factors, such as currency fluctuations and the costs associated with our ERP implementation have further contributed to G&A increases.

Importantly, even though our G&A spending has been increasing, G&A is declining as a percentage of gross auction sales, which for us is an indication of operating leverage and efficiency. The ongoing growth we expect in our business will continue to infuence future levels of G&A as we take the steps necessary to ramp-up our work force to manage a bigger company.

Excluding the impact of the after-tax gains of 1.1 million on sales of excess property, adjusted net earnings for the nine months ended September 30, '06 would have been 46.3 million or $1.32 per diluted weighted average share, which is approximately 31% ahead of adjusted net earnings in the first nine months of '05, excluding the after-tax affect of last year's gains on sale of excess property. We have highlighted these gains because we do not consider them to be part of our normal operating results. Net earnings for the third quarter of 2006 were 9.7 million or $0.28 per diluted share, compared to 4.6 million or $0.13 per diluted share in the third quarter of '05.

Before I pass the call to Jeremy to update our guidance for the rest of this year and give you some insight into our preliminary thoughts for '07, I want to give you an update on our CapEx program and tell you about our CapEx spending so far this year.

Total CapEx for the first three quarters of 2006 was 36.6 million including maintenance CapEx. The costs incurred in the first nine months of '06 related primarily to the completion of work on our new permanent auction site in Nashville, Tennessee, the commencement of work on our new permanent auction sites in Denver, Colorado and Springfield, Ohio, expansion of our yard in Orlando, Florida, and capitalized costs relating to the implementation of our ERP system.

For 2006 we are still expecting CapEx, including maintenance CapEx, to be in the range of 50 million for the year, although we may exceed this if we are able to acquire additional land and accelerate our auction site expansion plans.

Looking ahead, we have reexamined our expansion opportunities and are now updating our guidance to an annual CapEx program in the range of 50 to 100 million per year for the next two years. Actual expenditures will vary depending on the availability and costs of suitable expansion opportunities as we continue to invest in the expansion of our network of auction sites and fund any M07 strategic initiatives. We expect to fund future capital expenditures, primarily from working capital.

One final thing from me, our Board has approved a quarterly cash dividend payment on December 15 to holders of record on November 24th in the amount of $0.21 per share.

And, now, I will turn the call over to Jeremy.

Thanks, Bob. Good morning. I'm going to take a few minutes to provide an update on our guidance for the remainder of 2006 and give you some preliminary insight into what we currently expect in 2007. We will be able to give you more detail on our 2007 guidance during our next conference call, which is in February, once we've had a chance to get detailed plans and budgets from our field managers.

On the conference call the end of last quarter, we indicated that we were expecting gross auction sales for 2006 to be in the range of $2.5 billion. 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 nine months of this year we now believe that our full year gross auction sales will be in the range of $2.6 billion, which would represent growth of almost 25% compared to 2005. If you do the math, this would imply that gross auction sales for the fourth quarter of this year will be in excess of $600 million.

Bob has already talked about our auction revenue rate expectations, so I'll just reiterate that we expect the rate to be in the range of 9.5 to 10% for 2006. We also still believe this to be our long-term average sustainable rate. On our last conference call we indicated that we were targeting a long-term earnings growth rate of 15% per year on average but that earnings growth in '06 was likely to be shy of 15%, but better than 10%. With nine months now complete we are looking at an earnings growth rate that could be in excess of 15%.

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%, as we work our way through some of our M07 initiatives to lay a solid foundation for future sales growth, we are increasing some expenses, most notably G&A, at a higher than average rate. However, we have been able to keep our expense growth rate at or below our sales and revenue growth rates, thereby maintaining a GAAP 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 GAAP between revenue and expense growth rate that we expect to be able to deliver continued earnings growth.

Now, I'll pass the call back to Peter.

Thanks, Jeremy.

I'd like to introduce the incoming Chairman of our Board, Chuck Croft, who will take over this new position effective November 30, 2006. As I mentioned previously, Chuck has been on our Board since 1998, and so he understands our business very well. Also, he has many years of experience in the mining and drilling sector so he understands the customer and services that we offer to them. Over to Chuck.

Well, thanks for that introduction, Peter. I'm honored to be taking over Dave's role on the Board of Directors. I have big shoes to fill. However, I've been watching the company grow and mature over the last eight years as a Director, and longer as a customer, and I'm impressed with the depth of skill and experience in the team that Dave has assembled. They have all grown-up under Dave's expert guidance, and I'm confident in their abilities, as Dave is. Your company is in good hands.

So what can you expect from the Board going forward? Well, the best way to describe it is more of the same. With several new members added in recent years, we have a strong and independent Board guiding the future of the company. We all realize that the company is built on several critical foundations: honesty, integrity, and doing what's right. As the company and the Board, we remain focused on these simple principles and to supporting Peter and the rest of the team as they work towards the full realization of Dave's vision.

Thanks for giving me this opportunity, and now back to Peter.

Thanks, Chuck.

Before I conclude our call today, there's one more item I want to discuss. In August of 2006 Caterpillar, Inc. filed a complaint with the United States International Trade Commission, or ITC, against Ritchie Brothers and 19 other companies, requesting that the ITC conduct an investigation with a view to limiting the importation, sale, and purchase of certain hydraulic excavators in the United States. While this issue hasn't hit the radar of many folks in the financial community, I wanted to describe the situation to you so that no one would be surprised when they read about it in our Securities filings.

The complaint related to some hydraulic excavators and associated components manufactured by Caterpillar for sale in markets outside the United States. The complaint alleges patent infringements because of alleged material differences in the machines. According to the complaint, the principal differences between the specific hydraulic excavators manufactured for the United States market and those manufactured for the overseas market include various label and warning stickers, operation and maintenance manuals, and certain components and accessories, among others.

The ITC has instigated an investigation but has not made any decision on the matter. We do not know how long the investigation will last or when the ITC will make a decision. Even though this has not been an issue that our investors have been asking about, I wanted to mention it to you today to make it clear that based on available information we believe it is unlikely that this action will have a material affect on our business results of operations or financial conditions. More information on the complaint can be found by going to the U.S. ITC Dot Gov website.

Now, let me recap the main points that we covered on today's call. Firstly, Dave has announced his intention to retire from our Board and resign as a Director of the company effective November 30, 2006. Chuck Croft has been appointed our Chairman of our Board effective with Dave's retirement. In recognition of Dave's pivotal role in the company and the development of its success for us in the past, the Board has appointed him Chairman Emeritus.

Secondly, we ended the first nine months of this year with gross auction sales of 1.98 billion and net earnings of $1.32 per diluted share, excluding gains on sale of [excess] property, which is an increase of 31% over the adjusted earnings for the first nine months of 2005. We are expecting continued strength in gross auction sales for the remainder of 2006, and have increased our gross auction sales guidance to approximately 2.6 billion for the year and our earnings growth guidance to over 15%.

We would now like to begin to answer any questions that you might have so, Julia, would you please begin the question period.

[OPERATOR INSTRUCTIONS.]

Our first question comes from the line of James Gentile with BB&T Capital Markets. Please go ahead, sir.

How is it going, guys?

Hi, James, good morning.

Hi, James.

Wondering if you can give us more insight into some of the ERP Oracle costs in terms of when they'll start anniversarying going into 2007? It seems like those are some charges, if you will, if you want to use that term, going into '07 that may not repeat regardless of your other kind of headcount additions, et cetera?

Good questions, James. I think there are two aspects to Oracle to think of, and we never really give specific numbers because they just aren't that big compared to all the other things we're doing. One would be what's capitalized, and we have several million dollars now capitalized because we've gone live with the Oracle core modules and have capitalized the cost of the hardware, the cost of the software licenses and the effort involved in setting it up, and that was a few million bucks. That was capitalized in Q3, and is now being depreciated and amortized.

Right.

The second would be additional operating costs, ongoing costs, now that we have this stuff in place there's some additional bodies on the accounting side, there are some additional bodies on the IT side, and some just general, let's call it sustainment expenses. Again, not a material number, lost in the noise of general G&A increases due to increasing sales.

But I should address one point in your question, I don't think any of those are this year only. The stuff we've added on a sustainment basis is a permanent pit, we'll have it there forever. So if there's, I don't know, I'm not going to give you a number, but whatever the number is, we've got it this year, we'll have it next year and so on. What won't repeat would be all the amounts that we've set-up and capitalized because that was the onetime stuff.

Right.

And our view, James, is that this investment, of course, hits your G&A a bit now, it's a piece that's always there, but it enables you to grow on a foundation, on a base, so we don't have to continue adding folks, the way we've had to over the last few years. This is hopefully creating efficiency, scalability, and consistency.

Tight. So I guess if we're looking to 2007 now, would you say that you're going to have a year of better incremental G&A leverage in '07 than the past couple of years have shown in the base pie growth?

I've never been an expert at predicting the future, but I would say that we're getting darn close to exactly that. If it's not '07, it should be '08 where we would see the leverage even more dramatic than we're seeing it right now. A little plug for the company here, I'm pretty impressed, we've actually had operating leverage improvement this year even with all the additional Oracle costs that have hit us for the first time. So I would think theoretically what you described should definitely come true.

Q3 looks solid from a leverage standpoint, so.

I liked it.

Yes, great. Take care.

Thank you, James.

Thanks, James.

Our next question comes from the line of Bert Powell with BMO Capital Markets. Please go ahead, sir.

Thanks. Yes, clearly a great quarter on the top line. Bob, just wanted to dig a little bit further into the auction revenue rate, you know, I know you haven't changed your guidance and 9.5 to 10 is the range, but we're nine months at 9.6. Compared to the last three years, this looks like a step function down.

Can you help us understand a little bit in terms of what are the things that have worked? I know you've talked about the underwritten business, but I'm wondering is pricing playing in here? The Citigroup Colas deals, were those at slightly, you know, tighter margins to get that business in? Are you focused more on market share growth here? Or am I just reading too much into it?

No, I'm going to go through it very briefly, Bert, because there's hands flying up all over the Boardroom here.

Fighting for the microphone!

But I get to go first because I'm closest to the phone. I would like to suggest that it is not a step function down, to use your term. What you saw in the last few years was above expectations, unsustainably high.

Yes.

Auction revenue rates. And we've enjoyed that, let's call it a windfall, it's great when it happened. When it happens again, which I expect it will at some point, we'll enjoy that quarter or two quarters, as well. What you're seeing right now is what we think is sustainable. 9.6% is obviously squarely inside our range, and you don't see any gnashing of teeth around Ritchie Bros. That's a rate that we think we can hold going forward. As for why it's going and bouncing around, I'll open the floor to others.

Well, Randy is sitting here, as well, so maybe I'll offer him the…

Sure, Bert. It's Randy Wall. You know, it's interesting as the quarters were overperforming in the past, we've fielded lots of questions in the reverse. And speaking with many investors in conferences, you know, I remember advising people, we are not managing to a 10, 10.5% rate.

Yes.

We believe that we can do very effective business with very positive bottom line contribution in that 9.5, 10% range. If we try to achieve rates that are too high then competitively you open the door to other channels more than we think is appropriate. We are always in a highly competitive market, but for different reasons.

As the market was climbing in its strength, there's multitudes of, there's a greater ease for sellers of equipment to find different channels and to transact that, and so it tends to be very competitive and price sensitive. And meanwhile the market is going up, and now it's generally flattened or correcting a little bit.

And meanwhile you're doing much the same thing. It's highly competitive. There's always our desire to grow the business. We're also pursuing growth initiatives in different geographic sectors, in different industry sectors that are all layered and mixed into that average number of 9.6%, and I'll concur with Bob, that there's no discomfort on our side. We believe that 9.5 to 10% is a good solid range, both in the past as well as in the future.

If you separated, getting back to your last comment, if you looked at where your new and trying to grow some market share versus established markets, have you segregated the auction revenue rate between those two? Would it be higher and closer to the higher end of the range in one, and below in the other?

Yes, it's Bob. We've never broken it out that way.

No, I know, but just if you look at your internal numbers and look at it, is that what you see?

No. In some cases you get some that are over, and in some cases you get numbers that are down. And it's a part of the auction business. And I believe we've always said that as you push on the frontier end of your business expansion the average mix of business does tend to be a little bit more on the at risk component than your pioneering markets.

Okay.

But we continue to grow, and the average between, bouncing around between 20 and 30% of at risk business out of our global total continues, yes, once again, to be just fine. So, and again, I think as we grow we will have to be pushing and pursuing the frontiers, all the while increasing the penetration into existing markets. So I think the two kind of balance each other out, Bert.

Okay. What was underwritten during the quarter as a percentage?

IT was 22%, I think, for the quarter. I would speak to one other comment, I think you had asked about the Colas and that has no material affect on any of the rates. If you're thinking that the rate gain might be stepped down because we are entering these larger contracts with significant world players and providing more of a global service for some of these bigger guys then the answer is no, that's not anything to do with it. It's squarely still in the issue on the performance of the at risk business, and that will continue to fluctuate, and that's why we give you guys a range of 9.5 to 10, and that's the guidance that we're very comfortable with.

Okay, fair enough. And, Bob, tax rate in the quarter looked, I mean relative to last year, same kind of level, but relative to I think the rate you expect for the year, is that just simply timing? Is there any change in the auction revenue – I'm sorry, the expected tax rate for the year?

No, I think 35, 36 is still a good rate for the year.

Okay, perfect. Thanks.

Our next question comes from the line of Bruce Simpson with William Blair. Please go ahead.

Oh, Happy Halloween!

Happy Halloween! It's spooky, Bruce.

Oh, isn't that spooky. Hey, would you care to venture a guess, hearkening back to an earlier question, about the potential lowering of SG&A, I'm sorry, G&A, as a proportion of gross auction sales, as you begin to harvest some of these investments?

It's kind of tough for us to know how much of the growth in G&A, which I think was up about 20% YOY, is from recurring versus nonrecurring sources, and how much of that might be leveraged against ongoing gross auction sales. So, you know, it looks to me like maybe we'll get something like, oh, a 20 basis point or so lowering as a proportion YOY even during this period of rapid investment. So might you get down to 4%? I mean is that an achievable objective over the next couple of years?

Okay, Bruce, I think if I look at my – gross auction sales as a percentage, excuse me, G&A as a percentage of gross auction sales last year was 4.52%, and this year it's tracking to come in less than that, and my little spreadsheet model shows it continuing to decrease as we go forward. I don't think that we'll see 4% this year, and maybe not even next year, but I see it heading down towards that, and then continuing down below it.

If I go back a whole bunch of years I'd see back in 1998 it was a little over 3.6%, and it sort of went up from there, it seems to have peaked around 4.8%, and now is on its second year heading downwards, so I think you have correctly identified the same story that we're working towards, you know, this operating leverage. I think you are right. I don't know the magnitude of it, it's too hard to predict, and it really depends on how all the M07 different initiatives kick-in, what kind of benefits they provide and when they provide them. But we see a steady decrease downward.

Okay, fantastic. And then because there seem to be a number of either new or nonrecurring auctions in this period, I'm curious about whether you're willing to quantify the contribution of any of the following things? Real estate as a category, the Jewel sale, the Lubbock sale, contribution from Nashville, or contribution from the new agreement with Colas?

Bruce, I'll take it. None of those have really had any material affect on the big picture number. The real estate sale, the Jewel sale was kind of a unique thing for us in real estate, and we wanted to make sure that we did it right. So probably that contributed to the step-up in our direct expenses for the quarter. Lubbock was also kind of a neat thing, but not material in its financial impact, although it sure raised the profile of the company in different sectors including sports memorabilia, but it was just a fun sale to do.

And the reason why we did was there was a whole bunch of other construction equipment attached to that package, so the message got out that Ritchie Bros. is going into the sports memorabilia program, and that's not the case, so we were just – it was an adjunct to something that we were already expert in and we managed to secure the contract. And we know we can sell that stuff, there's a big market for it, but it's not our expertise and we've often said before that we're very focused on what we do, we're sticking to our knitting, and we don't want the wrong message to go out about that, so I appreciate you actually bringing that up.

But Nashville and the other sales, like Colas and things, nothing material there that I would suggest had any trending or any specific isolated instance of assisting you guys in trying to peel the onion.

I'd like to make one more comment, Bruce. It's Randy. Your theme of onetime events, that's been historically a core part of Ritchie Bros.' business, forever. There's -- if you look at any year in our history there's always been "unique" events or projects in different places, but I don't think there's anything new or unique. Sometimes they, as we manage to grow, we bump into a few more of them on average annually but that's not unusual given our scope. And we've just had our second sale in France last week and that was a great success, and there's other things coming about that, you know, I think it's just more, more business as usual.

Can you update us on the progress of the real estate business, either through quantifying the total gross auction sales or the number of auctions, or the number of people involved there?

I'm not quite sure I understand the question, Bruce?

I'm sorry, real estate auctions?

I was thinking about properties, not auction sites. No, that's not grown to a size yet to be big enough to disclose. It's quite small. It a fun, experimental piece of our business. I do personally believe that it will continue to grow, and where the up side of that it is, there's lots of big numbers in the global real estate sector and the amount of auctions that contribute to that, as well, particularly in North America, it's very, very high. So we have an optimistic but tempered view of that growth potential, and maybe I'm a little biased, I like it.

Okay, just a last thing, how many TMs at the end of the quarter?

238.

235.

All right. Thanks so much, guys.

Thanks, Bruce. Happy Halloween!

Our next question come from the line of Jacob Bout with CIBC World Markets. Please go ahead with your question.

Good morning, guys.

Hey, Jacob.

Good morning.

I had a question on the composition of your gross auction sales or at least the growth rate of it. According to my calculations here is that the number of auctions held essentially YTD is similar to all of 2005. So I'm assuming that the growth in the gross auction sales essentially was a reflection of the increase in the number of auctions held?

Well, hands just went flying on that one, too. We all love that question. I think the truth is we'll take our sales anyway they come. Sometimes it's more sales, sometimes it's larger sales. Sometimes we have a yard that did four sales last year, it decides to do five this year. Sometimes it's a bunch of special projects, like Randy and Pete were just talking about. So you're right, Jacob with the numbers, but that actually wouldn't be what we would point to as an explanation. We would say we've just done more volume, good momentum in the business, et cetera, and it happens this time we ended up doing it in more sales.

There has also been a little bit of a push to penetrate deeper into certain local or international markets using a strategy of smaller regional auction events, and that has been picking up momentum in the last couple of years. They're still small, it's been part of our strategy but it's a bit more focused now than it was perhaps, say, five years ago. And that is adding into the increase in those numbers, and that's also an impact I would say in our direct expense rate there because of the average size of auctions.

Okay. And then I just had a question on competitive pressure, what you're seeing basically from directly and indirectly? Directly basically being other auctioneers, and indirectly being other forms of sales of the industrial equipment?

It's Rob here. Competitive wise, as we've gone through this aggressively valued or priced market, I think one of you guys mentioned it earlier, in up markets like that there's lots of opportunities out there for people to use various sources to reach all their equipment, and us being one of them.

So as we've gone through this period, a customer may have multiple choices to sell the equipment, and as we go forward into a slower market, if you will, or a less aggressive market, the customers will trim back to what they believe is the best outlet or the best means of reselling their equipment, and we believe we have that better mousetrap. Our marketing ability is far greater and reaching many of our competitors when we get into tighter markets. So we think as the market slows itself we're going to see a good number of customers that may have looked to other competitive regions to come back, and maybe choose us first.

Okay, great. Thanks, guys.

[OPERATOR INSTRUCTIONS.]

Our next question comes from the line of Gary Prestopino with Barrington Research. Please go ahead, sir.

Hey, good morning, everyone.

Hi, Gary.

Good morning.

Do you have the statistics on your Internet sales for Q3? I think you gave nine months here, but can you fill us in what Q3 did YOY?

I don't have it in front of me, Gary, but I was looking at it just recently and it was very, very similar. I think all three quarters have been very close, it's sort of 20, 21, 22%. I think the full year number was, or the nine-month mark was like 22%. Is that what you are referring to, the percentage of [buyers]?

Yes, exactly. I just wanted to get an idea. And then just in terms of that, your -- what's going on in the States, what's pricing looking like in other markets, such as Europe, that you're operating in relative to what's going on in the States for equipment? Is it still holding pretty solidly, or starting to see a little slippage?

It's Randy here. In the overseas markets it has been more stable than what we're seeing in the U.S.

So stable in terms of the prices in the U.S. are lower than what's overseas at this point, or?

For over the last couple of years the pricing in the U.S. has risen above some of those other international markets, and now as that's, as the heat is coming out of that bubble they are drifting down to, let's call it more normalized layers. And the overseas markets have not seen that bubbling quite as much.

Do you see a situation where the price differential would be advantageous for the overseas markets, to buy more out of the U.S., via the Internet, for instance?

That's possible, yes, it's possible. Yes, there's sometimes configuration issues. Sometimes there's regulatory issues on bringing product into the countries. There is still, even, you know, we have to be careful, even though we say that there's been a bit of a correction or a softening or a normalization within the U.S. market, it's still a massive, massive market. There's still immense activity that's going on there. And there's still a lot of demand.

And even through the highest priced phases of this, the last couple of years, we still had lots of international participation in buying, even in the United States, and shipping overseas, and it's going to places like the Middle East and to Australia where markets have been very, very strong. So there's been international buying activity in the strongest of markets, and we will expect that to continue here in the next few years, as well.

Okay, thank you.

Thanks, Gary. It's Peter here. If anything on the European side, we were over there for [Mordike] sales later, the last part of September, if anything I saw, from my perspective, very strong even perhaps more optimistic buoyancy in the marketplace there than I saw in the U.S.

And part of that may be a little bit unfair because you get on a bit of a momentum slide in the U.S. or the housing market, and people read the papers, and they get all concerned about the impact in the U.S. economy, and that's yet to be seen, although we're giving you guys a little bit of comment on that today. We haven't seen that in the European theatre so there's a little more, I'd say there's a little more optimism level in Europe than there would be today in the United States.

Operator, any other questions, or?

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

Yes, I just had one final question. In terms of your gross auction sales growth, obviously, you've come in above your expectation this year, and I believe it was above last year. Can you talk about where the biggest surprises for you came? Was it, you know, you ended up holding more auctions this year, or was market share gains, you know, more customers believing in the auction process? I'm just trying to segment…

It's Bob here. I think it's a combination of a whole bunch of things. We've seen increase in our [GAS] virtually across the board, throughout the company. We've seen a number of auctions that we've had go up because, as Randy mentioned earlier, in certain areas where we're still looking to develop permanent sites, we've been having more smaller auctions, the permanent sites, the size of the auctions have been bigger, so the increase in volume is virtually coming all across the board for us. I don't think we've nailed it down to one thing.

There's been good increases in the U.S., that's the biggest chunk of our business, and that's been very strong for the first nine months. Europe is ahead of track. Australia is ahead of target, I mean virtually everywhere that we can go, on the up side.

If you look outside of the geographies, as well, on the Internet side we've now crossed over a billion dollars of sales online, so that's – there's no question in my mind that the Internet component is helping to drive sales. And if we take our sales and look at it as dollars per person, we're simply getting more efficient, more effective as a company.

What we call sales force productivity, which is the total sales divided by a number of sales guys, is closing in on almost $12 million per person, that's up several million dollars per guy over the last few years. It's also up as a percentage, as total dollars per total employees. So we're improving our efficiency, as well as geographic and industry stuff that Randy and Rob commented on. We feel pretty good, we're sort of firing on all cylinders right now.

And I guess given the momentum that you have in the market now, like what would make your sales slow-down to a 10% growth? I guess the thought I'd have is to implement them in all these different market sets, that you would probably see, continue to see above average growth?

Well, did I say all cylinders?

All cylinders.

I'm sorry, [small car]!

Just as the numbers get bigger, Sarah – it's Randy – it, you know, it's difficult to keep layering 15%, 20% numbers on top of ever increasing bases. And we will continue to have times when more things fall inside the pot, and then other quarters where it may not be.

So I mean one of the things that we're moving forward here is continuing to plant our long-term seeds and build our future growth areas, and they're in some of these expanding markets and areas that are not yet bearing auction results or proofs, which we fully expect they will and in times to come, and many of those investments are buried inside your SG&A numbers, as well. So, as Bob says, I think we're enjoying the momentum and we're enjoying the firing on almost all cylinders at the moment.

Just to reiterate, Sarah, too, that we expect that that growth will, it's not going to crash down to 10% overnight here. We think we carrying on, and that's a nice thing about it. We're able to lever that bottom line in a period of infrastructure expansion.

But in the long term, I think Bob's comments here in the call were on sort of the longer term, we think that it's a respectable growth target that we can grow the top line 10 and the bottom line 15% EPS on average per year, then that's kind of the targets that we work for. If we can get more than that, we're certainly going to do it, and we need to have systems that will enable us to do it, and that's one of the reasons why the infrastructure is expanding right now.

But I think we're in a pretty good position market wise. I think we're clearly the dominant player and the leader in value added service for our customer base, and we have to keep focusing on that, the concept of making sure that we add value to our customers every day, so that's why we're engaging in this process of continuous improvement, of M07 initiatives, expanding our infrastructure so that we can continue to build that global network of the sites out there.

All right, great. Thank you.

There are no further questions at this time. I will now turn the call back to you.

Well, thanks, Julia. And thanks for tuning in everybody. Enjoy your Halloween evening, and don't eat too much candy! We'll carry on here, and we'll speak to you, I think, in February for our yearend wrap, okay. Thanks, everyone.

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.