RB Global Inc (RBA) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Ritchie Bros. Auctioneers 2007 Q2 earnings results 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, ladies and gentlemen, this conference is being recorded today, Tuesday, July 31, 2007.

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

Thanks, Bridget, and good morning and welcome to the Ritchie Bros. Auctioneers investor conference call for the second quarter of 2007, and thanks for joining us today. I am Peter Blake, CEO of Ritchie Bros. I'm joined today by Randy Wall, our President for Canada, Europe and the Middle East; Bob Armstrong, our Vice President of Finance and CFO; and Jeremy Black, our Director of Finance.

We will be talking today about the results for the three- and six-month periods ended June 30, 2007, some of our significant achievements over the last quarter and our expectations for the rest of the year. Our presentation will take about 20, 25 minutes, and then we'll accept 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 U.S. and Canadian securities regulations. Comments that are not statements of fact are considered forward-looking statements that involve risks and uncertainties. These 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; our ability to attract and retain employees; actions of competitors; and other risks and uncertainties as detailed from time to time in our securities filings, including our Management's Discussion and Analysis of Financial Condition and Results of Operations for the quarter ended June 30, 2007, which is being filed this morning and will be available on the SEC, SEDAR and Company websites.

Actual results may differ from those contemplated in the forward-looking statements and differences could be material. We do not undertake any obligation to update the information contained in this call, which speaks only as of today's date.

I would also like to remind you that during this call, we will talk about gross auction proceeds, which is a new name for what we used to call gross auction sales. It is the same measure as gross auction sales, representing the total proceeds from all items sold at our auctions. It is not a measure of revenue or liquidity and is not presented in our Statement of Operations. Auction revenues is the revenue earned by Ritchie Bros. and presented in our financial statements.

We are now halfway through 2007, and our gross auction proceeds to date have exceeded $1.6 billion, which represents growth of 17% compared to the first half of 2006 and is the largest first half in our history. Our gross auction proceeds for the second quarter alone were over $945 million, which is remarkable in itself. We don't have to go too far back in time when this would have been our sales for the full year.

Our view continues to be that our gross auction proceeds growth has come from increasing our market share. We believe our business model is creating value for our customers by matching local supply with global demand in an open and transparent manner, and this is propelling us forward.

I am going to talk about our strategy before I pass the call over to Randy to talk about current market conditions and then to Bob and Jeremy to give you a financial overview. I will then wrap up the call and open it to questions.

Our objectives at Ritchie Bros. are pretty straightforward -- we want to grow our earnings per share at a sustainable pace and to maintain and enhance our culture. We are now planning -- or how do we plan to do this? Well, the answer to this question has not changed much over the almost 50-year life of our Company, but we have been refining the way we articulate our strategy, so I thought I would spend a little time going through it today.

To grow our business, we are focusing simultaneously on three different strategic elements which we believe work in unison. We focus on the three Ps of people, places and processes.

The first element of our strategy is people, or building the team that will help us achieve our goals. This includes recruiting and training and developing the right people, as well as enhancing the productivity of our sales force and our administrative support teams by giving them the tools and the training they need to be effective.

This component of our strategy also includes active succession planning and leadership development. Our ability to recruit and train capable new members of our sales team has a significant influence on our growth rate. Ours is a relationship business and our territory managers are the main point of contact with our customers. We look for bright, hard-working individuals of positive attitudes and we are committed to providing our people with a great workplace and opportunities to grow with the Company and become future leaders of our global team.

The second element of our strategy is our places, with the goal of continuing to expand our presence in existing markets and enter new markets, and to expand our international auction site network to handle the anticipated growth in our business. Although we expect that most of our growth over the next five years will come from expanding our business and increasing our penetration in the regions where we already have a presence, such as the United States and Western Europe, we anticipate that emerging markets in developing countries will play an increasing role in the longer term.

We need to increase our market share in our core markets of construction, transportation and agricultural equipment and to sell more assets in categories that are complementary to these core markets. Examples of these complementary categories include mining, petroleum, real estate and others. We also plan to expand our international network of auction sites, opening an average of two to three sites per year. We also intend to continue to hold off-site auctions in new regions to expand the scope of our operations.

The final element of our strategy is our processes, with the objective of developing and continually refining our business processes and systems and using continuous improvement to allow us to grow our revenues faster than our operating costs. Part of our continuous improvement focus is our M07 strategic initiative, which we believe is helping us to develop business processes and systems that are efficient, consistent and scaleable and is helping to establish a continuous improvement mindset throughout the Company.

It is important to recognize that this initiative does not end in 2007. Our focus in this area will continue well into the future, and we expect to continue to see benefits of it for years to come.

Part of our process improvement initiatives include the implementation of a new enterprise resource planning system, which we commenced in 2006. We have completed the implementation of the core financial and human resources modules and are in the process of developing new sales force automation and customer relationship management tools. In addition to our ERP implementation, we also intend to use technology to facilitate our growth and enhance the quality and service levels of our auctions.

We believe that the three components of our strategy work together because our people help us achieve our goals, our places give us a focus area for growth as well as capacity to handle it, and our processes help to grow our revenues faster than our operating costs.

Before I pass the call to Randy, I would like to give you an update on our ongoing succession planning efforts. As some of you already know, Randy Wall, who is currently our President for Canada, Europe and the Middle East, has decided to change his role with our Company early in 2008. He is going to stand down from his President position, but he is going to continue to work with us on a less than full-time basis, focusing his efforts in the property development and training areas. Although we will miss having Randy in his current role, we are pleased that he is going to continue to help us out, and we understand his motivation and we respect his decision to spend more time with his family. Randy has helped define persistence and integrity at Ritchie Bros. in his near 20 years, and we owe him a lot, so thanks, Randy.

As a result of Randy's decision, we will be promoting several people and shuffling some responsibilities. We will make further announcements when the new appointments become effective in 2008. Randy's changing role allows our next round of leaders to step up and proves the value of our continuous succession planning activities. I'm very confident that the individuals assuming new responsibilities will continue to propel our growth and maintain our dominant position in the auction industry.

And now, over to Randy.

Thanks very much, Pete, and good morning, everybody. I will repeat what Peter has just told you. I'm going to change my role at the Company in the spring of next year so I can spend some more time with my family. I will still be an active part of Ritchie Bros., but with a whole lot less travel. And please don't read anything more into this than that. It is really that simple.

And now, on to a different discussion about market conditions, a topic that is more interesting, in my opinion. We have had a lot of questions lately about how any current uncertainty in the market is going to affect our growth going forward, so we thought we should provide you with some color on our main markets to give you an idea of how we view our prospects in these changing times.

In the U.S. market, we have seen a general change in the market and a moderating of prices across the board, and we anticipate that this market will continue to moderate into Q3 and Q4 until equilibrium is established. Values have pulled back somewhat on late-model equipment, returning to more normal levels, while older equipment values seem to be holding up fairly well. The weakening housing market should continue to affect some participants in the construction sector, which we expect to fuel our auctions in a positive way.

Site development equipment such as scrapers, articulated trucks and larger excavators have seen the most downward pressure in values recently. Some contractors are able to pick up the slack with nonresidential work; however, others are faced with excess equipment.

Looking ahead for the remainder of 2007, we see lots of potential, but as always, it will remain a challenge to predict when consignors will decide to sell their equipment. Some contractors facing less work, a tougher time getting financing or difficulty finding quality operators are adopting a wait-and-see attitude rather than selling their idle equipment just now.

Overall, we believe that the changing market in the United States will result in more business for Ritchie Bros., and we won't be surprised to see an increase in equipment supply in some areas in the United States. At the same time, we also don't foresee a flood of equipment or significant pressure on equipment values. So overall, we remain positive about our prospects in the U.S. for the remainder of 2007.

A recent development in the United States which we will be watching closely and which should be positive for our business is the recent ruling by the California Air Resources Board, which seeks to reduce emissions from off-road equipment by encouraging the replacement of older, dirtier engines with new emission-controlled models. The requirement and deadlines vary by fleet size. However, large fleets will need to begin complying by 2010, meaning that many contractors in California will be upgrading their fleets sooner than they had otherwise planned. Similar requirements are expected to be introduced next year for over-the-road trucks.

It is expected that these new requirements will cost trucks and equipment owners billions of dollars, and we're well positioned to facilitate these transactions as we are able to give our California customers access to out-of-state and other-country buyers for the affected equipment.

For the most part, in Canada, prices have also moderated from the extremes of 2006 and have returned to more normalized levels. Some exceptions to this -- on a global basis, I might add -- would be cranes and pipeline equipment, where demand continues to exceed supply on much of this product. On the negative side is the forestry industry, where market factors have created serious negative pressures on much of the equipment.

Another part of the economy that we're watching closely is the oil and gas sector. We hear from our customers that work has been somewhat lower in the first half of 2007, but they expect a strong fall and winter as the oil and gas companies expect to ramp up their exploration and drilling activities. We will be ready for this and remain very optimistic about our Canadian business.

The European market remains in a state of short equipment supply and generally higher activity. And we're seeing general shortages of used equipment in the market. These factors have combined to increase price levels and make for strong competition on most equipment packages coming to market. With this supply imbalance and the strong euro, we're seeing increasing participation by European buyers at our North America auctions, which is also a very positive factor for us and demonstrates the value of our global network.

Our other markets, such as the Middle East, Australia and Mexico, remain buoyant, with healthy demand and strong pricing.

Now let me shift gears a bit and talk about some of our property development activities before Bob takes his turn. We established two regional auction units during the period, including Paris, France, and Hartford, Connecticut. And a reminder for you -- regional auction units are generally located on leased land and are often the intermediate step until we find property suitable for a permanent auction site.

In France, we're under construction now on our permanent auction site just to the west of Paris, and until that site is completed in 2008 we're operating on leased land nearby.

In Hartford, we have a multi-year lease on an auction site and have recently upgraded the site infrastructure by adding modest temporary offices. We continue to look for a larger and more permanent home in the New England area. But until we have landed that home for a permanent auction site, we will be operating from this regional auction unit in Hartford.

We're making progress on the construction of our new permanent auction site in Houston, Texas. Houston will be a replacement permanent auction site for our existing facility in that market, and we hope to have this new facility up and running in 2008.

We've purchased land in Kansas city, Missouri, during the second quarter and have already started construction of what will be a permanent auction site replacing our long-standing regional auction unit in that market. We expect to have our first auction on the Kansas City property in Q4 of this year, although we don't expect our facilities to be complete until 2008. We also purchased land in Grand Prairie, Alberta, during the quarter and we intend to build a new, permanent auction site in that city, although we do not currently have a construction schedule for this project.

We are still actively looking for land in other locations in the United States and Europe, and we are getting close in a number of regions. Our priorities for permanent auction sites continue to be the New England area of the United States, as well as Italy, the UK and Spain in Europe. We are also looking at opportunities for additional auction sites in several other markets, including Australia, Mexico and Japan. We will be sure to let you know as soon as we have news about any of these other locations.

And now, let me turn the call back over to Bob Armstrong.

Thanks, Randy, and good morning. The numbers that form the basis of the following discussion were included in our press release that was issued this morning and in our quarterly MD&A and interim financial statements, which are being filed this morning and should soon be available on the SEC and SEDAR websites.

All dollar amounts referred to on this call and in our press release and securities filings are stated in U.S. dollars.

During our last conference call, we told you that we were expecting gross auction proceeds for the second quarter of 2007 to be in the range of $900 million. Actual gross auction proceeds for the quarter ended up at $945 million. As Peter stated, we have so far this year generated gross auction proceeds of over $1.6 billion, which is 17% higher than our gross auction proceeds for the first half of '06. Our growth has come from strong performances in most of our markets, particularly in the United States, Canada and Europe.

Included in the total gross auction proceeds for the first six months of '07 are the results from 146 unreserved agricultural auctions, which generated gross auction proceeds of $94 million. This compares to gross auction proceeds of $99 million from 115 ag sales in the first half of 2006. We believe that the year-to-date decrease in this division is an example of the variability of our agricultural sales from period to period resulting from the timing and size of individual auctions and not necessarily any indication of a trend in this business.

Our auction revenue rate for the first half of '07 was 9.96%, which is higher than the 9.60% that we experienced in the first half of 2006, but within our expected average range of 9.5% to 10%. Our second-quarter auction revenue rate was 10%, which is at the top end of our expected range, and that was due to the better than expected performance of our underwritten business, which is made up of our guarantee and inventory contracts. This part of our business did not perform as well as expected in the second quarter of 2006, which explains this change from Q2 last year. We still believe that our annual auction revenue rate will be in the 9.5% to 10% range for 2007.

Direct expenses, which are the costs we incur specifically to hold an auction, were 1.37% of gross auction proceeds for the second quarter of '07 and 1.22% for the first six months of the year. The year-to-date rate is marginally better than the direct expense rate of 1.27% during the first six months of '06, mainly because of the relative mix and the size and location of auctions held during the period.

The direct expense rate is influenced by the size of auctions held in a particular period and by whether auctions are held at permanent auction sites, regional auction units or off-site locations. Larger sales and auctions held at permanent auction sites are more cost efficient and generally result in a lower ratio of direct expenses to gross auction proceeds. The average size of our industrial auctions increased in 2007, and this is the main explanation for the reduction in the direct expense rate.

General and administrative expenses were $34.3 million for the second quarter of 2007 and $65.1 million for the first half of '07. Our G&A was higher than the equivalent period last year, due primarily to the continued growth in our business. For example, personnel costs made up approximately 60% of our total G&A costs for the first six months of this year, and our employee headcount at June 30, 2007, was 19% higher than our headcount at June 30, 2006. Another factor contributing to the increase in our G&A expenses was the accounting effect of the weakening U.S. dollar.

Our income tax rate for the first half of this year was 37.2%, which is roughly consistent with the 36.6% we experienced in the first half of 2006.

Net earnings for the second quarter of '07 were $26.6 million or $0.76 per share -- per diluted weighted average share. And for the first half of this year, they were $44.1 million or $1.26 per diluted weighted average share. And that is 17% ahead of last year's first half.

If we exclude the impact of after-tax gains of $1.1 million recorded during the first half of last year on the sale of excess property, our earnings growth for the first half of this year versus first half last year was 20%.

Before I pass the call to Jeremy to update our guidance for the rest of this year, I want to tell you a bit about our CapEx spending so far this year. Total CapEx for the first half of '07 was $32.3 million, including maintenance CapEx. Our capital expenditures related primarily to the construction of new permanent auction sites in Houston, Kansas City and Paris, and also for the acquisition of land in Kansas City and in Grand Prairie, Alberta, and for investments in computer software and equipment as part of our business process improvement initiatives.

For 2007 and future years, we're still expecting CapEx, including maintenance CapEx, will be in the range of $50 million to $100 million per year as we continued to invest in the expansion of our network of auction facilities and fund our process improvement initiatives. Actual expenditures will vary depending on the availability and costs of suitable expansion opportunities and prevailing business and economic conditions, and therefore could be higher or lower than this range.

The expenditures related to our process improvement initiatives will likely be primarily for software, hardware and related systems development efforts. We expect to fund future CapEx primarily from our operating cash flows or draws on our excess working capital or available credit facilities.

And finally, some news about our dividends. Our Board has approved a quarterly cash dividend payment on September 14 to holders of record on August 24 in the amount of $0.24 per share, an increase of 14% over the prior quarterly dividend of $0.21 per share. The Board has restated their belief that we should use our cash flows first to reinvest in the business where there are prudent investment opportunities. But once those opportunities have been funded, excess cash should be returned to our shareholders.

And now I will turn the call over to Jeremy.

Thanks, Bob, and good morning. I'm going to take a few minutes to provide an update on our guidance for the remainder of 2007. On our conference call at the end of Q1 this year, we indicated that we were expecting gross auction proceeds for the full year to be in the range of $3 billion in 2007. We once again surveyed our field managers, and based on their input and our actual results for the first half of the year, we now believe that our full-year gross auction proceeds for 2007 will be in the range of $3.05 billion. This would represent growth of approximately 12% compared to 2006.

It is rare that our gross auction proceeds guidance is perfectly accurate, and we often get asked why this is the case. I would like to comment on this briefly today to give you some insight into the difficulty we face in trying to provide precise predictions about our future business.

In a relationship business such as ours, we often spend years cultivating the trust of our customers before they ever consider consigning to one of our auctions. We can speculate when they might pull the trigger, but we really have no way of knowing when they will make the decision to sell. This may sound simple, but it is a fact of life in our business -- we can only sell what is actually for sale.

Although we have some customers who consign to our auctions regularly, we have little in the way of predictable recurring business. When we establish our plan at the start of the year, it is hard to predict how our gross auction proceeds are going to unfold. Our visibility is limited in January, but becomes more clear as the year goes on and we get more auctions under our belt. We do our best, but it is not an exact science. We have not found any external measures that correlate with our sales volumes, so we rely on our internally generated forecast for planning purposes and also for providing guidance to the investment community.

Now with that context in mind, we are expecting that gross auction proceeds for the third quarter of this year will be in the range of $600 million. We will give you a more definitive sense of fourth-quarter expectations on our next conference call at the end of October. Bob has already talked about our auction revenue rate performance for the year to date, so I will just reiterate that we expect the rate to be in the range of 9.5% to 10% for the full year. We are continuing to target long-term earnings growth rate of 15% per year on average. However, the way 2007 appears to be coming together, our earnings growth rate for 2007 may be somewhat above that range.

And now, I will pass the call back to Peter.

Thanks, Jeremy. Let me recap the main points we covered on the call before we open up for questions. Firstly, we ended the first six months of the year with gross auction proceeds of over $1.6 billion and net earnings of $1.26 per diluted share. We are expecting continued strength in gross auction proceeds for the remainder of 2007 and have increased our guidance to approximately $3.05 billion for the year.

Secondly, our Board has approved a 14% increase in our quarterly cash dividend from $0.21 to $0.24 per share per quarter. We continue to believe that excess cash should be returned to our shareholders once we have funded all prudent investment opportunities available within the business.

Now we would be pleased to answer any questions that you have. Bridget, would you please begin the question period?

(OPERATOR INSTRUCTIONS). Ben Cherniavsky, Raymond James.

Let me congratulate Randy on his decision to retire and all his accomplishments at the Company. I think that is a great decision.

Thank you.

And congratulations on a strong performance on your gross auction sales. However, I'm going to focus on another recurring theme, and that is your SG&A expenses. At the beginning of the year, you had stated the goal that you wanted -- you didn't give specific guidance, but you did say your target was to keep general and administrative growth below gross auction sales growth. That has not been the case year to date. And I'm just wondering if you can -- I know you mentioned a few items in the call as to what accounted for that, but are you disappointed with where this number is coming in? Do you have abilities to ratchet down on this trend? Can you provide any more color on why this is happening and what you can do to control it?

It is Bob. A fair question. G&A is -- it is growing just at a slightly faster clip than we expected. So it hasn't got our alarm bells going off in any great manner. We're certainly looking into some particular line items because we don't want it growing any faster at all than it needs to. But it's not -- there aren't any particular items that are out of control. I think we mentioned on the call that the largest component continues to be personnel. And that's just a fundamental part of our growth strategy, is to continue adding quality people and training them up. And that continues to be the number one driver of our G&A, and it is pretty much in line; it is not scaring us.

So we are watching it. We don't want it to run away. We are very conscious of, in particular, the percentage of gross auction sales -- sorry, the percentage of G&A as a percentage of gross auction proceeds. And we would like to see that number going down over time. I think we've mentioned it may go up once in a while, but over the longer term it had better be going down. That is part of the magic of the model. And we still expect that to be the case.

But it is up almost 25% year to date. It was up 30% in the quarter. That is just a fraction above your forecast, or is that -- it sounds to me like that might be a little more than what you would have hoped for at the beginning of the year.

Well, for one thing, we always look at it on a full 12-month basis. But if I look at just what we expected going into this quarter to where it ended up in this quarter, it was only marginally ahead, and most of that can be explained by foreign exchange. So it is actually tracking pretty close to where we thought it would be right now.

Which is still ahead of gross auction sales growth.

Yes, it is a little bit ahead of gross auction sales growth this year, for sure.

Yes, quite a bit. I know you say that the M07 initiative is an ongoing initiative. But you've put the 07 in that acronym a few years ago for a reason, I believe. Would you have expected to have more results out of that at this point, halfway through 2007? Or are you maybe behind schedule? Have you added things that were unforeseen originally that are increasing expenses? What is happening there on that front?

It is a fun question to answer. First of all, when we established 2007, our eyes were bigger than our stomachs and we figured we would probably light the world on fire and get 'er all done. Reality set in within a couple of months and we wish we had called it something else. But we are happy to set aggressive goals for the Company. It gets everybody focused.

Within a few months, we knew this wasn't going to be something that was up and down in two years, three years. And that is why we always now talk about it as a mindset for change. It is more of a long-term program. We are very pleased with where we are in that program because we've already got the foundational stuff laid. We have a whole bunch of marketing initiatives that go live at the end of this summer. Sales force automation is the next one to get developed.

These things are very important to the Company. They take a lot of time. We want to do it right. So to answer your question, we will not finish it in '07. And I hope we haven't teased anybody into thinking that we would. Within about six months of launching it, we knew that we wouldn't, and we are quite happy to say it will be a long-term project.

Are we happy with where it is at? Yes. Would we wish it had gone faster? Of course. But realistically, it wasn't going to. We are better off doing it properly and getting good long-term benefits. Have we seen benefits yet? We launched the finance and HR units last year and they were painful at first, as any major ERP implementation is. But having just gone through a quarter under Oracle that went very smoothly, we are very comfortable now that we've got a good system in place and it is running well for us. We are over the startup pains, and we're now into being able to take advantage of it and launch some really valuable modules on top. So we are kind of in the middle of the meat of it and starting to see benefits.

And just to confirm that, ideally when that does kick in, you expect that to contribute to deceleration of operating expenses relative to gross auction sales as part of the whole philosophy there?

Very much so. It is exactly how we look at it.

And so for the year, then, can you venture to tell us at all where this G&A is going to end up, or even would you hope to finish the year with G&A up close to where gross auction sales were if you are only a little bit ahead of budget at this point?

I think the last thing we said, and I will reiterate it now, on the last call I think we said we thought that as a percentage of gross auction proceeds, G&A would probably be similar to or maybe a little bit worse than last year, but probably still roughly in the same range as a percentage of gross auction proceeds. So there's a few variables in there, Ben, because it is hard to nail exactly where gross auction proceeds will come in. But I guess that is the guidance, that we see this being a year of holding steady on that margin as we deploy more of these modules.

And then hopefully, without calling it guidance, you would hope that to start to trend down next year.

Clearly without calling it guidance, but yes.

Bert Powell, BMO Capital Markets.

Bob, just want to follow on with Ben's comments on G&A. In M07, the initiatives, the stuff related to computer expenditures, that's all being capitalized, correct?

Yes, we have capitalization policies -- to the extent we can capitalize it, we do, that is right.

So is there anything in this quarter's numbers that are related to bonus accruals being revisited because of the better performance in the -- I've got to get used to saying this -- gross auction proceeds and auction revenue rate this quarter?

Yes, as there is every quarter, but it wasn't massive.

So just, again, to continue on here, whereas last year, if we back out the legal settlement, we are still 20% or better in terms of G&A growth, we are pretty high this year -- when you look out for the balance of this year and heading into next year, where would you see the inflection point for the G&A? When do we start to see the real torque coming out of these initiatives?

Well, there's no way to be precise enough, but I think what I said to Ben is probably the best thing to say again, and that is that this year you probably won't see a massive improvement, if any improvement, in G&A as a percentage of gross auction proceeds. But after this year, I would expect it to be coming down.

Are we going to see a step function down, heading, or is it going to be a gradual?

If I had to guess, I would say gradual, but it could be a step. It's not -- I wish it was a science, but it ain't.

It is Pete here. Just to add a bit of color to Bob, who's being inundated with G&A stuff, and we suspected that you guys would want to talk a little bit more about the G&A line, so there is lots of stuff in there that is spot-on. I want you to try to maintain the focus that we are in the middle, probably, or nearing the two-thirds portion of a whole bunch of M07 initiatives and lots of IT, lots of support network around putting a new ERP implementation system in that we haven't really seen the benefit of yet.

We had a management meeting here in Vancouver with some of our key managers in July and are starting to talk to them now about more of the tangible tools that will be deployed into the field to help those guys become more efficient, more effective and more responsive to customer needs and free up more time for them to go and sign more business. So we are pretty excited about that.

And those are early stages of potential tool rollouts that will take the next 12 to 18 months or somewhere in that range. But we view this M07 as kind of like a permanent auction site investment. We're putting this part of our network we're putting in play here to help us grow our business for the long term. So yes, for sure, we see the ramp-up in the short-term G&A relative to gross auction proceeds growth. But I would echo Bob's comment that I would expect to see that margin coming back into line and way below as we carry on forward in the future years because of this foundational process that we put in place for allowing our guys to be more efficient and more effective.

You can't grow our business by simply throwing people at it. If 60% of your costs are people, you can't rely on that element to be the key function of what separates your growth for future. So we want to make sure that we carry on with that leverage.

So outside of the stuff that is being capitalized, are there costs that just fall away from extra staff or consultants that you have in now helping you get this stuff put in place?

Our finance guys do the best they can to track and make sure that they are capitalizing projects. But yes, for sure, there is other stuff that gets accumulated through the mixture that we had to accelerate, I guess, in the early days that we don't see the same rapidity of acceleration carrying on in the future because we've just had to basically step up to ramp up to get this new ERP system in place.

And just moving on to auction revenue rate, was there any contribution from any particular packages or one geography -- you talk about prices being very healthy in Europe -- was that geography a bigger contributor to the higher ARR rate in the quarter. Can you just give us a little bit more color on that?

It is Randy. I guess this will be a similar answer as in prior quarters. It is lumpy -- 25% or thereabouts is their average at-risk business. And nothing really stood out one way or the other. It was a pretty normal quarter for us. No big surprises, really. Generally speaking, we're happy with the way the markets are looking. We're seeing pressures in North America that would influence probably increasing equipment supply building towards the end of this year. At the same time, overseas markets, it's quite the opposite. So you are going to see buying activity continuing to happen internationally and equipment flows perhaps starting to head out of North America, whereas in prior years they were flowing into North America. All in all, just normal business.

(OPERATOR INSTRUCTIONS). Jacob Bout, CIBC World Markets.

Just following on your last answer there, you walked us a bit through the U.S. markets, but can you just compare and contrast what you are seeing in the U.S. versus Canadian versus international versus European markets?

It is Randy again. I will try to. The American marketplace -- one of the driving factors there, of course, has been this increasing money supply generated by the subprime mortgage dynamic and people pumping money into housing and residential. And that's, of course, reversed itself or reversing. I don't think that we have seen the full extent of what might occur as a result of that tightening in the money supply. There will be some casualties as we look forward. But the big factor in the U.S. -- Canada is not really a factor. It is more the resource sector. Forestry is weak. Oil and gas has been kind of treading water for the first half of this year. Indications are, talking with our customers and some of the oil companies, that it could well be a very brisk and positive winter, which is when most of the work occurs anyway.

And overseas, it is just -- there is a shortage of equipment and the activity levels are high for infrastructure development. Europe, for example, has been coming out of a couple of years of slower periods on average in many of the countries, meaning there was less new pumped into the supply chain, so that now as the tap is opening up for work, there is less of that supply out there coming out of the pipe. So supply is lower and demand is increasing, so you see upward pressure on pricing. In the Middle East, for the most part, very, very strong. I hope that is enough color for you, Jacob.

Sure, thanks for that. And then just a question on your direct expenses. I see that as a percentage of gross auction proceeds, essentially in line with the second quarter, and I think you made the statement before that as the size of the auctions increase, that should be decreasing over time. In the first quarter, obviously, we saw a large drop, and I am assuming that is because of the large auction in Orlando contributing to that. What is your expectation for improvements in operating leverage on the direct expense side going forward?

It is Bob. Yes, your observations are correct. In Q1, Orlando had an upside effect on our direct expenses that pulls the numbers down. You saw that last year as well. Going forward, all logic would tell you that we should see direct expenses coming down as a percentage of gross auction proceeds. It is part of our strategy to increase the average size of our auctions. We still do lots of little ones, but we should be seeing an increase in the average size. So you are right if you are thinking that direct expenses should be coming down over time as a percentage of gross auction proceeds.

When I model it, I don't model a very dramatic decrease. It's really quite subtle because it is already at a pretty low level. So yes, coming down, but it is not one that is going to be a big payoff. The bigger leverage comes from the G&A line.

Cynthia Houlton, RBC Capital Markets.

Could you give any incremental color on the impact of the Internet auctions you are playing in? If we look at, obviously, you talked about the forecast in gross auction sales isn't a science, but if we look at the $900 million versus the $945 million that you reported, maybe it would be helpful to walk through where, as the auctions progress, where that upside is coming from. Is it more auctions coming together later in the game? Is it more just the absolute size is much larger than when you put together numbers? I think that would be a little more helpful to understand how the guidance comes together and then when the results actually come, if there are different buckets of factors that change the outcome.

You tripped us up with your question, there, Cynthia. It started off as an Internet question and everybody started pointing at me. And then it switched into a different question. So I will give you some Internet color and then Jeremy or Peter or Randy might jump in with the general commentary.

So let's break your question into two -- what has been going on with the Internet and the impact on our sales, and then secondly, a really interesting question about when your sales come in higher than expected, was that because of a few extra sales, or did they all grow? It's a fun topic.

So first of all, on the Internet, for the last few quarters, up until the Q2, the Internet had been running at a pretty steady participation level. The Internet has been a buyer or runner-up on around 20%, 25% of the items at auction, which by all accounts is a pretty high number. But it appeared that it might have plateaued.

And then in the second quarter of this year, it actually jumped up quite a bit and it's now sitting around 25% or 30%. It is almost 5% higher in terms of participation by the Internet. And we actually had a couple of sales where the Internet was the buyer or the runner-up on north of 50%. Those are anomalies, and I definitely don't see that being the new norm. But it was kind of interesting to see it happen. And it just goes to show the acceptance of Ritchie Bros. in this space. We have a great technology, but really I think it just shows the trust and confidence that the bidders are able to place -- they know when they are bidding on our live system that it is honest and transparent and open and they are being treated fairly.

So it is fun for us to watch that growth. To talk about leverage, that has got to be one of the best parts. Every time we get another 100 bidders coming in on the Internet, that is less parking we provide, less catalogs, less hats -- if anybody's been to our auctions, you know how much free stuff we do for you. Plus, it is a very, very scaleable part of our business.

But please don't ever think, just because I get giddy when I talk about it, that that's the way the business will go. Most of our customers tell us they would much rather be there live and in person at the sales site. We believe that is really the critical, or one of the critical parts of our business, is providing the central marshaling of the equipment and the central meeting place for the bidders and the live auctioneer. But the Internet has proven to be a great enhancement. And I'm sure it is in part fueling some of our growth, and consignors certainly love it.

Now let's go for the second part of your question and see if anybody wants it, about just the general growth in volume and how the sales build.

Let me clarify one comment on the Internet, too. It is Pete here, Cynthia. The one comment that we also get from our bidders is that sometimes when the guys end up buying on the Internet, they have actually already been to the auction site or they have sent their mechanic there to have a look and they have done their testing. So even though they bought on the Internet, they still live in the real world of men and machines and they like to smell the exhaust and check the hydraulics and do all the things that they normally do when they buy used equipment.

So the Internet has been a great success tool for us in terms of providing a service to customers that is obviously needed, because they don't want to spend a whole day out of their life to come to the auction. They only want to buy something that is going to be available for the 90 seconds that it's up on the ramp. So they will send their mechanic out and fly him from wherever to do their testing, or they will hire a local OEM to do the work for them. So it has been a very, very complementary tool for us.

Maybe I will let Randy talk to point two of your question.

I am not sure exactly what you're trying to drive at, but maybe I will respond to what I see the auction growth dynamics of a particular event might be, and does the Internet have any impact on that. I don't believe it has any direct impact, but I do believe it is indirect. And when I mean by that is the fact that we are -- we are just continuing to produce better and better results for our consignors in terms of delivery of price realization. Likewise, we are creating a much more convenient platform for buyers to choose their own time -- as Peter said, they will come to the auction site anytime. And a lot of it -- even will have local bidders bidding on things on the Internet, purely because they don't want to spend the whole day at the auction. So you get a shift in buying behavior facilitated by a convenient tool.

And all those things wrapped up together is adding up to our business model being just a great thing. People enjoy it and there is momentum in using it. And those good results then therefore add to the snowball rolling down the hill and make consignors want to use us more and more. Prices are better; conveniences are good. But I don't think the Internet itself triggers or causes any specific growth in any particular event.

So Cynthia, did that get at what you were looking for?

Yes, it does. I think the only other point of clarity might be is -- are you seeing any trends when in the past several quarters you have provided guidance and then the results are generally better than the guidance that you provide to a fairly significant scale -- scale maintenance material difference in terms of what the actual gross auction sales were? And are you noticing any trends in buckets in why that is occurring?

Cynthia, it is just building momentum. It is, again, trying to predict with precision an inexact science in a lumpy inherent business is very difficult. We do tend to be conservative people. We don't want to blow a lot of hot air balloons up. We live in a world of reality. A lot of times, people say such and such is worth X or Y. Well, what would you be willing to pay for it and what would you actually pay for it today are two different issues. And we live in that same sort of mentality when it comes to looking forward in the future. We do see, again, the whole business model is coming together very, very nicely. There is good, solid momentum. You can feel it and it is coming from all areas, not just the Internet -- the network of sites is a real key enabler for people. As we are adding more people -- it is one of the strategy points that Pete mentioned -- just has more people on the ground in new market places.

And just all of those things adding up together -- you've got clients in Yemen or in Thailand or in Korea, wherever -- Japan -- that are coming and participating in the auctions, and they didn't do that before because our reach wasn't that great before. So that is as much as I can add to your question, Cynthia.

(OPERATOR INSTRUCTIONS). Renee Reynolds, Gilder, Gagnon, Howe.

To go back to the G&A, just wanted to ask quickly if you could quantify the impact of ForEx inside there.

I will give you a round number, Renee. We think that in the second quarter, had the U.S. dollar not moved, we probably would have -- compared to the first quarter -- would have been about $1 million off.

Now, you don't get that by itself. That has to be put in context. The foreign exchange has an impact on most line items in our financial statements. It affects the revenue side and the expense side. So we think that over any longer term, say 12 months or so, we are essentially bottom-line neutral. It is just the nature of our business. About 35% of our revenues and 40% of our expenses are denominated in non-U.S. dollars. So any swing in the U.S. dollar tends to have an impact on revenue line items and also expense line items. But the quantum of both hits tends to be essentially identical, which means we are bottom-line neutral.

If you look at a single line item, for example, gross auction proceeds or G&A, you do have the effects we just talked about. And if I look at the U.S. dollar exchange rate, Q1 versus Q2, we estimate that there was approximately $1 million of expense in G&A related to that.

And then looking at the ag sales, I know that they are lumpy, but is there anything in particular that is different year over year that explains why there were more sales, but fewer gross auction proceeds per ag sale?

Last year -- this is Randy -- there were actually one or two quite large events that did not repeat themselves this year. That is one explanation. Another one is that, again, it is the network effect of all our auction sites. And we continue to promote both on-site, i.e., small, farms sales as well as collective auctions in our permanent facilities. And there is complementary and cross-industry pollenization that adds up to a net benefit. And we are encouraging more and more dealers and farmers to take their equipment to our existing permanent auction sites. So you are getting volumes mixed into our regular industrial auctions. And we can't and don't break that out. So there will be some gross auction proceeds from agricultural efforts that are mixed into industrial auctions as well.

That's helpful. And my last question is on the guidance. The slight revision upwards -- is that reflecting better optimism for the second half, or is that merely adjusting for what you got in this quarter that was ahead of expectations?

It is Jeremy. I would say that it is partly reflecting a little better optimism for the second half. But more importantly, it is reflecting better visibility. Based on what has happened to date this year, we have a better view into the second half of this year and are just more comfortable with talking about it.

Okay, thanks, Bridget. That is it for today, guys. We appreciate your participation on the call, and as always, happy to take calls outside the conference. And Bob's phone will be busy, as Jeremy as well, mine will. So we will carry on here, and we will look forward to chatting with you after the Q3 call, sometime in October. Thanks, guys. Bye.

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.