RB Global Inc (RBA) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Ritchie Bros. Auctioneers 2006 year-end conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions].

As a reminder, this conference is being recorded Thursday, February 22nd 2007. I would now like to turn the conference over to Mr. Peter Blake, Chief Executive Officer of Ritchie Bros. Please go ahead, sir.

Thanks Jeanie and good morning everyone; and welcome to the Ritchie Bros. Auctioneers Incorporated investor conference call for the year ended December 31, 2006. I'm Peter Blake, CEO of Ritchie Bros. and joining me today on the call our Rob Mackay, our President of the U.S., Asia and Australia; and Bob Armstrong, our Vice President of Finance and CFO.

Rob and I are calling in from our auction site in Orlando, Florida where we are on the third day of our huge five-day auction which is featuring more 6400 lots being sold. So we apologize for the noise in the background, but that's the machines are running across the ramp while we were speaking.

We expect to spend about 25 minutes today talking about the results for the year ended December 31, '06 as well as our expectations for 2007. And then we'd be happy to take 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 and Canadian rules and regulations. 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 and other strategic 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 our SEC and Canadian securities filings; including our Management's Discussion and Analysis of financial condition and results of operations for the year ended December 31, 2006 which was filed this morning and is available on the SEC, SEDAR and Company websites. Actual results may differ materially from those contemplated in the forward-looking statements. We do not undertake any obligation to update the information contained in this call, which speaks only as of today's date.

One other reminder, during this call we will talk about gross auction sales, which represents 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 revenue is the revenue earned by Ritchie Bros.

So after that mouthful, I'm going to make a few remarks about our overall performance for 2006 and talk about a number of strategic initiatives before I pass the call over to Rob, who will speak to our expectations for growth in 2007 and who will provide an update of our property-development activities. Bob will then give you a financial overview, before I conclude the call and open it up to questions.

There is no other way to describe our sales performance in 2006 other than to call it an incredible year. With gross auction sales of over $2.72 billion, which was 30% ahead of our 2005 sales; there is no question that our expectations were exceeded by a significant margin this year.

2006 was another year of accelerating our growth. Over the past four years, our gross auction sales have grown at 13%, 15%, 17% and now 30%. This growth has certain implications for our Company because we believe that a more-sustainable level of gross auction sales growth is in the range of 10% per year. The most significant implication is the need to accelerate our infrastructure investments to both support this above-trend performance and to lay the foundation for future growth.

I'm proud to say that through the period of accelerated investment and more-rapid-than-expected growth, we have continued to stick to the basics of our business and provide the very best customer service. Our commitment to exceeding our customers' expectations is an important part of our culture and is something that we've been working hard to maintain.

Our culture and our commitment to the unreserved auction process have helped us become the world's largest industrial auction company. Our auctions match both the supply and global demand. This model has proven to be a very powerful tool in today's transparent market for used equipment and it helps us to increase our market share during the year that many would say should have been difficult for Ritchie Bros. Yet we increased our sales by 30% and we set volume records in 11 of our regions.

However, before we get ahead of ourselves, let me say that we still believe that 10% sales growth is our sustainable average growth rate for the long term, and that our long-term average target EPS growth, which is equally or more relevant; remains at 15% per year.

One of the other things that we expect will help us support our future growth of both sales and earnings, is our M07 initiative. As you may recall, the purpose of this initiative is to develop more efficient, consistent and scaleable processes to enable us to achieve our growth objectives. We made significant progress in 2006. We implemented a number of foundational modules of our Oracle Enterprise Resource Planning system, including HR and financials and are now deploying further phases of Oracle and our in-house developed Ritchie Bros. operating system.

As I mentioned on our last call, it is important to understand that M07 is far more than a series of IT projects and it certainly doesn't end in 2007. Our intent is that M07 become a mindset of continuous improvement and that it pervades all parts of our Company.

There's nothing like 30% sales growth to get you to pay attention to your systems. We are very focused on looking for ways to do things better to allow us to handle the growth in recent years and to lay the foundation for future growth.

Before I pass the call over to Rob, there are a couple of recent announcements that I would like to comment on. In January of 2007, we announced that we had selected Accruit LLC as our exclusive provider of like-kind exchange services to our customers in the United States. The purpose of this relationship is to provide a straightforward and cost-effective method for customers in the United States to take advantage of the tax deferral available under the Internal Revenue Code Section 1031, like-kind exchange rules.

We do not consider this arrangement to be material to our ongoing operations, though it is an additional service offering that will be beneficial for our American customers.

In February of 2007, we signed a letter of intent to acquire the auction business and assets of Clarke Auctioneers, Ltd., a southern Saskatchewan-based auctioneer of agricultural equipment. This acquisition is intended to expand our presence in the agricultural equipment and real estate markets in this region.

Darren and Jordan Clarke, auctioneers and principals of Clarke Auctioneers; both young, bright and perfect Ritchie-Bros. kind of people; are expected to join our agricultural team Saskatchewan in March. We will not be disclosing the terms of this transaction because we do not consider them to be material relative to our consolidated operations.

However, one of the acquired assets is an approximately 20-acre auction site outside of Regina, Saskatchewan; which will be our 34th permanent auction site. Now I'll pass the call over to Rob.

Thank you Peter and good morning. We've had many people ask recently about what an economic downturn might mean to Ritchie Bros. It's too soon to talk about how prices will shake out in 2007. You can ask us that in a few days when this great Orlando sale is finally finished. But we've been in the business for more than 40 years and have seen economies ebb and flow. Based on this experience, we believe that any change in market conditions for better or worse, will provide opportunities for us to grow our business.

The supply of used equipment has been very tight in recent years, thanks mainly to the strong economy, when equipment is working and isn't being sold and we've been able to increase our sales volume. However, if there was to be a material slowdown, it could arguably be very good for Ritchie Bros. A softening economy would likely bring more equipment to market and help us maintain the momentum of recent years.

In our experience, as the supply of used equipment increases, resale values do not decline as one might expect. One of the reasons is that during periods of uncertainty, many equipment owners shift their buying preferences from new equipment to good-quality used equipment. If they are uncertain about future contracts, they are less likely to purchase more expensive new equipment.

This has the effect of increasing the demand for the equipment at our auctions at the same time as supply is increasing, thus mitigating what might otherwise have been a poor pricing environment.

As long as things are changing and equipment owners have the need to buy and sell equipment, there are growth opportunities for Ritchie Bros. With that being said, we don't expect to maintain the growth rates of recent periods. We still believe strongly that our sustainable average gross auction sales growth rate in the range of 10% over the long term, with earnings per share growth of 15% per year over the long term.

Before Bob reviews the financial information, I'd like to give you a quick update in some of our property developments.

Our new permanent auction sites in Columbus, Ohio and Denver, Colorado are nearing completion and the grand opening auctions at both locations are scheduled to be held in April of this year. Denver is a replacement permanent auction site for our existing facility in that city. And Columbus will be an entirely new permanent auction site.

We've been conducting successful off-site sales in Ohio for many years now and have a well-established customer base in that state, but this will be our first investment in facilities in that market.

We've also started work in our replacement permanent auction site in Houston, Texas which we hope to have up and running 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 a number of replacement facilities in the U.S. and Canada, as well as new facilities in the New England area of the U.S. and France, Italy, the U.K. and Spain in Europe.

These property development initiatives are an important part of our focus right now. We believe strongly that our growth depends in part on us having a well-developed network of auction sites. Our ability to marshal large amounts of equipment at central locations is a competitive advantage.

It is true that we could continue to grow our sales for the next few years without spending money on auction-site development, but we believe this would be a poor strategy. By continuing to develop auction sites, we reduce the risk of future capacity constraints that could interfere with our growth perspectives.

And now I'd like to turn it over to Bob Armstrong.

Thanks Rob and good morning everyone. I hope you've all seen our earnings release this morning, and I'll also draw your attention to our MD&A and audited financial statements which are being filed this morning as we speak, and will be available on the SEC, SEDAR and Ritchie Bros. websites.

The numbers that form the basis of our discussion today are included in our earnings release and annual filings. All dollar amounts referred to on this call and in the press release and the filings, are stated in U.S. dollars.

As Peter mentioned, we achieved gross auction sales of 2.72 billion in 2006, which was 30% higher than our gross auction sales in '05 and comes on the heels of 17% growth last year and 15% the year before.

Our fourth-quarter gross auction sales were nearly 739 million, well ahead of our expectations for the quarter. There was no one event that caused us to exceed our guidance for the quarter, but rather a series of auctions that performed much better than we expected and it was a great way to finish off the year.

Our Canadian results in 2006 included gross auction sales of about 130 million, from the 141 unreserved agricultural auctions we held during the year; compared to just over 75 million from 99 agricultural auctions in 2005. Auction revenues in 2006 were 261 million, which was about 23% ahead of our 2005 performance.

The auction revenue rate in '06 was 9.59%, which was less than the 10.19 rate we experienced in 2005, but within our expected range of 9.5 to 10%. Our underwritten business performed unusually well in 2005 and it returned to more normal levels in 2006, bringing our blended commission rate back to the expected range.

Direct expenses, which include the costs incurred specifically to hold an auction- such as wages for temporary staff, advertising, travel expenses for staff to attend and work at the auctions; were 1.36% of gross auction sales for 2006, slightly higher than the 1.29% rate experienced in 2005.

The main reasons for the increase over the prior year are the fact that we incurred higher advertising expenses to attract real estate buyers to our auctions, and several large off-site auctions during the year necessitated higher than average direct expenses.

General and administrative expensive were 118.2 million for 2006, which is about 25% more than our G&A in 2005. The biggest single factor behind the growth in G&A was the growth of our employee base in response to the growth in the volume of our business.

During 2006, in response to our tremendous sales growth and to meet demand, we added 146 employees to our team. This personnel growth explains the bulk of the increase in our G&A because personnel costs, including salaries, benefits, stock compensation expenses, employee performance bonuses; represents about 60% of total G&A.

Our employee count at December 31, '06 was 821 people, including a sales force of 245. And these numbers are up from 675 and 211, respectively at December 31, 2005.

We are adding people at a more rapid rate than in the past, mainly because our business growth has been accelerating. Since 2002, our sales volumes have doubled but our employee base has only increased by about 45%. We were due for a catch up and 2006 was a catch-up year.

We are also adding administrative people to our operations as a result of some of our M07 projects. One of these initiatives that was developed in 2006, or deployed in 2006, was the introduction of a new senior administrative role in most of our regions called a Manager of Regional Operations or an MRO. These MROs are responsible for the non-sales aspects of our field auction operations. We are freeing up our regional managers to focus on sales activities rather than the day-to-day administration of their auction facilities.

Although we are increasing our administrative expenses as a result of this initiative, we expect the initiative to enhance our sales volumes and our sales force productivity. We now have MROs running most of our auction facilities.

It's gratifying for us to see the continued increases in our sales force productivity, even though we have been adding people to our sales team at a faster-than-normal rate. With gross auction sales per revenue producer of nearly $12 million, our productivity is at a very high level and is a testament to our hiring, training and retention programs; as well as our investments in productivity tools.

Another component of the increase in G&A, as mentioned on our conference call at the start of 2006, was an additional 3 to 4 million in G&A costs related to personnel working on M07 initiatives, including our ERP implementation; and also to enhanced compensation programs.

In addition, the incremental costs of complying with SOX 404 were in the range of $1 million. There were also a number of one-off items recorded in Q4 in G&A; and although the components are individually insignificant, in Q4 we recorded legal and related costs of 2.3 million, which we do not expect to incur in future years.

One of these non-recurring items was the legal costs involved in dealing with the Caterpillar ITC complaint that we have discussed on prior calls and described in our securities filings. We have now been released from this complaint.

While the dollar amount of G&A increased during 2006, it decreased as a percentage of gross auction sales; highlighting the operating leverage inherent in our business model. G&A in 2006 ended up being 4.34% of gross auction sales, which was better than the rate of 4.52% experienced in 2005 and in fact was the lowest rate we have experienced since 2000.

If I could distill the G&A discussion down to one concept, it would be that are G&A growth in 2006 reflected the significant personnel and infrastructure expansion of recent years. The benefits of these additional expenditures include our ability to hold larger auctions, the increased capacity that we now enjoy, and our ability to achieve higher commission rates. Thanks to our operating leverage, G&A has been growing at a slower pace than sales.

Our effective income tax rate for 2006 was 38%, compared to 35% in 2005. We recorded a number of one-time adjustments to our tax revisions in Q4 in part to adopt new accounting standards that reflect uncertain tax positions. And this, combined with an increase in the portion of our profits being earning in the United States; generated most of the increase in our effective tax rate.

We finished 2006 with net earnings of 57.2 million or $1.64 per diluted weighted-average share. Net earnings in both 2006 and 2005 included gains on sales of surplus property. Excluding these items, which we do not consider part of our normal operations, net earnings in 2006 would have been 56.2 million or $1.61 per share, which is a 14% increase over the comparable number in 2005.

On a pre-tax basis, growth was 19%. Strong gross auction sales growth was mitigated in part by a lower auction revenue rate, higher operating costs and a higher tax rate.

Looking ahead to 2007 and future years, we remain focused on achieving average earnings per share growth in the range of 15%. We have had this target for a number of years now, and as we have seen recently, there will be years when we exceed the target and years when we don't.

2006 was a bit of a catch-up year for our G&A expenses. I've described our investments in our people and infrastructure above, and there is likely going to be a bit more of that in 2007. That being said, we are still expecting earnings growth in the range of 15% for this year.

We were surprised by our strong gross auction sales performance in 2006, as I'm sure many of you were. And given that we can't count on the same sellers to consign to our auctions every year, it will be difficult for us to measure up to the 30% growth that we achieved last year.

Based on input from our field managers, we are expecting gross auction sales in 2007 to be about 8% ahead of 2006, putting our expectations for the full year in the range of 2.95 billion. Breaking down the quarters is always a challenge. But I would expect sales of at least 700 million in the first quarter.

We continue to believe that our sustainable auction revenue rate is in the range of 9.5 and 10%. But we have learned through experience, that our auction revenue rate is difficult to predict on a quarterly basis. As I mentioned earlier, we remain focused on achieving an average earnings growth rate of 15% and our current expectation for 2007 is that we should be in this range.

The pre-tax earnings target that our compensation committee has set for our executive bonus pool in 2007 is 100.9 million. This represents the level of normalized pre-tax income we need to reach before the base level of executive bonus pool is earned. It is also a relevant factor for some of our other employee compensation programs.

Of importance to you is that if this target is not reached, our executive and employee bonus accruals will be ground down. And if the target is exceeded, the bonus pools will be increased. This serves as a bit of self-correcting mechanism on our G&A, but it's not too dramatic because incentive compensation is still a fairly small part of our total expenditures. Even if actual earnings are significantly over or under this pre-tax earnings target, it's unlikely that bonus accruals could change much more than 2 or 3 million in terms of impact on G&A over the course of the year.

I need to stress that this pre-tax target is just a target. It's not a forecast. And I'm being very careful to make this distinction, as it would be a mistake for you to think that this is our forecast for the year. It's simply the target or hurdle that our compensation committee has set for bonus purposes.

Our CapEx for 2006 was 51.2 million. And in 2006 we invested in the construction of a number of new permanent auction sites, including new sites in Denver, Columbus, Houston and Saskatoon, Saskatchewan. Our total CapEx also includes improvements to existing auction facilities and a number of IT investments in connection with our M07 initiative, with the main one being our ERP system implementation.

Going forward, over the next four or so years, we are expecting CapEx, including maintenance CapEx, to average between 50 and 100 million per year; depending primarily on our success in identifying and acquiring properties suitable for the development of new auction sites and the scope of our M07 initiatives. Actual expenditures may be above or below this range.

We paid dividend of 26.9 million in 2006, which was about 47% of our net earnings. During January of this year, our Board of Directors declared another quarterly cash dividend of $0.21 per share, payable on March 16 to shareholders of record on February 23. The total amount we expect to pay out for this dividend is around 7.3 million

One final point from me; this was our first year of being subject to the requirements of Sarbanes-Oxley Section 404. And while it has not been a big issue for our shareholders, it was a very big issue for our employees, especially since we were dealing with all the first-year compliance issues while we were implementing our ERP system.

We are proud to have survived the experience and to have come through without any material weaknesses, meaning that we received unqualified opinion from our auditors. And now I'll pass the call back to Peter.

Thanks, Bob; again, apologies for the noise. We're just into the big crawl room right now so they're swinging by our windows. We're speaking to you guys from Florida here, but I appreciate the comments, Bob.

One more topic that I would like to mention before I wrap the call up and open it up for questions is our announcement this morning that our Board has adopted a shareholder rights plan. The rights plan, which takes effect today, has been adopted to ensure the fair treatment of our shareholders in the event of any takeover offer for our common shares.

I want to emphasize that we are not adopting the rights plan in response to or in anticipation of any specific takeover bid or proposal to acquire control of the Company. Our rights plan is a plain, vanilla plan and is very similar to plans adopted by many other Canadian companies.

And for the information of our non-Canadian shareholders who may not be familiar with the use and effectiveness of rights plans in Canada; let me say that these plans are not designed to thwart takeover intents. They are simply designed to give Boards and management of target companies, sufficient time to react and to deal with hostile bids.

The full text of our rights plan, which is subject to shareholder ratification at our annual and special meeting on April 13th; is available on our website and on the SEDAR and Edgar website.

I'm mentioning our rights plan today because we put a lot of thought into it and considered the experience of other Canadian public companies. In the end, we decided that this plan is the very best way to protect the interests of all of our shareholders and to provide our Board of Directors and shareholders with additional time to assess properly any unsolicited takeover bid and to consider any value-enhancing alternatives to takeover, to a takeover bid.

Now let me recap the main points we covered in this call. We had an exceptional year in 2006, breaking many regional records and ending the year with gross auction sales of over $2.7 billion, which is a tremendous 30% lift compared to '05.

In 2006 we invested significant resources in continuing to build the platform for future growth. This resulted in higher G&A expenses, but our operating leverage remains intact.

We've made good progress on our accelerated CapEx program and are opening soon in Denver and Columbus; and actively pursuing additional opportunities in the U.S. and Europe.

In 2007 we are forecasting gross auction sales in the range of $2.95 billion for the year. And we expect earnings growth for 2007 will be in the range of our long-term targeted earnings growth of 15%

Now, we'd be happy to answer any question that you have. So Jeanie, please begin the question period.

Thank you, sir. [Operator Instructions]. The first question comes from the line of Bert Powell of BMO Capital Markets. Please proceed with your question.

Thanks. Bob, on the G&A, the 2.3 that's just for legal--?

Legal and related expenses; that's right.

Okay. Is there any other one-times in there as well, that you would deem sort of not recurring? You sort of alluded to a basket of stuff.

The 2.3 is all non-recurring; and within the rest, I'm sure there are but they are not sizeable enough for us to pull out.

Okay. So if I look at the ramp in G&A coming into the fourth quarter, even if I back out the 2.3; it's a pretty healthy increase year-over-year relative to the increases in the quarters in the beginning of the year. Was there more people hired in the last quarter that counted for it? Were there some bonus issues in the fourth quarter that would compensate for such a big increase, relative to the other quarters?

Headcount-wise, Bert, the hiring was relatively consistent through the year. It was between 4 and 5% increase in headcount each quarter. It was a bit heavier in the second half but not dramatically. For sure there were some bonus accruals in the fourth quarter that were larger than some of the accruals in prior quarters, but not through the roof. But that often happens. It was a big quarter and so there were some accruals there.

So what would be the catch-up on the bonus side that got booked into G&A in the fourth quarter?

Less than a couple million dollars.

Okay.

In other words, not huge; but there was some. It's a good point. There was some of that. We obviously did quite a bit of analysis on this internally because it's a critical area for us and will be going forward. And when I break it down into all the different categories, most of the categories of G&A increased at a rate through the course of the year, lower than gross auction sales were growing. In other words, they were reasonable. And there were a couple that grew more, and some we talked about related to our M07 initiatives and some of the IT expenditures, for example. And that's conscious spending. I mean that's our plan; is to grow the foundation and ensure that we can have a good solid base for all of our future growth.

But the bulk of it comes back to people. I think you sort of summed it up in your question very well.

So if you forward to 2007, we've seen -- I think the staff is up 22% I think if I've got the number right. What do you think is going to happen to headcount in '07? Have you got-- has '06 been the big build year and we should more leverage to the G&A line in '07?

'06 was a good reminder to us that it's hard to answer that question. The truth is, our growth in people and our G&A expenses in '07 will largely be dependent on what kind of volumes we see coming at us. We start the year with a plan, no question; based on our assumptions for what kind of sales growth and other volume we think we'll see coming at us.

And like last year, we have to adapt. And so it's hard to predict that. But our [inaudible] goal is to-- is not to have our G&A growing in a way that's disconnected with our sales. There has been some catch up going on; there's probably more catch up to go because we've really grown above trend for a couple of years now. It's a big focus area for us, Bert. You're asking the right questions and they are questions identical to the ones we're chewing on ourselves.

Right, okay. So fully appreciate all that in the context of an 8% gross auction sales growth line then; where would you look for headcount to go? How much is continued catch up until you kind of deal with the step ups we've seen in the last couple years?

We've avoided getting too specific on that because we recognize we'll have to adapt as we go. But I would guess you wouldn't be too far wrong if you were somewhere between the-- I don't know-- maybe no more than 10 or 15%, hopefully less than that. But it's hard to say until we get further into the year.

Okay. Okay, a question for Rob; I guess you're in the middle of the big kick-off auction, but just back to your comments with respect to when things soften down-- volume is increasing and we'll get the results I guess from the Orlando auction at some point. Just looking over your shoulder, what do you see in this auction relative to last year, if you sort of had to guess in terms of what's there in the field, what's happening with prices-- just to give us a little kind of real-time sense?

Well, what we've seen in the first two days and this morning is a pretty steady market. We're maintaining what we saw towards the end of the year in Q4. And we're seeing some good strength in some of the product lines that are out there. And there's an enormous amount of people here from virtually all over the country and central South America, Middle East, Europe; and the pricing that we anticipated here is as good as or better in virtually most categories.

Perfect. Thanks Peter; thanks, Bob.

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

Good morning.

Good morning, Ben.

I'm sorry. I'm going to focus a little more on this G&A again. The management bonuses, if I recall correctly; the pre-tax target last year or for this year set at the beginning-- sorry for last year, set at the beginning of the year was $82 million, where is was going to kick in. So you achieved $92 million pre-tax I guess, after your bonuses were accounted for, which speaks to the self-correcting mechanism you're talking about. But, year-over-year how did that compare-- how did your bonus compare to the previous year? I'm trying to get a sense of the magnitude in the fourth-- not just the fourth quarter but the full-year 2006 G&A; how much of the delta in that was up over the previous year because you beat your target by quite a significant margin?

Management bonuses this year were lower-- executive bonuses this year were lower than executive bonuses last year.

So you actually exceeded your target by more in '05 than you did in '06? Is that what that implies?

Yes it is.

Yeah, it does imply it. And I think when Bob says lower, they were not materially lower. They were pretty close to even I think, Bob-- small dollar difference.

Yeah, it was-- the target was larger so we missed the target but our performance was compared to targets, it was better last year than this year. And also the dollars paid were lower this year than last year. I agree.

Okay. And so if you would only hit your target this year, you would see some backing off of your S&A there?

Absolutely. And that's-- I guess maybe that wasn't clear enough in my comments, Ben. The G&A that we start the year expecting is sort of based on the assumption that we will hit target, if that makes sense. And if we go beyond, as we did last year or the year before; then G&A goes up a bit. And if we miss target, then it comes down.

I've asked this before, but I'll ask it again; remind me why you won't disclose how much the bonus moves as per your target? Because it would make things a lot easier for our forecasting methods, and I don't understand what's so secret about it.

When you get down to people's compensation, we try and keep that fairly confidential internally and externally.

So you're talking about a lump sum for everyone; you're not disclosing what-- I'm not asking you to say individually what you're getting paid; just as a formula. How does it work?

Right. And the one thing we have said, Ben, is that the formula is not able to kick out a swing of more than a couple million dollars up or down. And we're hoping that that is enough information to be able-- in other words, it's just not that dramatic.

Well it seemed to be this year, but--

Well no, it came in roughly the same as-- a little bit lower than and similar to last year.

But the G&A was up so much. I mean I can't-- to Bert's point, I don't see how this all came in the fourth quarter unless you hired a bunch of people on October 1st.

There was hiring in the fourth quarter. That's one of the issues. There were the one-time items. There was a limited amount of additional bonus accruals in the fourth; you're both right on that. That happened the year before as well in the fourth quarter. So that's not really a good Q4 versus Q4 item to pull out. That's why we're not focusing on it.

Okay. Can I ask you about the ag market, because there's obvious increased interest in that industry and what's going on for all the reasons I'm sure you're familiar with. Are you seeing any of that excitement translate into more activity, higher prices for ag equipment, any kind of read on how that sector may be performing relative to the kinds of expectations that are building out there?

Well, I'm not sure about the kinds of expectations that are building. It's mostly with you guys.

Well, that's what I'm referring to really. There seems to be some disconnect between what-- like tractor sales, for example and some of the excitement about where that number could be going.

Well, I mean it's been enough to talk about the corn markets and $4 and etc., etc. I think it's fair to say that we see the ag as a real natural connection. And we are working hard to grow our business as being the premier and the only main choice for guys when it comes to auctioning of equipment. And so we've been working hard. We think this strategic acquisition in southern Saskatchewan is very positive for us. It just adds to our team and adds to our [pure] influence.

We're working hard at carrying that influence through to the U.S. market as well. I'll tell you in terms of pricing, our expectations are along with where the market is in terms of the firmness of not only the equipment bin, but the land as well. And a significant component that we end up seeing of people retiring out of farms in Saskatchewan in Alberta is the real estate side of things as well.

So we're seeing some consolidation in there that continues on. And you know most of the comments that I've read within the last two or three weeks on the farm I've read-- and my own light said-- yeah, those are all kind of what we're seeing. So I think you'll see some pretty happy numbers coming out of-- in terms of ag and where the ag is going. There's a little more confidence in the crop and a little more confidence in some of these larger farms and what they'll be able to produce and how they can effectively get their crop to market.

And one of the unknown right now still, is on the cattle and you know the U.S. cattle things- still not yet resolved to the satisfaction of most of the Canadian cattle guys. And I hope that that will happen, and that the noises that we kind of hear, that might happen early in the year. So we'll have to wait and see about that.

So you're saying that you are seeing a sentiment shift in the industry that would be consistent with some of the sentiment shift that's been taking place in the financial markets about that industry?

Yes.

Is that a fair statement?

Yes, it is.

And just finally on the tax rate; Bob, you mentioned, unless I missed it, you just generally mentioned a few items that led to an increase in the fourth quarter. Can you quantify them or can you-- or at least is it safe to say that we should just still expect like a 34% rate for '07 or something like that?

Oh, yeah. Good question; I wasn't really clear on that in that call. I think that we have not seen any structural in our rate expectations. It was higher in Q4 because of a bunch of business in the U.S. and also because of some one-time amounts we had set out. I would think-- not 34, I would think sort of the 35-36 range for next year, which is kind of consistent with where we've been.

Right. Okay, great; thanks a lot.

Our next question comes from the line of James Gentile of [EB&T] Capital Markets. Please proceed with your question.

Hey guys, how's it going?

Hey James.

I was wondering if you can kind take a look at -- you know take a step back from SG&A expenses and stuff and just kind of look at how you're managing the business on a day-to-day and just give us a couple points as to where you're seeing-- elements of your business model that are demonstrating some level of transcendence beyond your control. I mean the level of growth that you saw here and even in your Q1 gross auction sales forecast of $700 million shows 22% year-over-year growth, which essentially indicates that second half gross auction sales are going to be a lot weaker than what we saw in the second half of this year, to attain your 8% gross auction sales growth rate in 2007. So there has to be some element of uncertainty or maybe just more efficient markets that are transcending again, the ability to manage this thing on a day-to-day basis. I mean we've seen it in other marketplaces that are budding historically from tulips up to E-bay. So talk to us about it philosophically.

Sure, James; it's Pete here. I'm happy to speak philosophically because that's what we do a lot of-- is kind of naval gazing and try to figure out where the market is going. I'd say-- just to look at Q1 over Q1 and 22% and then to conclude that the market is shifting in the direction that we don't necessarily appreciate is probably wrong. Quarter-on-quarter comparisons are a little bit dangerous, so just be cautious on that.

I'm aware- but--

Pardon me?

I'm aware of that but--

It's just in general I think really what we're seeing is-- we sit in this massive marketplace and we're gaining pretty good momentum. And we're coming off some tremendous growth years in the past two or three with 30% lift on the prior year. And when we sit down and look at our forecastic data, the process we go through is very, very bottom-up and top-down both. We're getting our numbers from our guys in later in the year so they give us their estimates around in November and December for what they believe they're going to achieve in the following year.

And we look at that number, and we say well we realize that that's a big number you guys hit in '06 and you're looking at '07 saying- gee, where's it going to come from? It's hard to write down the big number. But we temper that with a little bit of a macro view from corporate to say well, we think you guys might do-- you're a little hot and you're a little more aggressive in your market than what we think you might achieve or we think you guys are sandbagging a little bit in the field and we think you'll be able to achieve a higher number than that.

So philosophically, on that macro basis, we do 2.7 of $100+ billion marketplace. And it's starting to really gain the momentum that we think we're earning. And we earned it in the marketplace everyday. Like looking out at the field of equipment here, we're looking at 6400-6500 items selling this year versus 5,000 last year, so this is a pretty good litmus test for us to feel confident in our ability to grow the marketplace. But we also need to be very mindful that if you grow too, too quickly, then you'll end up diluting the value of the service you provide to all of our customers.

So we have to manage that. And we spend an awful lot of time trying to exam and to make sure that we're beefing up our team of people so that we don't overtax them in the field. And in the administrative support side, so that we can serve the customer base just as well as we need to. And in the context of in '06 when you're implementing an ERP and you're going through you're SOX compliance and whatnot-- we had a good ramp of administrative support to make sure that we were not diluting the level of service to meet the needs of our customers. That's our primary goal. Because this is-- for us as an annuity, and we're cultivating this culture that we have to grow the value that we deliver to customers everyday. And if we don't continue doing that, then the long term will suffer.

So, you saw an investment for us in infrastructure in '06 that was fundamental to make sure that we maintain our platform of excellent and exceptional customer service.

So you would argue then that you're degree of operating leverage, moving on through 2008, it would be higher than we saw perhaps over the last two years?

Well, define higher? When you say-- you'll be more efficient or less efficient? I'm not sure what higher means.

Higher in terms of more efficiencies-- if we were going-- if we maintained this 10+ % gross auction sales growth, will we see 60% incremental margins or will we see a continuation of this overhead?

I think you can expect that you will not see overheads grow at the same pace that you did in '06. Nominally it looks like a big number, but from an operational perspective, it's actually more efficient than we were the prior year. We're working on making sure that we can deliver-- and this is part of the M07 strategy-- we want to be able to deliver more to our customers, more efficiency-- not by simply ramping up people, because that's our number-one single most costly G&A line item. So we have give them the systems and tools so they can process more with better tools.

And over time, our program is clearly exactly that; and deliver more and you'll see that operating leverage continue to be more favorable from a shareholder's perspective.

So then if you want to deliver more-- are you making that statement that perhaps the auction revenue margin is a bit higher historically and that in exchange for more accelerated top-line growth we'd see a trending downward of auction revenue margin?

No. No, I don't think you'll see a trending down. We're pretty comfortable that the auction revenue margin is 9.5 to 10; most of the variance on that will always be based on risk business. So in a market where it's less predictable in terms of where the pricing is, it makes us more challenged to deliver consistent numbers on the risk business in environments where it's a little more predictable-- like we see kind of '07 as being a little bit more predictable pricing environment. So when we deliver 959 for '06, we're targeting probably more to the mid-range of our anticipated program for '07. And we think that's clearly deliverable based on our comfort with the more-known pricing environment that we're in today, then we were maybe in '06 when we were chasing the market up a little bit and then down a little bit.

Okay, thanks.

Our next question comes from the line of Yvonne Varano of Jefferies. Please proceed with your question.

Thanks. Bob, I was just wondering if you could give a little more color on the one-time amounts on the tax?

Sure. In the U.S. -- U.S. GAAP FIN 48 requirement kicks in next year for many companies, including ourselves. And we, in applying FIN 48, are required to estimate certain tax liabilities that we previously didn't have to estimate and set up expenses and payables for them. And so we've done that this year. And they add up. There are a number of those little guys that add up to-- I've forgotten the actual impact on the tax rate; but that was main variation from our normalized rate in the fourth quarter.

Those are set up now, so they're done. They're on the books and they carry forward until they go away. So it's kind of like a one-time series of items you had to post. Individually, none significant; but there were five or six of them, little guys.

Okay. And I know you talked about the shareholder right not being in response to anything in particular; but just curious as to why you decided to do that at this point.

Excellent question-- we, the Board, have been looking at this for a year or so, thinking that it's something we should put in place. And there is no better time than just to do it at the present, just do it before there is something upon you. If there was to be a takeover attempt at some point in the future, the advice of counsel was you're better off having your plan and your strategies in place in advance; put them in when there isn't a lot of pressure, when nobody's actually looking at you.

In that event, when somebody does take a peek, if they take a peek; you're sort of set. You've already got your tools in place. And Yvonne, the nature of these plans, as a Canadian company, is quite different than what you might be used to in the states. And so these are plans that most Canadian public companies would have in place, a plan almost identical to this would be found in most major Canadian public companies.

I don't believe there has ever been a case in Canadian corporate law, with plans like this where the plans have actually been used to dilute. And it's not an effective poison pill. It's an effective time buyer. The securities commissions eliminate these plans I think within-- I forgot the number now but X number of days after they start to get enacted, they get rid of them before they become dilutive. But they buy time. And absent that, Boards of Directors don't have much time to deal with hostile attempts, and so it's really just a strategy for buying time and it's become a very well-established tool in Canada.

They're quite unlike the U.S. plans, which actually have teeth. These plans don't tend to have teeth. They simply buy some time and the advice of counsel was just put it in now, so you've got it. Because it's a huge hassle and not easy to try and put one in, in the heat of a hostile attempt.

Bob, you should maybe speak to the number of days. Because it kind of-- is to me it became quite relevant that this is kind of a-- it is a tool for us to be able to extend in the event that there is a hostile takeover; that you can try to maximize the value for shareholder. And today in Canada, I believe that there as quick as a 30 or 35- day turn between the time and a takeover bid happens. And I don't want to get too legal on you and I don't have the stuff in from of me, Yvonne.

But imagine a 35-day response period versus a 90 or 100-day response period, and that's what we're talking about in terms of-- if you had a plan that was effective and you could use that, instead of having to rush to market in 30 days and try to maximize the return to shareholders, you'd have actually 100 days. And it gives you-- it's kind of like having 100 days to prepare for an auction versus 30 days to prepare for an auction.

Right.

It's going to end up doing a better job.

Sure. Okay. And then just on the G&A, I know you said that there was about 3 to 4 million related to the M07 initiatives. Is that going to continue in '07 at about that rate?

Yes. In fact, to be clear, the 3 to 4 million number was the number we gave at the beginning of the year. [Inaudible] two things-- one was the additional costs for certain M07 initiatives, and some changes we had made to some of our compensation structures. We said, hey at the beginning of the year, look guys-- we've made some conscious decisions that are going have about a 3 to 4 million impact on G&A through the year. They did. And yes, they would continue.

Okay. Great, thanks.

[Operator Instructions]. We do have a question from the line of Bruce Simpson of William Blair. Please proceed with your question.

Hey, good morning. My question is about-- now that you're up to $12 million in revenue per territory manager, what's the target? Where can that go realistically over the next couple of years? And what are your thoughts about the rate of growth in your headcount of TMs?

We're at a disadvantage here Bruce because we can't look in the [inaudible] to answer the first question, but I'll take a kick at first, it's Pete here.

The 12 million GAS per TM-- I don't know that we have a particular target that we're aiming for. We've historical had 8 million as a number that we've experienced over many, many years. And that was our initial target and then as we get more and more efficient, then the momentum game kicks in and it doesn't take as much time to sign 12 million worth of iron as it did 8 million in terms of banging on doors and talking to customers. And you get more and more market momentum and market share. Those numbers will creep up. I don't think that we see anything other than continued ability for us to serve that marketplace with the guys and being as efficient as they can.

That might trend a little bit, depending upon whether you decide to jump into a market that has-- that is relatively new, or you're enhancing your ability to serve a metro market, like opening up sites in Columbus and the new site in Denver-- things like that. You tend to have a lift from that type of thing, versus not. So it'll probably be a balance [inaudible] 12. I'd be happy to see it go higher. I wouldn't stress out too much if it got a little bit lower than that. But we're working on making sure that that efficiency is maintained.

In terms of the headcount, we are at 245 for salesmen at December 31. And we're conscious about making sure that we continue to grow that pipe of new employees. We do a look-see to make sure that we're developing these guys in an effective manner. And I think one of the reasons why that thing has gone from 8 to 12 is we were able, thanks to the diligent work of a lot of people in our HR and training group, to make sure that we get these guys as efficient as possible, as quickly as possible.

So I'm encouraged to see that. I think that we'll continue to grow where it makes sense in terms in headcount to serve the market. But again, we have to be conscious because if you went out and just simply hired a bunch of new guys, you're going to dilute the level of service you provide your customer. So we have to manage that ability as well.

Okay, so does that suggest that thinking in the year ahead maybe the rate of new sales force additions slows down a little bit from the rapid pace in '06?

It's Rob here. In certain areas it may. In other areas I think it could grow. We have areas last year that we experienced some phenomenal growth in. And some of our TMs that were out there well exceeded that $12 million mark in their GAS and in fact, some of them would be double of that.

So when we look to areas like that and we see some of our territory managers getting up into the high 20's of GAS, and the number of contracts that they sign in order to get that volume achieved; we start to evaluate those areas and look at them and say- the guy is just about taxed out on the number of contracts he can physically sign and give the proper customer service to the customers in those regions. So then we evaluate those areas and try to ascertain whether we nibble a bit off of one and another and another, and create a new territory for a new TM.

So it's a constant evolution and analysis of each of the territories that we have out there. And we know that some of our regions are going to have TM growth higher than last year and some of them are going to cut back a little bit because we don't see the same growth rate in those areas as the others.

Okay. So all in all, should we expect to probably grow in line with your targets for gross auction sales-- sort of 10 percent-ish growth?

All in all, it's hard to give you a fixed number but I think that's probably a fair target. We've talked about that in the past too, Bruce; in that trying to grow our TMs kind of consistent with our GAS target number. And if you want to write down a number on a page and you were sort of in 10% range, you'd probably be pretty close.

Okay, and then shifting gears and talking about the subject du jour of G&A here and leverage-- it sounds as if you mostly moved into what you think is more of a sustainable level of infrastructure. If you do achieve your targets of hitting 10% GAS growth for the next few years, where can you drive down G&A as a percentage of gross auction sales? What kind of leverage do you foresee?

First of all Bruce let me say I think that are real target here has to be on the bottom line, and we think that we'll be able to [inaudible] something in the range of 15% earnings growth for the next several years, on average. And we won't be able to do that if we don't manage to keep our G&A growth below our sales growth. There will be ups and downs in that. We've seen that in the past and we'll see it in the future. So I kind of shy away from looking at specific quarters or years. But we still believe that overall we'll be-- overall meaning over the next several years, that we'll be seeing our 15% earnings growth. That's very much what we're targeting.

There's a number of operating statement items that contribute to that. Gross auction sales growth is one. There is the auction revenue rate, direct expense rate, G&A; and of course there is also the tax rate which took a jump up this year and we think it will come back down again next year to a more normal number.

But to specifically look at G&A, it's at its lowest level since 2000 in terms of percentage of gross auction sales right now. And it may go up or down a little next year from that number, but we would expect overall a continuing decreasing trend. It's not the kind of thing that travels consistently. So I'm cautious not to tell you that it will go down again next year. It may well go up; it just really depends on how the year goes.

But we still see a longer-term downward trend, just as we have seen over the last several years.

Okay. My last question has to do with the auction revenue rate. Pete, I think I divined from your comments that perhaps one of the reasons why the full-year rate as well as the fourth-quarter rate was at the low end of the 9.5 to 10% target- is that pricing has kind of flattened out and been a little unpredictable and so there is some kind of correlation there between the overall pricing environment and the auction revenue rate.

When you look back at '06, would you say that's true- that probably the fact that pricing was a little flatter over '05, was slightly depressing to the full '06 rate of 9.6%?

Yes--divining- I've never heard that term before. It's a pretty good one I'll have to use that with my children. I'll be divining when I get home to them. But the pricing environment in 2006 was somewhat more volatile then we would foresee '07 to be. '07, the things that are lining up for us in '07 that we see right now are a little bit more normalized level of supply in most product lines, apart from perhaps cranes, which are still pretty strong on the [inaudible] market being very, very robust.

We're seeing a little bit more normalized levels of inventories with dealers, perhaps creeping up a little now that they've overfilled perhaps, their orders. So it's a little more normalized in that respect as well. And it's a little more-- consequently the supply and demand-- it's easier for us to sort of line up and we have a higher comfort level in terms of performing on an at-risk basis over what we did in '06, as we sit here today.

Okay, thanks guys.

Our next question comes from the line of Ali Motamed of BP. Please proceed with your question.

Hi, that's Boston Partners. I was wondering- when you look at the internet business, you've done a fantastic job growing that business. But one of the real values that you have historically had is that you have a big network effect and you're sort of the only game in town if people want to come and buy equipment and sit and see it. Does this concern you at all, that as you help migrate people to an online type business model, that it might in the long run sort of disintermediate you?

It's Rob here. I don't envision that happening. I think once this Orlando sale is over and we see our statistics from the sale; this is a pretty unique event where it's a place to go, it's a place to be and there is so much equipment here that people want to come and see it. And I believe that our internet stats for this sale will probably be down from what they are on average at our other sales.

It's still very much a business where people want to come out and touch it, feel it and look at it. And part and parcel of the big sales that we have particularly is the social atmosphere, where a customer- be it an end-user, a dealer, a broker-- there isn't anyplace on earth that he can go and have a captive audience of people to talk to and visit and get a feel of what's going on out there in the economy and do business with.

So attending the sales is still a very, very important part of the business that we're involved in today. The internet bidding application is a [bowl pond] that allows people that don't have the time to afford to a two or three or four or even a one-day sale, to still have the opportunity to bid and get after and buy equipment that they want to see. But it's still very much a social environment that we operate in and a touchy-feely I want to look at my equipment before I buy it; whether it's me or my mechanic- atmosphere that we operate in and the level of activity that we have with our internet today I think is probably going to remain pretty consistent.

I think that there are some internet buyers probably that attend the sale prior to the sale date because they just make it on the day or they don't want to devote a whole day to. They come out and they do their own inspection here and they get comfortable with the equipment and they simply go back and buy from the office because they know exactly what it is, so they've already done the physical inspection. So-- a little bit of the stats sort of belie the truth in that people are still coming to kick the tires; they're just for convenience they're electing to bid over the internet on the date.

So you're really continuing to emphasize the core business and not the people bidding online?

Very much so.

I'd like to add to that, that one of the key differentiating factors between us and an internet-only model is the ability for us to marshal huge quantities of equipment in a central location, line up all the like-items- all the excavators side by side, to facilitate that inspection. If we were to move to an internet-only model, it would be very, very difficult for our bidders to inspect, test and compare and therefore come up with the amount they want to bid.

So I kind of hear where you're going with this and we're excited by the adoption of the internet tools by our customers, but the vast majority of our customers have a strong preference for attending the site in person. The internet tool is simply a convenience for them.

Thank you.

Gentlemen, there are no further questions at this time. I will turn the conference back over to you to continue with your presentation, or closing remarks.

Thanks, Jeanie. We just have some closing remarks. We appreciate you guys attending and listening to comments and fielding the questions. As always, it's always nice to speak to you and we'll hopefully look forward to seeing you when you're out there. We'll just close with a comment about the Florida sale here and we're very encouraged by what we see out there; in terms of not only the market, but the activity that we've seen in the last couple days and even including this morning with some of the pricing environment. It's sort of supportive of where we think things are headed. It's a huge crowd and we'll be press-releasing the results of this next week some time. You'll be able to see what we see today.

So for those of you that have been to an auction, come to another one this year. And if you're not an auction yet, then please look at the schedule. And that's the best way to understand our business, is actually come out here and look and see what happens and talk to the people that are attending and ask them what's going on in the market as well.

So thanks for your participation today and we'll look forward to talking to you in the future.

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. Have a great rest of the day, everybody.