RB Global Inc (RBA) 2008 Q4 法說會逐字稿

Welcome to the Ritchie Bros. Auctioneers 2008 year-end conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference call is being recorded Thursday, February 26, 2009. I would now like to turn the teleconference call over to Peter Blake, CEO. Please go ahead, sir.

Thanks, Brian, and good morning, everyone, and welcome to the Ritchie Bros. Auctioneers investor call for the year ended December 31, 2008, we appreciate you joining us this morning. I'm Peter Blake, Ritchie Bros. CEO, and joining me on the call today are Bob Armstrong, Chief Operating Officer; Rob Mackay, our President; Rob McLeod, our Chief Financial Officer; and Jeremy Black who has recently been promoted to Vice President of Business Development and Corporate Secretary since our last call.

Today we'll be discussing our financial results for the year ended December 31, 2008 as well as our expectations for 2009. The presentation will take about 20 minutes and then we'll open the call for questions. Before we start I'd like to make the Safe Harbor statement.

The following discussion will include forward-looking statements as defined by SEC and Canadian rules and regulations. Comments that are not facts are considered forward-looking statements that involve risks and uncertainties and include statements about our projected future results of operations and financial performance, growth and other strategic initiatives, property development plans, and other matters.

These risks and uncertainties are set forth in detail in our management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2008, which is available on SEC, SEDAR and company websites. Actual results may differ materially from those contemplated in the forward-looking statements.

I'd also like to note that during the call we will talk about gross auction proceeds which represent the total proceeds from all items sold at our auctions. Our definition of gross auction proceeds may differ from those used by other participants in our industry.

Gross auction proceeds is an important measure we use in comparing and assessing our operating performance. It is not a measure of financial performance, liquidity or revenue and is not presented in our statement of operations. The most directly comparable measure of our financial statements is auction revenues which represent the revenues we earn in the course of conducting our auctions.

Despite the market and economic turmoil in 2008 this was a year of record results and strong growth for Ritchie Bros. We sold more equipment than ever before, $3.57 billion worth, which was 12% more than in 2007. We achieved record adjusted net earnings of $85.5 million or $0.81 per share, that's 19% more than in 2007 and well ahead of our targeted average annual rate of 15%. And we continue to forge ahead with our growth strategy.

Here are some other 2008 highlights. We were added to the S&P TSX Composite Index and Russell Global Index; we generated a record number of total bidder registrations, online bidder registrations and dealt with a record number of buyers and sellers at our auctions. We set new Internet bidding records with more than $700 million of equipment sold to online bidders, which is a 17% increase over 2007 levels. We opened five new or replacement auction sites around the world. We conducted our first auction in Eastern Europe in Poland, and we purchased land for our first permanent auction site in Japan.

We are very pleased with our performance in 2008 and particularly during the fourth quarter in the face of economic turbulence. While many other companies struggled we remained strong by continuing to deliver value to both buyers and sellers of equipment. Ritchie Bros. has been growing steadily and generating strong earnings for decades, we've grown in good times and we've grown in bad. In fact, over the last 50 years we have demonstrated our ability to grow at all points in the economic cycle.

One of the main reasons for this is that the market we are chasing is very large and extremely fragmented. Our growth comes more from increasing our share of the market than from growth of the market itself. So, when times are tough, as long as we remain focused on our strategy, we should be able to grow. We have re-examined our operating and capital plans for 2009 to make sure they remain sound given current conditions in the market and we continue to be confident about our growth prospects this year and into the future.

This is the big question that we get asked every day -- are you going to be able to grow the business in the face of such unprecedented global economic challenges. The simple answer is, yes, we believe we will. Rob Mackay will give some more color on equipment pricing in a few minutes, but overall we believe the constantly shifting mix of assets we sell and the increased consignment volumes at our auctions should more than offset decreased equipment prices.

The reality is in this type of economic environment equipment sellers are seeking certainty, access to global markets through best in class marketing, fair market prices and prompt and reliable liquidity which is exactly what we provide at our auctions and what very few other competitors are able to offer. Increasing inventory levels at dealers and financing challenges they and others are facing create great opportunities for Ritchie Bros. to gain market share.

There are real life examples of how we believe this environment will play out. Last week in Orlando, and right now in Phoenix and Moerdijk, at these recent sales we are seeing increased volumes of equipment and near record bidding audiences. Prices or off compared to a year ago, but not so relative to equipment pricing that we saw in Q4 of 2008. Orlando was a good example of this.

Although our gross auction proceeds were down from last year, the asset mix was very different than in '08 thanks to our ability to take on more small equipment with our expanded yard in Orlando. In the '09 sale we contracted with a record number of consigners and bidders, had record Internet participation and generated what all those in attendance universally saw as prices that were substantially as firm or higher than prices in the market in Q4 of 2008.

Rob will give you some more color on this in a minute, but let me say that to us and to our customers the Orlando auction was a great success. An increasing number of equipment owners have been turning to Ritchie Bros. to sell their surplus assets over the years. This is even more true in a tough market like we are in today because they know we will provide certainty where uncertainty is the word of the day.

Our consigners know that we will attract a diverse international audience of mainly end user bidders, both on-site and online, to the auction, that we will sell their equipment on auction day and that we sell it for global fair market value. And they will receive the proceeds of sale shortly after the auction. There are a few other selling channels, be they auction companies, dealers or even private sales, that can deliver that kind of certainty to the equipment sellers.

We've demonstrated our capacity to grow in previous economic downturns. We believe our online presence, which we did not have in the last significant economic downturn early in the decade, makes us even better prepared to weather this current economic storm. Since introducing our real-time Internet bidding service in 2002 we've sold over $2.5 billion worth of equipment to online bidders and we now have close to 100,000 registered and approved users of our system. We sell more equipment to on-site and online bidders than any other company in the world.

And the reality today is that people are still buying equipment, so we expect demand to remain firm. They're buying equipment they can put to work building roads, hospitals, bridges, fueled in part by increased government spending on infrastructure projects in the Americas, Europe, Asia, the Middle East and Australia as well as by other construction activity which has shrunk compared to a year ago but is still massive.

Construction spending in the US still exceeds $1 trillion per year and the stimulus package led by the USA and other governments of late helps to explain why we do not see and do not anticipate that we will see a shortage of buyers at our auctions. And so while many companies are rethinking their business direction and growth strategies, we're staying on course and we are maintaining our long-term view of how we plan to grow the business.

Our goals remain the same, to grow our earnings per share by an average of 15% per year over the long-term while delivering reasonable returns on invested capital and to enhance our corporate culture. There will be years where we exceed our earnings growth expectations that we have done over the last five years, delivering adjusted earnings compounded annual growth of over 23%. And there will be catch-up years where we achieve growth of less than 15% as we did last in 2004. But we are still firmly of the belief that our model will allow us to continue to deliver earnings per share of 15% per year on average. Rob Mackay will now give you a brief market update.

Thanks, Pete, and good morning. We've conducted a number of auctions around the world since our last earnings call including our first couple of sales in 2009. We understand that the eyes of the equipment world have all been waiting since last year and have watched with great interest the results of these early 2009 auctions to help them ascertainment the state of the used equipment market. I'm happy to say that so far this year we have seen record bidding audiences and strong participation from bidders around the world and higher-than-expected pricing.

The big question for many outside observers leading up to the recent sale in Orlando was, who's going to buy this stuff? We're happy to say that a record 7,600 people from 75 countries registered to bid and buyers from outside the US purchased over 34% of the gross auction proceeds, which is roughly consistent with last year in Orlando. We sold equipment to buyers from all over North and South America, Europe, the Middle East, Africa and the Asia Pacific region. As Pete said, people around the world are still looking for good quality used equipment that they can put straight to work.

At all of our auctions we sell a wide variety and mix of equipment, so it's impossible to draw a direct correlation between total gross auction proceeds and used equipment values. This was clearly shown in the recent Orlando auction. In February '08 we conducted the largest auction in company history at our Orlando site selling 6,200 lots for total gross proceeds of $190 million. This year we sold some 8,300 lots generating a healthy $184 million in gross auction proceeds.

Many people expected our gross auction proceeds to increase during last week's Orlando auction, but it didn't. Some observers were surprised, so I'd like to comment a bit more.

At our Orlando auction in February 2009 we had a much larger volume of lower valued lots than in prior year. In February of '08 we had capacity restraints so we limited lower valued consignments. In '09 we added 35 acres to our Orlando yard and an extra day which allowed us to accept a broader mix of consignments including a higher proportion of lower valued items. Next sale it could be different again. At the end of the day we sell what's for sale. We are a reflection of the marketplace.

Some have tried to extrapolate the results of this Orlando sale forward and felt the bottom was falling out of the used equipment market. But what we believe they did not account for was the significant change in the mix of equipment sold. Comparing Orlando '08 to Orlando '09 is not like comparing oranges to oranges. The more meaningful stat is that we sold many more lower value items than the impact of the average value per lot more than the pricing environment accounted for.

When you look at specific categories of equipping you get a better picture of the market and realize that used equipment prices are not as volatile as commodity prices. When we compare our '09 Orlando results to those achieved in February of '08, which seems like a lifetime ago now, we see in most categories of equipment a range of 20% plus or minus decline in values, but roughly consistent with more than the prices we were seeing in our auctions in the fourth quarter of 2008.

As we look forward to the rest of the first quarter and the remainder of '09 there's still a lot of uncertainty in the market. Although recent sales have afforded the market some confidence with valuation levels and helped some equipment owners make up their mines to sell now, we believe there are still a lot of people sitting on the sidelines waiting for signs of further stability or price increases.

We believe we are starting to see some of that stability with record bidding audiences at recent sales. We are aware a large amount of equipment likely will still come to market, but right now it's difficult to predict exactly when sellers will feel the right level of confidence to proceed. Overall it is too soon to say out equipment pricing will unfold in '09. We believe that many categories have hit upon and may start to improve depending upon supply and demand, particularly late-model low R machines.

A few other categories still seem to be uncertain. We will give you more color on our next call in May, but the message today is based upon limited results to date in 2009 we have more comfort in where values are at and remain cautiously optimistic that further price declines in 2009 will be limited to certain product lines. Bob will now update you on the investments we are making in our people, places and processes.

Thanks, Rob, and good morning, everyone. Our growth strategy is familiar to most of you by now -- hire, develop and retain bright, hard-working employees; expand and improve our global network of auction sites; and invest in process improvements to make our business more efficient and effective. All of these efforts work together to help us better serve our customers and that's what will sustain our growth.

We ended 2008 with 1,077 full-time employees including 265 sales representatives and 29 sales trainees compared to 943 employees, 265 sales reps and 11 trainees at the close of 2007. It's great to have so many enthusiastic new trainees in the pipeline; they represent the future of our business and directly impact the amount of equipment that we consign to our auctions.

We added many new people to our sales force in 2008, but we lost the same number due to attrition. While we did upgrade the quality of the team, we were not at all satisfied with our lack of sales force growth in 2008. As we look out to 2009 we are expecting to increase our sales force by at least 10% and so far we are on track to achieve this. We are also committed to increasing their productivity. In 2008 we saw sales force productivity increase by 8% to $13.5 million per revenue producer.

There have been some exciting developments on the places front as well. Some of the recent highlights include -- we opened two new permanent auction sites in Kansas City and in Paris, France, replacing regional auction units in those areas; we established a regional auction unit in Las Vegas, Nevada; we commenced construction of a new permanent agricultural auction site in London, Ontario; we moved our regional auction unit in Spain to a larger site; we're currently under construction of permanent auction sites in Mexico City and in Melbourne, Australia which will replace regional auction units in those markets when they open in 2009; and we purchased land on which to expand our permanent auction site in Orlando, to replace our permanent auction sites in Grand Prairie Alberta and Vancouver B.C. and to build a new permanent site in Tokyo Japan.

Since the end of 2008 we've also completed the construction of replacement permanent auction sites in Minneapolis, Minnesota and Houston, Texas. We'll be celebrating the grand opening of those two sites in March. Including these two sites we expect to cut ribbons at as many as five grand openings in 2009. All of these projects give us the capacity to handle the sales growth that we have been driving.

I've detailed a number of our process improvements in previous calls, so I'll just mention a couple of exciting new developments today. The first is our Internet bidding service. Using input from our customers we have developed and recently launched an enhanced online bidding tool. The service offers new features and functionality that bring the experience of bidding online even closer to the experience of bidding on site with the added bonus that our customers can now bid more easily in multiple simultaneous auctions and auction it rings.

Another exciting initiative is our partnership with uShip, the world's largest online shipping market place. People bidding and buying at our auctions in Canada and the US can now visit our website for real-time shipping estimates and competitive shipping quotes enabling them to save time and money. The new service was very well received by our customers in Orlando last week and our online shipping calculator is integrated with the equipment specification engine and RitchieWiki.com, the free information website that we launched in 2008. Rob McLeod will now go through the highlights of our 2008 financial results.

Thanks, Bob, and good morning. I hope you've all had a chance to review our earnings release for the year ended December 31, 2008 which will form the basis of my comments today. The release was issued and filed this morning along with our audited annual financial statements and MD&A. All three documents will be available shortly on the SEC, SEDAR and Ritchie Bros. websites. All amounts in our filings and in this call are stated in US dollars.

2008 was another record-breaking year for Ritchie Bros., we generated gross auction proceeds of $3.57 billion, a 12% increase over 2007. In fourth quarter we achieved gross auction proceeds of $853.9 million. Our year-over-year growth cannot be attributed to our success in any one particular region or market, rather we experienced strong growth worldwide.

Our target gross auction proceeds for 2008 was $3.65 billion; we fell short of that target largely due to foreign currency headwinds. The US dollar strengthened dramatically against the Canadian dollar and euro in the latter part of 2008 and this impacted the translation of our gross auction proceeds from those currencies into US dollars. In quarter four we estimate that currency changes resulted in a $50 million decrease in gross auction proceeds, all else being equal.

One additional factor impacted our gross auction proceeds in quarter four and that was uncertainty. The world changed drastically in a very short period of time and many equipment owners decided to delay selling their equipment until things stabilized. As Rob Mackay mentioned, we are currently working with many potential consigners who have maintained this posture.

Our auction revenues increased 14% in 2008 to a record $354.8 million. Our auction revenue rate increased to 9.95% which is within our expected range of 9.75% to 10.25%. This increase was due primarily to the performance of [round written] business which again accounted for about 25% of our gross auction proceeds in 2008.

In 2008 we achieved a direct expense rate of 1.39% compared to 1.46% in 2007. Direct expenses are costs we incur to conduct auctions such as wages for temporary staff, auction advertising, site security and rental offices for off-site auctions and travel expenses. In general larger auctions and auctions held at our permanent sites result in lower direct expense rates. In 2008 about 89% of our gross auction proceeds were generated through auctions at our permanent auction sites and regional auction units.

We recorded general admin expenses of $164.6 million in 2008, a 14% increase over 2007. Personnel costs, which include salary, wages, bonuses and benefits, accounted for about 60% of our total G&A expenses in 2008 and our headcount increased 14% over the course of 2008.

We have operations around the world carried out in many currencies, but our reported currency is the US dollar. In 2008 many of our operating currencies, notably the euro and the Canadian dollar, fluctuated dramatically relative to the US dollar resulting in a $2 million increase in our reported full-year G&A, simply due to the translation of non-US dollar cost into US dollars.

Our G&A as a percentage of gross auction proceeds was 4.61% in 2008 compared to 4.54% in 2007. This is consistent with our past comments that our leverage would not improve in 2008 but, as we previously commented, we are expecting to see improved operating leverage in 2009 as measured by G&A as a percentage of gross auction proceeds.

One significant change in the presentation of our statement of operations in 2008 was to reclassify monetary foreign exchange gains and losses to other income. Previously they had been included in general admin expenses. Our intention in doing this is to provide more visibility to our operating performance and in 2008 it highlights two specific monetary foreign exchange affects.

First, we generated monetary foreign exchange gains of $15 million due to the repayment of inter company loans that had been considered long-term in nature. These gains had previously been recorded in the cumulative translation adjustment count on our balance sheet. We have highlighted this amount because these settlements were done as part of internal tax and cash flow planning initiatives and we do not expect similar gains to occur in future years and so we have excluded these gains from our reported adjusted income. We did not settle any similar inter company loans in 2007.

Partially offsetting that gain in 2008 was a $5.8 million monetary foreign exchange loss relating to the revaluation for financial statement purposes of US dollar denominated bank debt held by a subsidiary that has the Canadian dollar as its functional currency. The equivalent amount recorded in 2007 was a foreign exchange gain of $4.8 million.

We have highlighted these amounts because subsequent to December 31, 2008 the Canadian subsidiary assigned the bank debt to an affiliate whose functional currency is the US dollar, eliminating the impact of currency fluctuations on this debt in the future. As we do not expect these foreign exchange gains or losses to recur in future periods, we have also excluded these gains and losses from our reported adjusted earnings.

One other transaction that we do not consider to be part of our normal operations was the $8.3 million gain on the sale of excess property in 2008. As we do not consider these property gains to be part of our normal operation, we have excluded them from our reported adjusted earnings. There was no such again in 2007.

In 2008 our interest income decreased by 32% to $5 million as a result of significantly lower interest rates applicable to our short-term investments of excess cash. Our effective income tax rate for 2008 decreased to 27% from 32% in 2007, our income tax rate varies from period to period depending on the level of earnings in the various jurisdictions in which we operate. In 2008 the decrease was primarily attributable to a higher level of earnings in lower tax rate jurisdictions and the lower rate of tax applied to the property gain in the foreign exchange gains and losses.

Our GAAP, or financial statement net earnings, were $101.4 million in 2008 or $0.96 per diluted share representing a 33% increase over 2007. Our adjusted net earnings for 2008, which we define as financial statement net earnings, excluding the after-tax affects of excess property sales and significant foreign exchange gains or losses resulting from financing activities that we don't expect to recur, those earnings were $85.5 million in 2008 or $0.81 per diluted share representing an increase of 19% compared to adjusted net earnings of $71.3 million in 2007.

Just as a reminder, adjusted net earnings is a non-GAAP financial measure that does not have a standardized meaning and is therefore unlikely to be comparable to similar measures presented by other companies. We believe that comparing adjusted net earnings for different financial periods provides more useful information about the growth or decline of our net earnings for the relevant financial period and isolates the impact of items that we do not consider to be part of our normal operating results. We have provided a reconciliation in our press release issued this morning and in our MD&A for the year ended December 31, 2008.

In 2008 recorded CapEx of $145 million compared to $113 million in 2007. Most of our capital expenditures have resulted from the construction permanent auction sites and the investment in IT infrastructure to support to our ongoing process improvement initiatives. Going forward we expect our CapEx to fluctuate but to remain in the range of $150 million per year for the next few years as we continue to expand our [network of] auction sites. We expect to old grand opening sales at five new auction facilities in 2009.

We finished 2008 with working capital of $47.1 million and with $512 million in unused credit facilities. During 2008 we added committed revolving credit facilities of $135 million and uncommitted non-revolving credit facilities of $250 million in order to provide flexibility and ensure access to capital over the long-term. We believe that our existing working capital and established credit facilities are sufficient to satisfy our current operating requirements and future growth initiatives.

We believe that our ability to secure new credit at very favorable pricing in the current environment is a testament to the strength of our business model. We paid regular cash dividends of $0.08 per share in the first two quarters of 2008 and $0.09 per share in the last two quarters resulting in total dividends of $35.6 million in 2008. On January 23, 2009 our Board of Directors declared another quarterly cash dividend of $0.09 per common share. Jeremy will now offer our guidance for 2009.

Thanks, Rob, and good morning. Making an accurate prediction of gross auction proceeds and net earnings for the coming year is more challenging than in previous years in light of today's uncertain markets and volatile foreign exchange environment. This being said, we remain confident of our ability to grow in 2009. The question is, at what pace?

Compounding our challenges for 2009 results is the fact that our growth over the last five years has been well above trend. As Pete mentioned, our compound annual adjusted earnings growth rate has been over 23% over the last five years. Our compound annual gross auction proceeds growth rate has been nearly 20% in the same period.

In the face of this strong performance over the last five years and the currency headwinds we are likely to face in 2009, we are predicting a bit of a catch-up here for 2009. Ignoring the impact of currency fluctuations we're expecting GAAP growth of gross auction proceeds growth in local currency of roughly 11% for 2009.

In the US dollar terms this places our gross auction proceeds guidance for 2009 in the range of $3.8 billion. So depending on currency fluctuations with the Canadian dollar, Euro and Australian dollar, this number could be higher or lower than this amount. We have used average US dollar exchange rates for the month of January in our projections for 2009 and it is difficult to predict how rates will move for the rest of the year. We will update this guidance at the close of the first quarter.

Our auction revenue rate guidance remains consistent at 9.75% to 10.25% for 2009. On the heels of adjusted net earnings growth of 19% in 2008 we expect 2009 growth in the mid-single digit range. Although currency fluctuations will have an impact on line items in our statement of operations, we do not believe there will be a material impact on our net earnings in 2009; this is consistent with how it's been in previous years.

Our tax rate in 2008 was lower than planned which creates a tougher comp in 2009. And the current low interest rate environment will eat into our interest income in 2009. These items are partially offset by the improvements in operating leverage that we expect in 2009. We expect to have better visibility as the year progresses and we'll update our guidance when we report our Q1 results. Over the longer term we remain focused on average annual EPS growth of 15%. Pete, back to you.

Okay, thanks, Jeremy. Before we open the call to questions we'll quickly recap the main points we covered off today. 2008 the biggest year in Ritchie Bros. history. We sold a record $3.57 billion worth of equipment at 340 unreserved auctions around the world generating record adjusted net earnings of $85.5 million or $0.81 per share which is 19% higher than 2007. We worked with a record number of sellers, attracted a record number of on-site and online bidders to our unreserved auctions and set regional gross auction proceeds records at 12 auction sites.

We opened five new or replacement auction sites around the world, conducted our first auction in Eastern Europe and Poland, and we purchased land for our first auction site in Japan. In the face of a more challenging FX landscape in 2009 compared to '08 we're expecting gross auction proceeds in the range of $3.8 billion for 2009.

There's a lot of uncertainty in the world right now, but at Ritchie Bros. it's business as usual. We're still hiring great people, expanding and improving our global network of auction sites and delivering exceptional value for buyers and sellers of equipment. Wherever they live, whatever their local market conditions, our customers continue to rely on our fair, unreserved auctions to help them access the global marketplace.

Our services today are even more valuable to our customers during these periods of economic challenge which is why we are expecting 2009 to be another record year for Ritchie Bros. Brian, would you please open the call to questions?

(Operator Instructions). Bert Powell.

Thanks. Pete, just looking at the guidance and looking at -- last year we had phenomenal equipment pricing and I understand Orlando came in better than expected and we've got the dollar working against you. And just looking at the auction data, so far Vegas is down for the first quarter. And what we've seen is more loss but lower value loss. I'm just wondering, what's giving you the confidence that you think that this year that the GAAP's going to be actually up to 3.8?

Bert, I think the things that give us confidence are the increasing number of bidders that are attending, the need for sellers to be able to access a market that they need to sell their assets in. There are still lots of people out there that are doing work, so there's a tremendous demand for equipment; we saw that out of Orlando with 34% of the value going outside the United States.

So that was flying in the face of a strong US dollar and a lot of people in Orlando were waiting to see, well there's nothing going to go offshore because no one is going to come here. The Mexicans show up and even the peso devaluation didn't deter them from taking equipment back because there's work to be done.

So when you layer over all the uncertainty that's in the world today and the fact that there's still a lot of work on, over $1 trillion just in the US alone, and the fact that people are more uncertain in these times to go out and buy new things and you see that while more cyclical fluctuations at the OEM level, we're seeing increasing participation, we're seeing increasing volumes of equipment.

For sure the pricing environment is different than it was last year, but keep in mind, at the start of '08 versus the end of '08 that pricing environment drastically changed, so we'll be going through '09 in an environment where we believe the pricing has been firmer and even in many cases higher than we saw in Q4.

So you layer over all that and we talk to all of our guys and drill right into the very knots of the individual predictions for geographic territories the territory managers are covering and bubble that up from the bottom up and we look at it from the top down and we think that we're in very, very good shape to deliver great value for our shareholders in '09.

It's Rob here. I'd just like to add to that. Everybody was waiting for Orlando, Vegas came before it, we add 190 odd some sales last year and we've had two this year and everybody is trying to predict the future off of two sales. The whole world was sitting and waiting to see where the market was, where the demand was in the world, who came to the sales. And we got a lot of activity that's been created as a result of the results we've had now from Orlando and going forward.

We're going to start to see more activity with our customers out there because they've seen kind of the benchmark, albeit Orlando is a unique beast. But we can't really look at two sales and see that we're going to find some trend going ahead because those two sales didn't achieve better than last year or were a little bit below their GAAP. So we're early in Q1.

I hear you guys on all of that, but if I just look at Orlando, the mix is what resulted in a flattish to slightly down GAAP number. If that trend continues over the course of the year, in other words, if I have a guy that's got a large piece of equipment and he decides, you know what, he's actually going to abstain from being in the market. So you can say pricing in terms of what we sold is reasonable, but in fact it's the high-value stuff that stays out of the market, that directly impacts the GAAP number on a year-over-year basis because your mix then starts to shift down to lower value stuff.

So your whole business model holds in tact and all the things that you guys are saying is absolutely valid, it's just in terms of coming up with a GAAP number, are you guys forecasting that that high-value stuff starts to come back into the market? Because that's the point I'm just having a little bit of trouble triangulating against if I look at -- and admittedly, it is one data point. I guess the other way to ask the question is, are you seeing the mix shift in Phoenix and Moerdijk as we go through and see the same kinds of things happen that happened in Orlando?

Again, I think it's too early to look at the sales that are existing here in the next week or two, it's what's going to be out there at the end of Q1 or Q2. The assumptions is being made that the guy with the high-value lot has the financial wherewithal or ability to sit on it forever. And the reality that is out there that, okay, I don't want to put it in this sale because I'm uncertain as to pricing, but let me find some stability and belief and comfort in the market and then maybe I'll come forward.

So we've got all sorts of lifts and packages and dealings with customers today that are sitting there waiting. And they're starting to see more comfort and with each sale they'll see a level. And at some point in time they're going to have to react and do something, they just can't sit on this stuff.

The other thing to keep in mind on the Orlando site, and you're aware of it, I just want to reiterate -- the mix of assets in Orlando changed primarily because last year in '08 we restricted many assets coming to the auction because we knew we were going to be full. And this year with an extra 35 acres we were able to take almost everything. In fact, near the end we had to shut her down because we were full again.

But the mix of assets for sure in Orlando was not -- the change in mix of assets '08 to '09 is not economic. It was really driven by us because of the restriction of our ability to handle all the assets that were in '08 that wanted to be sold in Orlando.

I was waiting for my buddies to take the easy point, but they left this for me so I will. In all previous downturns in the Company's history we've grown our gross auction proceeds because it's a market share story. I would agree with all of your analysis and your concerns if in fact we were fully mature, but I see us still growing by taking share even if the market appears to be slightly smaller.

Right, this is a anomalous year in terms of what happened, right, with that backs and pricing, right? We're coming off some pretty big moves here, that's all I'm trying to get my head around, Bob.

No. Fair. That's very fair.

Okay, I'll get off before Ben gets upset that I'm (multiple speakers).

Do we have time for one more question?

Scott Stember.

Good morning. Can you talk about the G&A costs? They were sequentially down in the fourth quarter and year over year, down a couple of bps. Could you just talk about some of the things that happened in the fourth quarter and what we can see on the front of infrastructure costs abating throughout 2009 if at all?

Hey, Scott, it's Rob McLeod. The G&A costs in quarter four were down from 2007 partly due to the exchange rates. And so exchange rates do have an effect on individual line items. And so fall of the Canadian dollar and the euro, pretty dramatic in late October/November, reduced the US dollar cost of our costs that are incurred in Canada and in Europe. And so that would be the majority explanation for the fall in 2008. And so your second question in regards to infrastructure spend in 2009?

Well, as far as -- just go over it again, you talked about adding your increasing your sales force by a certain amount. And some of the other items like back office, it was my understanding that some of that would abate a little bit in 2009, not grow at the same rate as let's say the sales force.

Right, that's -- for sure our plan is to, as we said, to gain more leverage in our G&A cost. That doesn't mean that G&A is going to go down, it means it's going to go down as a percentage of gross auction proceeds. And so for sure that's the plan. And part of that is because we, the last couple years we ramped up as a part of implementing a number of infrastructure projects and so that's been done, it's in place.

Okay. And on a financing side, I know you're getting a lot of questions about whether your customers are having trouble getting credit. Last time you guys spoke it wasn't an issue. Could you talk about it right now?

Sure, I'll talk to it, Scott, it's Pete here. We're not seeing any effect in purchasing power from a lot of our customers that are out there. I think -- it sounds counterintuitive to what everybody else is facing out there in terms of credit challenges. Thankfully most of our customers are the old economy guys and they're the old fashion way, they actually save money. And then when they have enough money they come and they spend it.

Or their relationships with their banks are solid enough that they have direct access to credit that hasn't translated into any -- and we talk to our customers all the time -- are you having challenges or what are you doing? And it's all anecdotal that every guy we talk to, they're in there buying and they're buying in strength and in greater numbers too. Bob, you might want to add a comment?

Yes, I will, Scott, it's Bob. I've actually had a number of phone calls I'm supposed to be returning this week from finance companies who want access to our auction sites so they can come and market to our customers. And when I talk to these guys I ask them if they have is subscription to a newspaper, do they realize it's tough out there and there's no credit? And they say, no, it's different for you guys. The customers at your auctions are the people that we want to lend to.

I've heard repeatedly now, and I guess I'm just getting used to hearing it, that the assets we sell are ones that the banks would like to finance. They're not as volatile in pricing. There's a very liquid market for them, meaning our auctions. The guys who are buying them are buying them to generate cash. They're not speculative investments; they're only buying them because they have a cash flow generating use for them.

And the history has shown that the people who buy these assets will make the payments on their truck or their excavator before they'll make the payments on their house because the truck or the excavator is the beginning of their cash flow food chain. So, banks that are lending very limited -- in a very limited way to other industries are still very interested in financing our customers.

Okay, and last question to that point. You haven't been with -- well, actually you've been without an on-site finance partner for the last quarter or two. Do you have anything in the pipeline that could be announced relatively shortly?

We have a lot of conversations in the pipeline, but no, we don't have anything to announce there and, in fact, I'm not sure that we will. It's not appearing to be a problem for all the reasons I just described. We like having that CitiCapital relationship, that was a wonderful relationship. And if we could find something similar to that I suspect we would attempt to enter into something like that.

But it's not a matter of urgency in that there remains ample credit available to our customers whether or not we have an exclusive on-site relationship. So we really haven't got our foot on the accelerator on that one at all.

All right, that's great. Thanks a lot.

Gary Prestopino.

Good morning, everyone. Could you just kind of very slowly just walk through what's opening this year in terms of new sites since this is basically a marketshare game at this point? I think that's very important. You said you had five sites opening, right?

Sure, here's what I think will happen, Gary. Houston, Texas has a grand opening for later in March, that's a replacement permanent auction site --

A growth size too.

Thank you, it's a much larger site, say it's more than twice -- it's almost three times the size of our current Houston site. In Minnesota -- Medford, Minnesota which is a Minneapolis replacement also a grand opening in March of this year and it's also much larger than the site it's replacing.

How much larger, about three times again?

Yes, we're going from 28 acres to 74.

Yes, so almost three times the size. But that doesn't mean the auctions are (inaudible) nearly three times the size, but there's potential, it's good capacity. London Ontario is an agricultural smaller site agricultural focus, that's a new site in a new market for us, but definitely a smaller operation for sure. In Mexico City in a town called Polotitlan to the northeast of -- northwest of Mexico City we'll be having our first sale on that site in March of this year, but the grand opening of the building is expected for later in the year.

In Japan we are hopeful to have a sale on the site this year with a grand opening either at the end of this year or early the following of the actual building itself. In Grande Prairie, Alberta, we hope to be opening our replacement permanent auction site there by the end of this year so that's another Q4 or Q1 of the following. And that's a replacement site, again much larger, more than double I think in terms of acreage and capacity would be more than that. And in Vancouver we're replacing our site there, but that's going to be opening the following year, 2010. I think I gave you six of which you can choose five.

So Japan -- is Mexico a new permanent auction site or is that just a --?

It's a replacement of regional auction unit. We currently -- used to have operations in Toluca, Mexico on a leased site. We've moved our entire operation to Polotitlan just northwest of Mexico City. And that will be -- once we open it we'll call it a permanent auction site, because we own the land.

Okay. And the same for Japan, that will be a permanent auction site?

It will be a permanent auction site, but that's a net new site in that we do not currently have any site there. All our operations in Japan to date have been exported equipment. This will give us the ability to sell in Japan but -- Pete is reminding me with interesting hand signals. It's also a bit of a replacement for our Singapore site which we closed this year, we're just relocating our Asian sale site.

Okay, so you basically have what, five sites opening this year, right?

That's my best estimate at this time.

And then in terms of the real estate, given what's gone on worldwide are you finding it somewhat easier than it was a year or two ago to find land or sites or are communities more amenable to having you in their towns?

In some areas yes and in some areas it doesn't appear to be that way. Our specific needs sometimes don't take [absolute] advantage of the current environment. But we're looking at some pieces right now where the prices are quite a bit lower than we would have expected to see a year or two ago and that's wonderful. So we see opportunities.

In other cases we're closing on deals that we've been working on for two years and so the pricing is locked in and so we're not able to take advantage. I think the benefits you're speaking of we'll start to see over the next couple of years based on the deals that we're putting in place right now.

Okay, and then two other questions. I've been reading that Dubai is really sliding in terms of what's going on over there. But in terms of your international markets, where are you seeing the strength in demand coming from?

In the short experience -- it's Rob Mackay. In the short experience we've had in this year we saw a lot of demand and strength coming out of Latin America, Central America and North and South America. And surprisingly a couple of the Middle East countries honed in on some pretty late model low houred stuff that we were selling in the Orlando sale.

In addition to that, at the two sales that we've had down there we've seen some pretty interesting strength coming out of parts of Canada. So Mexico, Latin America, the demand has held off for sure in Australia due to the strength of their dollar vis-a-vis '08 versus '09 and the economy down there with the commodity issues, and it's similar to other parts of Asia. But there are still pockets of strength around in the Middle East albeit that you read some pretty negative stuff about Dubai these days. And a little (multiple speakers).

Keep in mind -- I mean, Dubai is not the barometer for the entire Middle East, it's really very much a financial and tourist center. It's kind of like view it as the Miami of the Middle East type thing, it's a great place to go for a vacation and there's a lots of places to go now that are less expensive than they were before. But the economies that are run by some of these other commodity-based, oil or whatnot, there's still lots of activity in places like Kuwait and Abu Dhabi and Oman, even into Africa as well, there's considerable strength that we're seeing out of those markets too.

Okay, and then lastly. As far as your gross auction proceeds, is it safe to say about 60% of them are impacted by the -- are 40% impacted by the value of the dollar?

Yes, that' a pretty close approximation because we do sell in US dollars in Dubai and in Mexico and obviously in the United States as well. And so that's probably a pretty close estimate.

And yet 60% of your operating costs are not in the US dollar, right?

That would be a little bit high I think. I think it would be somewhere closer to 50%, 55% where your operating costs are outside of the US dollar. And also --.

Thank you.

I'm sorry, Gary?

I'm there.

And going forward it will change as we move into more markets outside of the US and outside of the US dollar.

Okay, thanks.

Adam Comora.

Thanks. I just wanted to come back to the guidance question one more time. It looks like the gross auction proceeds in the fourth quarter were up 3%, 3.5% in local currency, down 2% when you factor in FX. And our last couple of data points here in the first quarter were down low to mid single digits in local currencies. Can you help us understand how the tenor of the guidance should play out above 11% gross auction proceeds? Should that happen in the first quarter, second quarter, sort of evenly throughout the whole year? Are you anticipating some pricing recovery in the back half of the year?

It's not usual that we are going to give specific quarterly guidance on that. And so really the guidance is 3.8 for the full year.

It's Jeremy here. I'll just add that the proportion of our gross auction proceeds by quarter we're expecting a roughly consistent proportion in 2009. We've typically seen more active Q2's and Q4's in the past and we continue to expect that in 2009.

Okay, can you help us understand a little bit how it works between volume and pricing? And I know it's not apples-to-apples and different equipment each year. But just general thoughts on how pricing and volume will get you to that 11% gross auction proceed growth?

Sure, Adam, it's Bob Armstrong here. You're asking a very common question, it's a great one for understanding our business. The mix of business that we handle changes dramatically auction to auction, month to month, quarter to quarter and for sure year to year. Rob MacKay in his comments made the comment that we sell what's for sale. And if it turns out there's a whole bunch of cranes for sale one year and a whole bunch of scissor lifts for sale the next year, for sure the mathematical average selling price will be completely different.

And so we found a metric that we actually follow, it's easy to calculate, but it's not one that we manage the business by or follow. So it's a bit dangerous. As we go forward this year was expect our mix of business to change dramatically region to region, area to area, more or less forestry equipment, more or less agricultural equipment, transportation equipment, and so that will change a lot the mathematical average selling price.

For sure though pricing has come down year over year. I think Pete and Rob both said that we've seen fairly solid pricing since Q4. But pricing down year over year, Q1 of this year versus Q1 of last year, for example. So you have some pricing decreases in most categories of gear, we're facing that. You're seeing increased volume in a lot of categories of gear and, more importantly, I think the most significant is the shifting mix and that's not very predictable.

Our territory managers are responsible each for a geographic area and they call on all the equipment owners in that area, which means they're calling on many, many industries. And this year maybe they'll be selling more agricultural gear than last year because we didn't sell as much ag gear last year as we might have otherwise due to the strength in those markets.

However, you may sell less -- I'm making this up now -- forestry gear this year whereas we sold quite a bit last year. And that mix of business shift is probably the most significant driver of the information you're after. Anybody else?

I'll add to that, Bob. We've seen really strong growth in commodity prices in the past vis-a-vis today and as a result of that you've seen a massive demand for big rock trucks. And as a result of that we've seen very little rock trucks ever come to auction because they're all out there being used. Same can be said in the crane industry.

So as those two -- as the demand changes for those two things and commodity comes down and you see mines starting to park up some trucks you're going to see more of that product probably come to the market this year and the same with the crane market. The supply has cut up to demand, there is surplus out there, and we're going to see the asset mix change this year where we see more of that stuff vis-a-vis other stuff that we were selling before. So it's a constantly changing, ever evolving package of equipment that we deal with.

Okay, great. And if I could just one last quick one. How should we think about gross auction proceeds being driven by volume rather than price as it relates to your margins? Is there anything qualitatively you can tell us about maybe how much more the Orlando auction would cost this year versus last year because of the extra day or moving the additional equipment? Or how should we think about margin in a case where volumes are up but maybe pricing is down?

Sure, it's a great question in terms of understanding the model. It's a tricky one for us to answer though. The margins are driven by so many things and number of assets is interesting but not the biggest number of days can be relevant, there's a lot of different factors. So we look at it on a more overall basis. For sure Orlando is an unusual one, we won't have another six-day auction this year (multiple speakers).

Well, maybe we will, Rob.

But we don't expect to have another six-day auction this year. So looking at margins for Orlando doesn't help us in predicting margins for the rest of the year. What you will see as we go through our year, we believe we'll see improving margins because you're going to see I think a gradually increasing average auction size. Part of our strategy has been to have more and larger auctions at our existing permanent sites.

That's part of the strategy behind building out our network of sites around the world. It's way more efficient, it helps us keep our margins down. Your direct expenses come down, you're able to essentially achieve economies of scale. So that's a way more significant factor than looking at number of lots and numbers of days.

Just to be clear, Adam, if you're going to add one day to our Orlando sale your costs don't go up by 20%, there's a very nominal increase in cost to add an extra day to an auction. All the guys have already flown there, the advertising has already gone out, you've got labor, day labor, you're going to pay them an extra day of work so it's not that dramatic.

Okay, thanks.

Ben Cherniavsky.

Good morning, guys. Just wanted to ask you a clarification on your guidance. You're talking about $3.8 billion gross auction proceeds this year. But you are -- but then I think I heard you say 11% in constant currency. Is that how you're going to looking at it?

Yes, Ben, it's Jeremy. The comment was 11% in local currency. So if you look at our sales in Canada, our sales in Europe, our sales in Australia, in local currency we expect about 11% growth. But when you translate those sales into US dollars at the rates -- the average rates in effect in January, obviously that turns into a US dollar number that doesn't have 11% growth.

Right, okay. And just going back to the mix issue. Have you guys seen -- I understand your -- the different types of equipment that you will see at the auction. There must also be an issue with the average age or the vintage of equipment that you see at the auction. I would just think intuitively that what you would see in a downturn is a lot more late model equipment that in good times equipment owners are more reluctant to sell and in more difficult times they're forced to sell.

And if I recall the Asian crisis correctly at that time, I thought you guys had seen a lot of late model and large equipment come to the market at that time. Would that be something to consider in this environment and should we be -- are you seeing any signs of that at this point?

Ben, it's Rob here. Much of what we saw in the Asian crisis in '97/'98 were massive inventories, unused inventories that dealers were holding around the world vis-a-vis late model lower houred stuff. So it's a little bit different pursuit of the business that we had then. Today --.

Why would it -- sorry, Rob -- why would it be different? That's what I'm suggesting. Wouldn't there be -- a lot of these dealers who overstock, wouldn't they be turning to you guys to get off their unused equipment?

Well, we would love them all to come to us for their unused equipment. But since '97 what went on in the Asian crisis, the OEM dealers and the OEMs themselves have I guess strengthened the bond between OEM dealerships selling unused equipment and other channels selling unused equipment. And many of the dealers today, their inventories are a lot smaller of unused product than they were back then. And the OEMs are stepping in to help them today deal with their orders of unused.

So in a perfect world we'd love to see that stuff come to us, but they're trying to maintain their channels of distribution within themselves. On top of that the (multiple speakers). On top about that before in '97 there was very little restrictions to the flow of unused equipment around the world from EPA or EU equipment standards. So we saw the stuff moving out of markets in Asia over to North America and Europe. Today because of the destination specific engines or machines that manufacturers are building much of that stuff can't come out of one economy into another so it has to recirculate itself there.

With regards to the late-model stuff that we see coming, I think there's probably today in Q1 or waiting from Q4 to Q1 there are as many owners that are trying to sit on that later model stuff, lots of guys talking about the monies coming from the US government, if they're going to go back to work they want to have their equipment. In order to get cash flow they may have started to trickle out some of the mid to older stuff and hung on to the new stuff. But as we go through Q1 and into Q2 if they don't have work you're going to see that later model stuff coming to market.

But are you saying that over the last 10 years the OEMs have strengthened their own channel to the market? And if so, how does that play into your market share growth story if a major source of the market is not sending as much equipment through you?

We're talking about the new stuff though, Ben.

That's unused. Predominantly the amount of unused equipment we sell in a year is not very significant. The used world is predominantly where we play and it's the unused stuff that the OEMs are more protective of.

That said, you can go onto their site today and Moerdijk can see a whole bunch of unused items that we've been selling today for very good values. (multiple speakers). Sorry?

I remember seeing some of that when I was with you there. That's one of the reasons why I asked the question.

Yes, yes. So we'll see some of that and it will be interesting and we'll try to highlight it on the way through. But I think Rob's comment is very accurate. Laying it over top of the Japanese and the melt down and the Asian theater experience to today is probably unrealistic. But -- but, I think laying it over top of what we saw in the '80s is probably not a bad barometer to try to measure against.

And I suspect that you probably will see proportionately more newer product flow through our channel this year than you would in a normal year. But as Rob said, it's not going to be -- or I don't think it's going to be overly dramatic. But it's just an other outlet for people to be able to meet the need to have access to. We sold some unused product for some of the OEMs in Orlando and did very, very well for them.

We'll probably see a little more of that on the way through. But again, we don't look at that and say we're going to get 3.8 because of that. We just think it's just more share and adding more value, more bidders, more of everything -- more of what we've been executing on for the last decade and it's just -- all these things are coming to fruition for us to be in a very, very good strong position to be able to add value on the way through to the bidders and the sellers both.

Okay.

Operator? Brian, we probably have time for one more question, then we should get back to work.

Jake Crandlemire.

Thanks for taking my question. I just want to touch on the auction revenue rate a little bit, no one brought it up yet. And I just want to understand, clearly the trends, if you look at first-half versus second half on a year-over-year basis, first half of '08 was better than first half of '07, but the second half was worse -- second half of '08 was worse than second half of '07.

And I just want to understand -- it seems logical, and correct me if I'm wrong, but that unit economics as you guys sell smaller pieces of equipment, less expensive pieces of equipment, the unit economics are going to work against you, i.e. the process is basically the same but you're realizing less auction proceed dollars off of each sale but you still have to make the sale and it's the same amount of manpower. In terms of your guidance for next year of maintaining the 9.75% to 10.25%, obviously you guys are working with a headwind on the unit economics. I'm just curious as to what you guys have in place to offset that?

Sure, Jake, it's Bob Armstrong. The way that the auction revenue rate works, it's a percentage of the value sold. On a straight commission contact, for example, if I have a deal with you at 10%, if you sell $100,000 worth of gear I get $10,000. And that could be if it's one-piece or if it's 10 pieces. So the decreasing value of individual pieces, if the mix changes such that we sell more $10,000 pieces and less $100,000 pieces, that in and enough itself does not impact the auction revenue rate.

Where there could be a slight change to the rate is actually to our advantage. If we sell an increasing number of lots for $2500 or less we have a higher rate for those smaller lots. So I guess to your question, we do have some systemic stuff that helps us get higher income on the smaller lot. But a gradually shifting mix towards some lower value gear, that's what we see this year, that in and of itself will not necessarily impact the auction revenue rate.

Okay, guys, just two quick follow-ups. One, what was the percentage of at risk business in the quarter?

In quarter four 2008 it was about 24%.

And 25% for the year.

Sorry, and 25% for the year.

Got it, okay -- go ahead.

And that will fluctuate pretty significantly from quarter to quarter.

Yes.

Got it. And then, so I guess if it does -- if the unit economics isn't going to impact the ARR, it should though theoretically impact the whole business model, the operating margin, etc., and be a headwind if I'm not mistaken whether it's through G&A or direct operating costs or things like that. So if I could rephrase my question, what do you guys have to offset -- you're talking about G&A leverage, you should have that working against you I guess, what's going to offset that?

We really don't see it that way. You're right if in fact there was a colossal change and you sold all scissor lifts next year, then you would have a different economic story. But we are constantly dealing with a shifting mix of business. So it's something that we're quite comfortable with. Sometimes the average value at an auction is less than $10,000 and sometimes it's more than $20,000. We are pretty adept at handling these things.

The smaller lower value pieces we have -- we get pretty efficient at dealing with these things. It takes more time to set up and deal with a crane than it does to deal with a scissor lift. So your point is -- it's pretty valid, but we seem to have been able to deal with it over the years and so it's actually not something that we see as being an issue for us this year.

Okay, got it. Thanks, guys.

Okay, Brian. Thanks, everyone. We appreciate your attendance on the call. We're going to head back to work and go make some money and we'll be talking to you near the end of April about our Q1 results, okay? Thanks, everyone, appreciate your time.

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