RB Global Inc (RBA) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ritchie Bros. Auctioneers 2007 Q3 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, this conference is being recorded Tuesday, October 30, 2007.

I would now like to turn the conference over to Peter Blake, CEO. Please go ahead, sir.

Thank you. Good morning and welcome to the Ritchie Bros. auctioneers investor conference call for the third quarter of 2007. Thank you for joining us today.

I am Peter Blake, CEO of Ritchie Bros. I'm joined today by Rob Mackay, our President for the United States, Asia and Australia; Bob Armstrong, CFO; and Jeremy Black, our Director of Finance. We will be talking today about the results for the three and nine-month periods ended September 30, 2007, some of our significant achievements over the last quarter and our expectation for the rest of the year. Our presentation will take about 25 minutes, and then we will 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 the US 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 September 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 a today's date.

I'd also like to remind you that during this call, we will be talking about gross auction proceeds, which represent 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 have now completed three quarters of 2007, and the gross auction proceeds to date have exceeded $2.3 billion, which represents growth of 17% compared to the first nine months of 2006. Regardless of macroeconomic factors we see evolving in the more than 25 countries in which we operate today, our transparent business model, which creates value for our customers by matching local supply with global demand, is proving to be increasingly popular. The global used truck and equipment aftermarkets remain inefficient and highly fragmented, and the size of these aftermarkets is enormous, which presents an excellent opportunity for us. We believe we can continue increasing our market share and achieving growth at or above our targeted goals by continuing to execute our strategy.

Based on input from all of our field managers, we are expecting gross auction proceeds in the fourth quarter to be in excess of $800 million, which would make this our largest fourth quarter ever. This would also represent excellent full-year growth over 2006, and would reaffirm that our sales growth strategies are on track and working well.

Before I pass the call over to Rob, I would like to share some results of our recent customer satisfaction survey with you. We hired an independent market research firm to conduct an extensive international customer survey to help us get a clear picture of our customers' opinions and needs. The results of that survey are now being used throughout the organization to help us improve service levels and to grow our business.

Some of these results will interest you. 89% of the respondents said they were either satisfied or very satisfied with our service. 90% said they had recommended Ritchie Bros. to a friend in the past year. 80% rated Ritchie Bros. territory managers' performance as being good or excellent, and 78% said that their territory manager was better or much better than the other industrial sales reps that they deal with. When asked to rank us relative to other auctioneers, our customers identified that we were far superior in areas of professionalism, integrity, trustworthiness, customer service and innovation.

This was, of course, very flattering to hear, but there were also some interesting bits of feedback. For every $1 of assets these customers sold through a Ritchie Bros. auction last year, they sold $2 by private sale. 32% of them said they plan to increase the amount of business that they do with us, but there is still a massive opportunity for us to further penetrate our existing customer base.

This has been a great message to deliver throughout the Company. Our customers love what we do for them, and in theory, we should be able to double or triple our business by helping them with all of their asset sales.

Our marketing department and our sales force are hot on the trail of this and other opportunities. It makes us all very optimistic about our ability to grow our company well into the future.

Now, I'll pass the call over to Rob Mackay.

Thanks, Pete. Good morning, everyone. You can't pick up the newspaper these days without reading about the worsening state of the US housing market and the potential negative impact on the economy as a whole. As you can imagine, we are as interested in these trends as anyone.

While the main driver of our growth is our ability to execute our strategy, macroeconomic factors can make it harder or easier for us to do this. We can only sell what is for sale. If an industry or region is booming and much of the equipment is busy on job sites, then our work becomes much more challenging.

Thanks to the hard work of our sales team and the value created by our business model, we have grown well in recent years in spite of tight equipment markets. Now it appears that we are heading into a period of looser supply in some equipment markets. We wouldn't expect this to have a material impact on our growth rate, but it should make it less challenging for us to achieve and even exceed our growth targets.

In the US market, we have seen a general change in the market and moderating of equipment prices across the board. Prices have come down from the frenzied highs of 18 to 24 months ago, and while prices may have stabilized, there may be further room in some cases. Interestingly, even in the regions hardest-hit by the housing slowdown, we have not seen across-the-board pricing pressure. There is still a large amount of non-residential work being done, and there is ample demand for equipment outside the hardest-hit regions. This has led to relative stability in the marketplace.

In reality, the residential construction sector has tentacles that reach into many other sectors, but on its own, it is quite a small part of the total economy. Some categories of equipment, such as large motor scrapers and articulated dump trucks that were heavily used in larger housing developments, are suffering from shortages of demand. But most equipment that was used in housing projects has moved over to non-residential projects or has moved out of the hardest-hit regions.

The amount of construction activity in the United States is still massive, so a reduction in residential construction volume doesn't automatically have an immediate destructive impact on equipment values. We anticipate that the market will continue to moderate through early 2008 until equilibrium is established.

The weakening US dollar has also had an impact on the used equipment market. Purchasing power of the US buyer has diminished, and we are seeing an increasing amount of equipment at our US auctions going to new owners in Europe, Canada, Mexico and South America.

This trend highlights one of the strengths of our business model, and we are doing our best to let our US customers know about this. If you are selling equipment at a Ritchie Bros. auction in California or Florida or anywhere else, for that matter, the prices you receive are not solely dictated by local market conditions. Because we are able to match local supply with global demand, we are able to transcend local market conditions. Given all that is happening to the US dollar and the US economy, this is a very compelling competitive advantage for Ritchie Bros.

Overall, we believe the changing market in the US will likely result in more business for us, but we won't be surprised to see an increase in equipment supply in some areas of the US. At the same time, we don't foresee a flood of equipment or significant pressure on equipment values.

Thanks in part to a continuing expansion within the new EU members in Eastern Europe, the European market remains in a state of short equipment supply and generally high activity. These factors have combined to increase price levels and make for strong competition on most equipment packages coming to market.

It is this supply imbalance and the strong euro that has led to increased participation by European buyers at our North American auctions. The fact that European buyers can meet their equipment needs by participating in North American auctions shows how transparent and frictionless our market has become.

Interestingly, our business model can be compared to the stock market. With buyers and sellers having much access to much of the same information, transactions migrate to the most efficient markets and take place in an open, global and transparent manner. Equipment owners simply need access to that efficient marketplace where buyers and sellers can trade goods at market value. That's what we do.

If you wanted to sell 100 shares of Microsoft, you wouldn't put an ad in the paper and phone a few friends. You would go to the stock market, where all the buyers and sellers of Microsoft are located.

The same can now be said for a loader backhoe. Why stick a for-sale sign in the window of the cab, place an ad in the trade publication or website and then take calls from lookie-loos? Today, if you want to access the international retail marketplace, you can consign a loader backhoe to any Ritchie Bros. auction and attract global interest.

Now, over to Bob.

Thanks for that, Rob, and good morning. The numbers that form the basis of my discussion were included in our press release that was issued this morning, and are 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 filings are stated in US dollars.

During our last conference call, we told you that we were expecting gross auction proceeds for the third quarter of 2007 to be in the range of $600 million. Actual gross auction proceeds for the quarter ended up $668 million. As Peter stated, our year-to-date gross auction proceeds are 17% ahead of the first nine months of 2006.

We have enjoyed growth in all of our major regions, with volume growth being strongest in the United States and percentage growth being strongest outside the United States. The weakening US dollar further magnifies the impact of our sales growth in Europe, Canada and other non-USD markets.

Comparing the first nine months of 2007 to the first nine months of 2006, the US dollar weakened 7% against the euro and 2% against the Canadian dollar. Had the dollar remained at the same level through both periods, our gross auction proceeds growth would have been 15% instead of 17%.

Included in total gross auction proceeds for the first nine months of 2007 are the results from 160 unreserved agricultural auctions, which generated gross auction proceeds of $111 million. This compares to gross auction proceeds of $117 million for 127 agricultural auctions in the first nine months of 2006.

There were some unusually large farm sales in 2006, which provided a tough comparative number. As noted on our last conference call, we don't see this decrease as an indication of a trend.

Our auction revenue rate for the first nine months of 2007 was 10.03%, which is higher than the 9.6% we experienced in the first nine months of 2006 and right at the top end of our expected average range of 9.5% to 10%. Our third-quarter auction revenue rate was 10.2%, which is above our expected average range, due to better-than-expected performance of our underwritten business and gradual improvement in our straight commission business.

Direct expenses, which are the costs we incur specifically to hold an auction, were 1.35% of gross auction proceeds for the third quarter of 2007 and 1.25% for the first nine months. This year-to-date rate is better than the rate of 1.31% experienced during the first nine months of 2006. The average size of our industrial auctions has continued to increase through 2007, and this is the main explanation for the reduction in the direct expense rate, as 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.

General and administrative expenses were $34.9 million for the third quarter and $100 million for the first nine months of 2007. Our G&A is growing, as you would expect, along with the continued growth in our business. Personnel costs continue to represent approximately 60% of our total G&A costs, and our employee headcount at September 30th was 16% higher than a year earlier.

As noted on our last conference call, another factor contributing to the increase in our G&A expenses is the accounting effect of the weakening US dollar. This is worth discussing for a moment, as the large portion of our revenues and expenses are denominated in currencies other than the US dollar, primarily the Canadian dollar and the euro.

All else being equal, our G&A expense for the nine months ended September 30, 2007 would have been $1.7 million lower if the US dollar had held the same average value as it had during the nine months ended September 30, 2006. G&A expense in Q3 would have been almost $800,000 lower if the US dollar had held the same average value as it had during the third quarter of 2006.

The FX impact on our revenues counteracts the FX impact on our expenses, with the result that the FX volatility has an immaterial impact on our bottom line. But individual line items are clearly affected by fluctuations in the US dollar.

The US dollar fell 6% against the Canadian dollar in September alone, so it's likely that the average Q4 exchange rate will be quite a bit lower than the average Q3 exchange rate. It's entirely possible that Q4 G&A could be in the range of $2 million higher than it would have been if the US dollar had held its value from Q3 to Q4. Again, the impact on individual line items can be substantial, but the bottom-line impact should be insignificant.

Our income tax rate for the first nine months of this year was 34.1%, which is lower than recent periods. The continued growth of our business in international markets has the effect of reducing our overall tax rate, because the United States is our highest tax rate jurisdiction. The Q3 rate was particularly low, in part due to a $1.5 million adjustment posted to tax expense in the quarter, primarily related to 2006 taxes.

Following the preparation of our 2006 US tax returns, we booked the difference between our actual tax expense and the accrual amount that we had estimated at the end of 2006. The full effect of this adjustment was booked in Q3 of 2007. We continue to believe that 35% is an appropriate tax rate to expect as we go forward.

Our net earnings for the third quarter of 2007 were $14.9 million or $0.42 per diluted weighted-average share, and for the first nine months of the year were $59 million or $1.68 per diluted weighted-average share, which is 24% ahead of the first nine months of 2006. If we exclude the impact of after-tax gains of $1.1 million recorded last year on the sale of excess property, our earnings growth this year has been 27%.

Before I pass the call to Jeremy to update our guidance for the rest of the year, I want to tell you a bit about our CapEx spending so far this year. We are under construction on new permanent auction sites in France, Houston and Kansas City. We expect to have our first auctions on each of these sites in 2008. We [purchased plans] earlier this year in Grand Prairie, Alberta, with the intention of building a replacement permanent auction site in that city, although we do not currently have a construction schedule for this project. We can now tell you that, subsequent to the end of the third quarter, we completed the purchase of approximately 123 acres of land in Medford, Minnesota, on which we expect to build a permanent auction site to replace our existing facility in that region.

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

Our total CapEx for the first nine months of 2007 was $57.4 million. For 2007 and future years, we are still expecting that CapEx, including maintenance CapEx, will be in the range of $50 million to $100 million per year, as we continue 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 cost of suitable expansion opportunities and prevailing business and economic conditions, and they could be higher or lower than this range. We expect to fund future capital expenditures primarily from our operating cash flow or draws on excess working capital or available credit facilities.

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 last conference call, we indicated that we were expecting gross auction proceeds for the full year to be in the range of $3.05 billion in 2007. We once again surveyed our field managers, and based on their input, we now believe that our full year of gross auction proceeds will be in excess of $3.1 billion. This would represent growth of more than 14% compared to 2006.

We are currently expecting our fourth-quarter gross auction proceeds to be in excess of $800 million. We still believe that 9.5% to 10% is an appropriate long-term average auction revenue rate to use when looking at future periods.

Our focus continues to be on delivering average EPS growth of 15% per year. It appears that we are on track to come in ahead of this mark in 2007, due to better-than-expected gross auction proceeds growth and a strong auction revenue rate experience. Our expenses have been coming in as expected during this period of infrastructure investment. On previous conference calls, we have said that over the next several years, we expect our G&A to decrease as a percentage of gross auction proceeds, but that 2007 would probably not be a year of much, if any, improvement in that metric. This continues to be our view. However, it does appear that we are still in a position to deliver EPS growth this year that is well ahead of our long-term average annual targeted rate of 15%.

We are in the process of working through our detailed planning and forecasting for 2008, so it's too soon to give you any specific guidance for next year. However, our strategic plan, which was approved last week by our Board, is designed to achieve an average EPS growth rate of 15% per year well into the future. We expect to achieve this by growing our gross auction proceeds and by continually improving the efficiency of our operations, so that we can enjoy operating leverage for many years to come. We expect that this combination of top-line growth and operating leverage will allow us to achieve our EPS growth target.

One metric that we use to assess our operating leverage is our sales force productivity. We calculate this by dividing gross auction proceeds by the number of revenue-generating people on our team. Per-sale costs are our largest expense, so growing auction volumes faster than our headcount is a key strategy.

In the late 1990s, our sales force productivity hovered in the $8 million to $9 million range. In 2001 and 2002, it actually dipped below $7 million following a couple of years of rapid hiring.

Since then, we have improved our training programs, the efficiency of our auctions and our use of technology. We have essentially become more efficient at serving our customers, meaning that we are able to do more on a per-employee basis. Our sales force productivity has risen steadily from $7 million in 2002 to $12 million today, and we see room for continued improvement in this metric.

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

Thanks, Jeremy. Before I wrap the call, I want to draw your attention to some executive officer announcements contained in today's press release and securities filings, all of which are effective as of January 1, 2008. You will note that all these people have deep and varied Ritchie Bros. experience.

Steve Simpson started his Ritchie Bros. career as a territory manager in British Columbia and has been with the Company for 17 years. When we opened our doors in Australia, Steve moved down under to get us rolling there. He built up a solid business in Australia and then moved to the West Coast of the United States, where he has led our Southwest Division through several years of spectacular growth. Steve is based in Phoenix and will, on January 1, 2008, become a Senior Vice President with the responsibility for the entire West Coast of the United States.

Curt Hinkelman started as a territory manager in Minnesota 10 years ago. He moved to our national accounts group and then he moved again to Illinois to head up our Great Lakes Division. He is now moving to Atlanta, where he will take the role of Senior Vice President with the responsibility for our operations for the entire East Coast of the United States.

Nick Nicholson has been with Ritchie Bros. for 18 years, and he also started life as a territory manager with us. Nick's first territory was in Texas. Then he moved into national accounts, then to the Great Lakes and then back to Texas, taking on an increasing management responsibility with each move. Most recently, Nick has taken our operations in Mexico and South America under his wing. Based in Houston, Nick will be our Senior Vice President for the whole of the Central United States and will also retain responsibility for Latin and South America.

These three gentlemen, who have deep Ritchie Bros. experience, will between them oversee all of our US operations. Many of you have met Rob Whitsit, who is currently in charge of our Eastern US operations. With this reorganization of our management team, Rob remains the Senior Vice President, but traded his geographic responsibilities and takes on our growing transportation, real estate and national accounts groups, and adds an increasing focus to other major accounts.

Canada will be run by Kevin Tink. Kevin grew up in the auction business and was a partner and the general manager of All Peace Auctions when we acquired that Company in 2002. All Peace was an agricultural and industrial equipment auctioneer in Northern Alberta, and adding Kevin and his team to Ritchie Bros. enabled us to expand our presence in Alberta and enter the agricultural auction market in a real big way.

Kevin was appointed the leader of our Agricultural Auction Division. Then he expanded his responsibility and took charge of all operations in the western Canadian side. Kevin is based in Grand Prairie and Edmondton, and going forward he will be our Senior Vice President for all of Canada, as well as our Agricultural Division.

Vic Pospiech has been with Ritchie Bros. for seven years, and has been overseeing our ever-expanding human resources and training functions for most of that time. With recruiting, training and retaining of our people being critically important parts of our strategy, we are raising the profile of the HR function and appointing Vic to be our Senior Vice President of Human Resources.

Finally, Bob Armstrong will be holding two titles next year. We had previously announced that Bob will be appointed Chief Operating Officer in January of 2008. We have completed our search for our next CFO, and we have decided to groom one of our internal candidates for the position rather than hire from the outside.

Rob McLeod has been with Ritchie Bros. for 15 years and has worked in our offices in Vancouver; Lincoln, Nebraska; and Moerdijk, the Netherlands. Rob is currently our Director of Global Accounting, and we believe he has the right skillset and experience to be our next CFO. We're embarking on a formal grooming and training program with Rob and expect to name him CFO within the next 12 months. In the meantime, Bob will hold both the COO and the CFO titles.

As part of the evolution of our finance team, Jeremy Black will be changing his role, and will now have a greater focus on business development and risk management. Jeremy is also becoming our Corporate Secretary, but in order to make time for his new areas of responsibility, he will be evolving away from some of this current responsibilities in the areas of financial reporting and securities compliance. Jeremy will still be involved with our Investor Relations efforts, but will be working mostly with Bob on the operations side of the business.

It's very exciting to have such depth and breadth of talent in our management ranks. These are all key players, and they will all play critical roles as we continue to grow our business around the world.

Now let me recap the other main points we covered on this call today before we open up for questions. Firstly, through the nine months of this year, our gross auction proceeds are up 17% and our normalized earnings per share are up 27% over 2006. We have increased our guidance for full-year gross auction proceeds to be in excess of $3.1 billion for the year.

Secondly, if the US economy continues to weaken as predicted, based on our experience in prior economic slowdowns, it should prove to be a positive for us in our efforts to attract trucks and equipment to our auctions. Even better, the strength of our overseas network and our ability to expose equipment to the international retail marketplace means that we are continuing to see strong pricing in most categories of equipment we sell. An increasing amount of equipment sold at our auctions in the United States is leaving the country, which demonstrates not only transparency and the lack of friction in our market but also the power of our business model.

Now, we would be pleased to take any questions you have. Would you please begin the question period?

(OPERATOR INSTRUCTIONS). Bert Powell, BMO Capital Markets.

Bob, you mentioned your remarks the underwritten and straight commission performed well in the quarter. Is there anything that was anomalous in the straight commissions side of the equation that would account for some of the outperformance, or is there some systemic change that you guys have instituted, and now it's starting to take hold? Or are you just getting paid for the value you're creating?

Thank you for answering the question, Bert.

I wanted to just take that one off the table. I want to hear something different.

No, I can't point to anything in particular. I think the last thing you said, that we're just doing better job of getting paid for what we do, is what we're seeing. If I look at my straight commission business in isolation, it has been gradually trending up over the last several years. We've talked about it periodically. It's continuing to do that. It's great to see that, and in this particular corner, it wasn't a big spike up or anything; it's just continuing to move in that direction. So when you have that, at the same time as an improvement in your underwritten business, so the two of them together give us a better-than-expected rate.

I know, in the past, you use to offer kind of teaser rates to get an auction seeded and get that going. Is that still the case today? Is there enough critical mass in the business that those kinds of things just aren't happening, and that is giving a little step function up in the auction revenue rate?

Each deal that we go on and each auction sale is a case by case entity by itself, and one auction many face competitive factors vis-a-vis another auction, and a different auction may face economic cycles that another one isn't having. So we look at each one on a case-by-case basis, and sometimes we go in and effect some commission rates on deals to start auctions or for competitive nature, to get a deal to start an auction.

So it's not on the whole. It's just a case-by-case basis on each thing that we chase.

But in general, you're getting paid for the value, which should start to argue that the [ARR] would operate in the upper bounds of the range, correct?

Our field management and our sales guys are getting far better at commission rate equity.

Rob, I'll continue on. In your remarks, I know that the standard line has been for years for the Company is top 10, bottom 15, although you certainly gave a fairly positive view of the world going forward. Given that we haven't seen 10% for a while, and we are in the mid double digits, is that momentum, in your -- are you guys expecting that to continue through for the next few years, and 10% average is really something that we would look to see it in 2012 kind of thing?

Well, we are just correlating our numbers for 2008 right now, and as we mentioned, we envision that the US side of the world market is going to see a shift in the supply side and is likely, in our minds, going to be more equipment coming to market as a result of the slowdown in the economic cycle.

So do we see it coming in massive volumes? We see it maybe easier to pursue. How much that means to the top line, we are not quite sure yet. We haven't got our field guys with all their analysis done for next year. But for sure, through 2008, we think there is going to be an oversupply out there in the marketplace available to us.

I'd add to that, we're in the law of large numbers here, so even 10% gets pretty hard to achieve, especially when you think that a lot of the business we do is almost one-time business. You can't go back to the same pool each year.

Yes, I know it.

Okay, you know that.

I know you're reloading every quarter.

Last question -- Rob, maybe can you just give us just a little bit of color? I know you guys have good data that you don't share with us in terms of where stuff moves. Just in terms of the weak US dollar, is there any one area that's really pulling the equipment out of the US? Is it mostly Europe? Is it mostly heading south? Are you seeing the trends north? Is there anything really discernible that you've noticed because of the weak dollar in the last little while that would indicate where things are going?

I don't know if it's discernible in large numbers, but we're seeing some unique activity going on in the marketplace. The Australian market is quite active in buying larger equipment, mostly driven by commodity activity going on in Australia. You're seeing the same activity along the northern part of South America, where there's a lot of oil and gas developments, a lot of construction activity.

So you're seeing quite a bit of equipment leaving the US heading into that part of the world, Central America. Mexico, for sure, is still a significant purchaser in the US. The Europeans are buying select equipment lines, if you will. Of course, there's still quite a strong demand in the Middle East throughout just about everything we are selling in the US, excluding on-highway trucks.

Has there been much of a flow north into Canada that you've noticed?

I wouldn't say a significant increase in it.

You would say yes or no?

No.

Ben Cherniavsky, Raymond James.

Bob, you stole my question. Good numbers; congratulations. One thing actually I will pick up on, Bert, which you didn't cover or didn't get into in quite the same detail is on this auction revenue rate. It sounds like there's some reasons why it's outperforming; that's nothing new.

But I went back and looked at your last 22 quarters, so over five years of data. Your average is 10%; it's not the 9.5% to 10% range. 10% is not the upper limit of the range. It's the actual average. I'm not going to ask you if you're going to change your guidance, because you said you wouldn't. But how much more data do you need to see before you will change that and say, you know what, we have underestimated our long-term target here?

I think the way we described that, and the reason we don't feel any desire to change it at all, is when we look to the future and think about what we think is reasonable to expect on a sustainable basis, we just don't see that today, don't see that 10% being a sustainable rate. There's a good reason why the last several quarters were down more below -- what were they, between 9.5% and 10% for the last five or six quarters, and just finally popped back up again. We don't see anything in our business model that says it should be sustainably at a higher rate. If we did, we would be the first to tell you.

Well, how much more do you need to see, though? The numbers, they say something in themselves, right? The average, as I said, being 10% over 22 quarters, like this is -- I recall way back when, when I think your average was like -- what did it use to be, like 8.7% or something? You had scores of data that showed that historically, that it averaged in that range. That proved to be a fairly accurate estimate.

A whole bunch of things happened that raised your average target. But that became a new estimate in itself, and then over time, you start to collect data that tells you where the actual is relative to your estimate. Clearly, it has been better than you thought.

When we do our guidance, our projections, if you like, we're not so much looking at the past as we are looking at what we think is going to happen in the future. You're absolutely right about the past; that's just factual. But we reassess regularly as we look forward, and what we think is coming at us and what is happening in our world. The past is interesting, but it's the past. Randy and -- there's a lot of hands up in here if you want to (multiple speakers). Randy has snuck into the room, and he feels the urge to comment.

One thing that is important to note here is, what should we attempt to achieve, and what is the trade-off between volume and rate? If we push our rate up higher, which we could attempt to manage to, it would have an effect of slowing down the top line. We're very conscious of that, and we don't -- we also believe that it's a good range to live in, and that helps balance our desire to grow into new markets or new sectors.

If you get too fat in your margin, it just creates a lot of room for competition as well, and for other alternative methods of transacting -- The Iron, which are our greater competition. Pete mentioned the customer survey where, if we can just capture the dollars that our customers are spending today, not with Ritchie Bros., we could triple our existing volumes. That's just with our existing customer base. So we've got to continue to show good value to the people that we're selling for, and I believe that 9.5% or 10% is in fact the right range, not only for us to happen to fall into but to attempt to manage towards to get top-line growth as well.

Fair enough. Okay. No, that makes sense. At the end of the day, what you're saying, it's a price and you start raising your price too much, and you're going to lose some business.

It is.

That's exactly right.

Our customers are already very price sensitive, and we're already the most expensive guy out there. Everybody knows that we charge more because we deliver more. So we are very focused on ensuring that customers understand the value proposition.

Already, even our good existing customers who do business with us -- two-thirds of their business goes somewhere else. So we haven't yet convinced those guys of the deeper value proposition that we will be able to provide to these guys. They are looking at it and saying, "Well, why would I want to pay Ritchie Bros. 10%? I'll go and sell it myself." They have an auction of one versus an auction of 3,000.

So that's our challenge, is to continue to keep the focus on adding value. If you want to add value and try to layer a rate increase on top of that is just not -- it's not part of our strategy.

Just two other very quick items of clarification. Can you just repeat what was it in the third quarter that caused your tax rate to be lower, and what would it have been if you ignored that item?

There was an adjustment in the third quarter, about $1.5 million, primarily related to, I guess you'd call it, book-to-tax adjustment. You file your actual tax returns in September for the United States; that's when you know with certainty what your prior year's tax expense was. In our case, our prior year's tax expense was lower than we had accrued, and so we had to put through an adjustment. We do it every year; this year it was $1.5 million. It just goes to show how difficult it is to come up with your US tax estimate at year end. So there was a -- the main driver, US tax returns book-to-tax adjustment, $1.5 million.

You mentioned your sales force productivity in dollars per employee. But what is the current sales force headcount at the moment?

[It was erased], but I can do it for you.

From memory, 258.

258, yes.

That's as of September 30. 258.

Scott Stember, Sidoti & Company.

I just had a question on the G&A as a percentage of gross proceeds. Obviously, you've had some -- the M07 costs and headcount increase. Can you just talk a little bit more granular what impacted the quarter?

I guess, when we look at the percentage of G&A, G&A as a percentage of gross auction proceeds, I will encourage you to look at it on a 12-month basis rather than a quarter. 12 months, we're running at very a similar rate to where we were last year, which is pretty much as expected. You correctly identified that we're investing right now in a bunch of systems work and that adds to the cost. We like to say we're laying a foundation, but we're putting stuff in place now that we believe will be helping us to reduce the percentage point forward.

But this year, it's coming in roughly the same as it was last year. Last year, the full-year rate was 4.34%. That's G&A as a percentage of gross auction proceeds, and it looks like it's coming in in that general range right now. Nothing unusual in the third quarter.

As far as the Internet auctioning that you have, can you talk about how that performed versus last year? I know, in the second quarter, you saw a nice little jump. Can you talk about the third quarter?

Yes. The third quarter, in percentage terms, was slightly down from the second quarter, the second quarter being quite a big spike up, exactly as you noted. Right now, the Internet is the buyer or the runner-up on between 25% and 30% of everything that we're offering online. If you take out quarterly fluctuations, it has been a very steady grower for the last several years, that percentage has, which is fascinating to us. I was prepared to call it a plateau about a year ago, and it just keeps marching forward slowly but surely. So far this year, we have sold online almost as much as we have sold online for all of last year.

So that's continuing to be a great grower for us, and boy, do I ever love those customers. These are guys that come to our website, they register all by themselves, they don't need a hat or a catalog, they don't need any parking. Then, when they buy something, they pay me. They are about the best guys I could have onboard, and they are coming to us in increasing numbers.

My marketing guys told me last week that we have 1,000 new registrations per week for our Internet services. Bidding is just one of those; it's not 1,000 new bidders every week. But we're somewhere in the range of 80,000 registered Internet bidders right now, and it's growing quickly on a weekly basis. It continues to increase, primarily with our existing customers. That's quite interesting to me; it's not like we're attracting a whole new group. For sure, there are some new people. Really, it's just another dimension to our relationship with our existing customers.

Would you happen to have that percentage of bidders winning from the Internet from last year?

Well, that percentage, as Bob mentioned, was bid or backup bid, so let's be careful about that. Some of the value on the Internet is having the backup bidder on the Internet pushing the live crowd to the next increment up. That was that 25% to 30% number. I think actual transactions were less than (multiple speakers).

To give you a comparative to that -- I don't have the number with me. But my recall is that it was about 5% lower this time last year, in terms of the buyer or runner-up percentage. So if I'm saying 25% to 30% now, about a year ago -- Jeremy is nodding at me. We think probably about 20% to 25%. It varies, obviously, auction by auction, but that's a companywide average. So it has been increasing.

Please don't take a ruler and a pencil, though, and keep drawing that line out. Our belief is that these live auction and the live participation at the auction is not going away anytime soon. The nature of the assets we sell -- really, it's driven by the live crowd participation. The Internet may well continue to increase as a percentage, but I personally don't see it taking over.

An important element to add to this is that many of these customers that are bidding online are using it as a convenience tool. They have also been to the auction site previously. We see it on a very regular basis; they go and do their inspection in advance, when it's convenient on their timetable, maybe the weekend before. They're only interested in a certain number of items at the sale, and instead of spending -- some auctions are three days long. They may come for day one, and then they bid online for day two and three, perhaps.

So there's a real mixture, and as Bob said, it's a different dimension to the relationship that we have. It's very much a convenience tool, as well as a tool that allows expanded reach to farther areas like Europe and the Middle East, for example, that Rob was talking about being bidders on events in North American. So it's a mixture of all of that.

The headcount that you gave for sales force was 258. Was that a similar increase as the total headcount of 15%, 16% over last year?

Now you're going to make Bob grab his calculator.

258 divided by 235. No, a bit lower, just about 10%.

Just last question -- can you talk about the real estate side? Any new developments there?

Sure, I'll give a stab at that. We're carrying on, still, in our pioneering efforts. We're having some successes, but it's immaterial at this time. Everything is immaterial; it's really not something that we should comment on, on a global basis, other than we continue to see it as a potentially significant future path and we are, step-by-step, trying to put strategies together to validate that theory and pursue that opportunity.

Gary Prestopino, Barrington Research.

A couple of just questions on -- one of you mentioned that you were seeing prices moderating in the US in terms of the residential side. Is that correct?

Yes.

How much have they been coming down here lately?

It really varies on the commodity itself. We've seen some significant decline in the value of, for instance, the larger motor scrapers that have been used in the housing industry in the West Coast, in particular. We've seen a moderate decline in articulated rock trucks, due to the same decrease in demand for them, plus the offsetting increase in supply that's available in the market today. The rest of the equipment that we run in out there has seen a slight decrease -- I wouldn't say it's significant -- off some of the highs we've seen. The crane market, the crushing market, crushing equipment market still is very strong. I would say we've probably seen the same prices or, in some instances, higher than before.

So in terms of the international buyer, with the decline in the dollar and seeing prices come down in the US somewhat, it's a double benefit, correct?

Yes. There's a still very good demand overseas in many of the markets, and they've got a stronger currency.

Do you keep statistics on the amount of gross auction proceeds that were put on the US but taken out of the country?

Yes, we do.

Do you make that public?

No, we don't.

If we were to talk about that, it has been increasing. I'm trying to think of the numbers I've seen recently. It has been increasing fairly meaningfully, I'd say, over the last year or so.

But that's something that we don't specifically track and manage to. It's global arbitrage, and one year it's going east and the next year it's going west. If you looked at this over the last 10 years, it absolutely bears that comment out. Currencies go up, currencies go down. One market is stronger this year; other markets are stronger next year. So these things don't continually flow in the same direction all the time.

Consignors are starting to realize that it's a world market for the equipment, and if you can't access the global market to get the top value in the globe, then you're walking by dollars. That's obviously the basic value proposition that we provide these guys.

So we show them evidence of moving a product outside of the state or province or country that they happen to operate in, and we continue to see an increasingly flatter world out there. That hasn't changed in the last probably 7 to 10 years. It's getting more -- the velocity of that change is increasing with the tools that we have available like Internet or the global footprint that we've got now, with sites in Europe and the Far East and Australia, Middle East. Those all add up to increasing transparency for the marketplace, and that just means more value to the end seller of the equipment and a better selection for the buyers as well.

But at the end of the day, they still have to get a better price, and that would include the shipping they have to pay to get it from --?

Absolutely, yes.

Cynthia Houlton, RBC Capital Markets.

You discussed in the past, when you saw a decline or slowing in the economy, the availability of equipment tends to increase. Could you maybe talk about what -- the pace of how that happened in the past? Because obviously it's been a few years since we've had a slowing economy and a slowdown in the real estate market. Is it something where you've started to see it build now, and then you anticipate a faster progress of availability of equipment? Or do you think it's something that will come at a certain pace? Or just maybe how it occurred in the past would be helpful.

You are right; we haven't seen a slowdown for quite some time. For us, the most exciting thing about that is that the last the slowdown we had, we didn't even have the Internet tool available for us. So we are looking for great things to happen when we can provide a global marketplace for sellers of equipment.

Pace is a very difficult thing to measure. You can see lots of recent activity in the US on the housing side that's caught some real credit crunch and consumer problems that seeped into Europe and the UK, and the Spain real estate market was in trouble last year.

So there's lots of curious things going on around. I don't know that you can put your finger on it's going to say 10% or 20% or 5% in movement. I think the general feeling we can share with you out there is that there's some concern that the US market is on a downslide, and some even believe it's in recession. We'll find that out in 12 months from now, when we get the statistics from the government agencies about what actually happened right now.

But there's lots of challenges out there for lots of different industries. At the same time, there's an awful lot of work going on. When we looked at the US economy, in general, the GDP is about $13 trillion. Even in the most severe of recessions, I think you see a 2.5% to 3% decline. You're still talking about over $12.5 trillion of GDP that's going on out there in the US. So that's what we referenced comments in the compared prepared call to there's lots of non-res work going on -- lots of roads being built, lots of commercial construction, not only in the United States but everywhere else.

Rob, I don't know if you want to share --?

I think each time we've gone into different economic downturns, it has been affected by different things. Right now, we're going into one that is affected by the housing industry. The type of equipment that's used in that industry can easily migrate next door into another industry.

In the past, when we've seen economic downturns, particularly in the commodity markets or oil and gas development, when those types of industries slow down, and that type of surplus equipment becomes available, it comes to you a lot quicker because there's nowhere else for it to go. When a mining truck has -- commodity prices are down and the mining is down everywhere in the world, that mining truck has fewer alternate industries to go into.

So you see a lot more of the product come to you quicker, and you see probably a quicker decrease in the value of it than we're experiencing today in the loader backhoes or the type of equipment that you see using in the housing industry. So the factor that slowed the economy really dictates how quick the quantity of stuff comes towards us and how quick the value of it may increase or decrease.

Maybe a follow-up, then, kind of on a similar angle, is in addition to all the talk or discussion in the news headlines about the weakness in the economy, weakness in real estate, credit is obviously something that has tightened up a lot, and I understand that a number of your customers require financing for their purchases. Maybe, again, any understanding of any changes that Citi had made into terms for financing or tightening up credit standards for your potential customers?

Sure, Cynthia. Two comments on that. I actually met with the CitiCapital folks a few weeks back and asked them that very question. They said, "No, we haven't changed our rates." They are offering the same rates and terms to our customers as they were two months, three months ago.

I think the answer may lie in the question about who is trying to get the credit. There has been a shakeout in the credit markets, so that today, people who were getting easy credit a couple years ago can't get it today. Well, probably we would all agree they shouldn't have had the credit, anyway. I think, if I went to the bank today to borrow a loan, I have no problem. If Ritchie Bros. wants to borrow money, we (multiple speakers).

You, Bob?

Okay, bad example. If Ritchie Bros. once to borrow money, it's no problem. But if Joe, who should never have been able to borrow, goes today, well, he could last year but he can't this year, and that's probably the way it should be.

Most of our customers are solid guys making money. They've got cash flow. Yes, a lot of them -- most of them probably finance the gear. I'm not aware of any particular change of behavior due to lack of available financing. For the stuff we're talking about, it's not speculative real estate; this is income-producing assets. So I think we are not insulated, but it has not really been a big hit to us.

Anybody else one to comment on that?

The one thing that you probably will see is probably a more competitive margin on some of these projects that are being bid, because there's more supply of contractors to do the work, but equal or maybe a little bit fewer projects to be bid on. So typically, what happens in a downturn we've seen in the past is that the margins get squeezed a little bit, and the guys that have less equity or less liquidity and are managing the business in a little bit tighter, on-edge manner than other guys tend to be the ones that will exit first. So if competition goes up, margins get tight a little bit on the way through, and then the rest falls out.

The one thing that we haven't seen in this particular downturn that we've seen in the past is interest rates. Interest rates have not really ticked up that dramatically, like the 18% to 20% ones that we saw back in the 80s. So that allows people to hang on a little longer and allows people to try to manage and work through tougher times. But they get a little more creative and a little more lean in terms of what kind of equipment they need to hang onto. So that's areas that we can help them rationalize their fleets.

I know you made some small inroads into real estate auctions. You are reading that that's becoming a more popular way to address the excess capacity there is. Any comments on that business, whether you see that opportunity accelerating, becoming more material? Comments on that would be great.

I guess I could repeat the comments I made just a minute ago. We do have a team dedicated to building that sector. It is very small or immaterial today. We do believe that it has a prospect to grow much beyond that, and it's a challenge as we go abroad to India or China or Japan or Russia and we try to convince somebody to put a $200,000 bulldozer in our auction, unreserved.

That's a pretty unique element that we shouldn't overlook. In the same dynamic, it's probably magnified, on real estate, because you cannot name a price at our auctions. Everything will sell unreserved. That applies to a $25,000 remote [lock in the bush] or to a $2 million or a $10 million commercial property.

So we are following that model, and we're going to go the path slowly. But we do believe that it's a very inefficient manner of trading real estate today, typically, and that with our system, we see the ability to bring a far more efficient, far more transparent mechanism in the marketplace, where the assets can trade faster and create increased liquidity and a long-term vision. I think it's pretty exciting, but right now, it's immaterial.

One thing I will share with you is the focus for us is not on REO, not on real estate owned. Any residential real estate is something that we're going to try to stay away from. We're trying to focus more on the real estate that's used or needed by our customer base, so industrial/commercial, the odd luxury property here and there. But not so much the distressed housing market that's out there today.

Bruce Simpson, William Blair.

Congratulations, particularly to those of you with promotions coming up Jan. 1. Great job.

I've got a question about operating leverage, and in general, if we can assume kind of low double-digit growth in gross auction proceeds for 2008, as you seem to be anticipating, is that the year where you expect to see a breakthrough in the ability to leverage SG&A -- in other words, sort of harvesting the fruits of M07? Or do you see enough fixed expense ahead in your IT systems and more hiring of personnel and so forth, that that's probably further out than 2008?

I think that we are at the high point now, in terms of G&A as a percentage of gross auction proceeds. We're probably looking at a couple of years in a row at this mark, and I would expect it to -- trailing down. Certainly, that's our plan. We're spending lots of money in investing, but we're also now starting to see the benefits of that. So our plan calls for improvements in that particular metric starting somewhere next year.

So I think you are right. To exactly when and exactly what magnitude -- that's too tough to know. But that's what we're expecting.

Talking about the fourth quarter in particular, you may recall that in last year's final period of the year, there was a little bit of a surprise, I think, to the Street in the accruals in that line item of G&A. Some of it had to do, as I recall, with your M07 IT infrastructure; some of it was incentive comp and so forth. Can you give us some kind of indication as to what you're anticipating here in the last quarter of the year, based on specific accruals you've made so far?

Yes. We don't see anything weird and unusual yet in the fourth quarter. Last year, there were a couple of items that you didn't mention that actually had the biggest surprise factor of all. One you may recall, legal fees, dealing with our issue at the time with Caterpillar, their International Trade Commission complaints. That was something that was dealt with and settled in the fourth quarter of last year, and there was a big legal fee to do with that. The other was an issue to do with a European dispute with one of our customers that was settled in the fourth quarter of last year -- two large one-time items that hit G&A Q4 of last year that, of course, we don't expect to see this year, and we don't have equivalent things going on.

So I don't expect anything like we saw last year. That was definitely a surprise; that's a good word for it.

So probably more in line with typical seasonality, about some increase in accruals as you head into the fourth quarter but not nearly to the extent of last year?

Yes, with the caveat -- and that's something I mentioned on the conference call -- that foreign exchange is doing fun things to us right now. The US dollar has weakened precipitously in the last couple of months, and so I think there could well be an impact in Q4 on G&A, also an impact on our gross auction proceeds and auction revenues. So, bottom line, not a big deal, but I think your Q4 G&A could well have a hit, thanks to the US dollar, just because of what it has done since the beginning of September.

Are you guys paying yourselves in year-end bonus in USD or Canada?

USD, man.

A little bit of everything.

Our bonus scheme is all US dollar-based.

Switching gears into your transportation market, can you update us about what percentage, roughly, of gross auction proceeds is represented by all of the transportation goods, how that has been growing here in the first three quarters of 2007 relative to the Yellow Iron and how it is impacted by the impending recession and price trends in that segment of the market?

Just while Rob is gathering information from other experts -- if you could only see what's going on here, Bruce, it's comical.

We've got a truck guy in the room, so he's just whispering into Rob's year.

Normally, when we have talked about the transportation segment as part of the whole, we usually say construction equipment represents about half of what we sell, knowing that it's tough to define what the heck is construction equipment. So we say it's about half, and transportation, we usually say, is around 20% and then agriculture is, I don't know, 10%, 15%, somewhere in there -- nice big, round numbers.

So with that as a backdrop, here's Rob Mackay with his recent research.

Nicely done, Bob.

I tried to buy you a bit of time there.

20% is probably a little closer to 25% these days. When we talk about the transport industry, as Bob mentioned, it's a pretty broad spectrum from construction trucks -- which are dump trucks, crane trucks, that sort of thing -- to over-the-highway trucks. During the course of the last 12 to 18 months, we've had a designated push into the other trucks, which is over-the-highway type transport trucks. The other stuff comes to us by our normal ways and means penetration by our local PMs. But we have a designated group that is going after the over-the-road business of the big transport companies.

During the course of 2007, we have initiated some marketing ideas, some additional promotion advertising, some hiring of guys that focus directly on those guys. Truck guys like to call on truck companies. Yellow Iron guys don't like to call on truck companies.

So Dean Siddle, one of our Vice Presidents, has been hiring and growing that team. Really, we're just starting to get some traction in that industry, and I think we will see some payoffs in 2008 and beyond. But [part of match] of growth in 2007.

Overall, is that growing at approximately the same rate as the construction piece, or noticeably faster or slower?

The over-the-road stuff would not be growing as fast as the construction growth.

Then are there price changes going on there, either having to do with residential construction or price of energy or any other macro factors that mirror what is happening in construction equipment?

Not anything significant, I would say at this time.

Then a last question for me is one for Peter, and addressing your original remarks, when you say we really only have about $1 out of $3 that our existing consignors give us -- where do you think the majority of the other $2 are going? How much of that is truly realistic, versus where there might be structural barriers where they are never going to give it to you?

It's unrealistic to think that we'll get everything from everyone. But I think that typically, you see the equipment that's easiest to sell is the newer stuff. The people or consignors or equipment owners are getting phone calls -- or had been in the past, anyway, getting phone calls for, "Hey, do you have this for sale or do you have that for sale?" So these guys theorize, well, why would I pay Ritchie Bros. a 10% commission to sell it? I can sell it myself, and then I'll give them the other stuff that needs to be refurbed, or maybe is a little bit more difficult and they need a broader market to chase.

So I think it's mostly the nearer-new stuff.

And it's a private sale.

Well, it's a private sale, yes. So it's the direct sale by the equipment owner to a third party, be it a dealer, be it another end user. It's very hard to generalize, but the opportunity that we have in front of us was very clear, and the survey results. So we'll work on making sure that people have a very good understanding of our value proposition, even better than perhaps we thought they did.

Thanks, and congratulations again.

I'm not sure what question queue is, but we probably have time for one more.

That was the last question.

Oh, perfect. Okay, well, thanks.

Thanks, everyone. Perfect timing, and we'll carry on with the rest of our world. We've got St. Louis on today, and Adelaide was yesterday, and we've got a pretty busy fourth quarter ahead of us. So we'll get out and we'll look forward to talking to you sometime in late February. Thanks, everybody.

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.