RB Global Inc (RBA) 2010 Q2 法說會逐字稿

Good morning my name is Andrea and I will be your conference operator today. At this time, I would like to welcome everyone to the Ritchie Brothers Auctioneers Q2 2010 earnings conference call. All lines are being placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) I would now like to turn the call over to our host, Mr. Peter Blake, CEO for Ritchie Brothers. Please go ahead, sir.

Thanks Andrea. That's quite a mouthful. Thank you, good morning, everyone. Thanks for joining us on the call today. Ritchie Brothers Auctioneers Q2 2010 investor call. I'm Peter Blake, CEO of Ritchie Brothers. Joined on the call today with -- here in Vancouver with Bob Armstrong, our Chief Operating Officer, Rob Mackay, our President, Rob McLeod, our CFO, and Jeremy Black our Vice President of Business Development and Corporate Secretary.

Before we get to the business of today's call, I'd like to make a Safe Harbor statement. The following discussion will include forward-looking statements as defined by SEC and Canadian rules and regulations. Comments that are not statements of fact ,including projections of future earnings, revenue, gross auction proceeds or other financial items are considered forward-looking and involve risks and uncertainties.

These risks and uncertainties that may affect our performance significantly or could cause our actual financial and operating results to differ significantly from our forward-looking statements are detailed from time to time in our SEC and Canadian securities filings including our management's discussion and analysis of financial condition, the results of operations for the period ended June 30, 2010 and subsequent quarters, which is available on the SEC, CDAR and Company websites.

Examples of these risks and uncertainties include the supply of and demand for equipment, equipment values, the mix of equipment we sell, and the impact of recent economic circumstances on our customers and their buying and selling patterns. Actual results may differ materially from those contemplated in the forward-looking statements. We do not undertake any obligation to update the information contained in this call, which speaks only as of today's date.

I'd also like to note that during the call today we will talk about gross auction proceeds which represents the total produces 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 in our financial statements is auction revenues, which represent the revenues we earn in the course of conducting our auctions.

Today, we plan to give you a quick recap of some of the topics from our previous conference call in July and some of the highlights of Q2 before opening the line to questions. As you may recall, we talked in July about our GAP being difficult to predict at the best of times, and how the current economic environment has further compounded those challenges. As a result of ongoing challenges in our major markets, primarily the United States, in July we reduced our 2010 gross auction proceeds guidance to the range of $3.3 billion to $3.5 billion for the year, and adjusted net earnings guidance to the range of 25% to 30% below 2009 adjusted net earnings. This guidance still stands. I would like to re-emphasize today that we believe this revised guidance is very much a result of factors arising from temporary timing issues and is not an indication that our business model or our ability to execute on our strategy are in question.

Our long-term fundamentals are very much intact and our competitive mote remains very wide. To recap, we believe our current situation is a result of temporary market conditions, and while it is predominantly centered in the United States, we have also seen a moderate slowdown in transaction volumes in northern Europe. Equipment owners and creditors' actions that we have experienced in previous downcycles have not yet materialized. Low interest rates, lack of confidence in the firmness of the equipment pricing environment, a lack of urgency on the part of creditors to react and liquidate assets as they have in past down cycles, and equipment market participants waiting on the promised impact of government stimulus have contributed to this effect.

In addition, we have seen equipment owners express a high degree of uncertainty over the yet unannounced pricing for EPA Tier 4 compliant equipment, which could cause used equipment values to increase in line with expected increases in new equipment pricing. The consequence of these factors is that many equipment owners remain reluctant to trade or liquidate their inventory currently. So, even though equipment may be sitting idle or, at best, drastically underutilized, they're choosing instead to hold on to their equipment until some of these uncertainties are resolved. This is particularly acute in the US market where the dynamics remain challenging.

I should add that we are not witnessing or experiencing used equipment being sold in any meaningful volumes through alternate channels or methodology. It is simply idle and not transacting. Our adjusted net earnings for the first half of 2010 came in at $38.2 million, compared to $58.1 million for the first half of 2009. This translates into $0.36 cents per diluted share which is consistent with our expectations for the period. The primary driver of the decrease in net earnings from 2009 was the shortfall in our gross auction proceeds, which were $1.7 billion for the first half of this year compared to $1.9 billion last year. Our auction revenue rate for the first half of 2010 remained above trend at 10.81% and higher than last year's rate of 10.70%.

The phenomenon that we have discussed previously about our auction revenue rate remains high in the face of challenging GAP environment and continued in Q2, as both our at risk and our straight commission business performed well. We were successful controlling our G&A in the face of the decelerating GAP, particularly considering the 6% increase in our headcount compared to last year. The biggest component of the increase in G&A was the effect of foreign currency translation. With that quick recap, I'd like to ask the other guys on the call here for their thoughts about what's been going on. So, Jeremy maybe you can start by telling us what's been on the mind of investors that you have spoken with lately.

Thanks, Pete. We've had lots of questions and some -- have seen some commentary recently about our market share in light of the current challenges we are facing. This is an important matter to address today. Although there is no hard market share data to which we can point, based on an analysis of various information sources, it is our belief and -- that we have been increasing our market share over the last 18 months for a number of key reasons.

First, there has been a meaningful decrease in used equipment values over the last two years. Both at our auctions and through other channels. In addition, our experience points to lower transaction volumes over the same period, as equipment owners have chosen to sit on idle equipment. Thirdly, OEM new equipment production and sales in the latter part of 2008 and much of 2009 contracted severely, in some cases by as much as 60% which means dramatically less equipment has gone into the market during this period of price and volume decreases. On top of this, recent equipment data associates ECC filing data, has pointed to significantly lower volumes of equipment, financing transactions during the same time, which further lends supported to a contraction of the market.

The end result of these various data points is that during this time of what seems like a significant market contraction, we have maintained flat gross auction proceeds which suggests that we have been gaining shares during this period of market contraction. We believe that this is an important factor to evaluate when judging our performance in 2009 and 2010, and our prospects for 2011 and beyond. Rob Mackay, would you like to add any comments about the market?

Thanks, Jeremy. There have not been any meaningful changes in the market since our last update, except that we are seeing more of what we talked about in our last call in terms of competition for late model OR equipment from participants who have not been very active over the last two years. There have been increasing signs of OEM starting to slowly increase production, and we expect this will have a positive impact on the overall use equipment market. But in the meantime competition is fierce for near new equipment. Some of that competition is coming from dealers, and in some cases they are purchasing this late model equipment for their rental fleets.

In other cases, they are taking this equipment into inventory because of uncertain OEM production and delivery times, along with the potential for price increases in new Tier 4 compliant products. These factors are further adding to the competitive nature of this segment of the market. While we remain optimistic, it's still too soon to say we are close to turning the corner in the US market. A lot else could happen to give equipment owners visibility into the future and necessary confidence to make equipment buying and selling decisions. And unfortunately, we don't know when this might occur and it is very difficult to predict with any accuracy. We remain confident that our slowed -- slowdown in sales and the contraction in the used equipment market are timing issues and that a return to a more normal state is inevitable.

However, we share your frustration. It is tough to predict the timing of the catalyst for this return to normal. Back to you, Pete.

Okay, thanks, Rob. It's important to understand the complexities of the current used equipment market to appreciate the challenging conditions we and other market participants are facing. However, let me assure you we are not sitting idly by hoping for a change to come.

We are taking prudent steps now to ensure we are focused on performance in the near term and setting ourselves up for success over the long term. These steps include prudent and properly timed investments in our infrastructure, particularly auction sites and systems, and a renewed focus on leadership development, and insuring we have the right employees and the proper positions to help guide the company in the future. Let's switch gears here a bit and Rob McLeod can talk more about our dividend announcement this morning.

Thanks, Pete. If you saw our earnings release this morning you will have seen that we increased our quarterly dividend by $0.005 per share. We thought long and hard about what is the right approach to take with our dividend, given our expectations for lower earnings in 2010. Our dividend increase -- has increased annually since we started paying a dividend in 2003, and we have always maintained that our dividend will grow at a rate that approximates our long-term earnings growth. It has never been tied to annual earnings growth or a target payout ratio. We've maintained this policy each year, and after a considerable internal debate and further discussion with the board, we have concluded that it's an appropriate -- it was appropriate to increase the dividend for 2010.

Some might argue that this is not a prudent use of capital, given the uncertainty in the market and our limited visibility for our GAP over the next six to 12 months. However, we continue to believe strongly that the current challenging market conditions we are facing are a temporary phenomenon. Although we don't know exactly when the equipment market will return to a more balanced state, we are confident about our long-term growth prospects. We recognize these are difficult times for our business, but our cash flow continues to be strong and this increased amounting to about $2.5 million in additional dividend payments annually is manageable. But most importantly, it sends a very clear message about our confidence in the robustness of our model and the validity of our strategy.

Let me talk briefly about another long-term concept. We have talked a lot in the past about operating leverage and our expectation that we will start to see improvements in our G&A expenses as a percentage of gross auction proceeds. It is evident that this has not happened as expected, and the main culprit has been the lack of growth of our GAP in 2009 and 2010, combined with recent infrastructure investments. Our G&A growth has been planned and is controlled, and we feel that we are spending wisely. However, until our GAP growth returns to more normal levels and our investments and facilities mature, we do not expect to see a meaningful increase in our operating leverage.

The potential is still there and we truly expect leverage in the future. We just need to have GAP growing again before we start to see some of the benefits of our recent efficiency initiatives, and we're not sure when that will happen. On that note, Bob, maybe you could give an update on some of our initiatives in this regard in quarter two.

Thanks, Rob. We have been very busy this year rolling out a number of initiatives designed to enhance the level of service we are offering our customers, and to create efficiencies in our systems and processes. A great example of one of these initiatives is our timed auction system. We have talked lots about this in past calls so I won't go into detail today except to say, that this system has been more successful than we anticipated.

As a result, we have accelerated our roll out plan and now expect to have the system up and running at the majority of our auction sites by the end of this year. This will help us deliver more convenience to our buyers, more value to our sellers, while allowing us to be much more efficient in the sale of lower value lots. I would like to talk about one other initiative currently in progress. Every year we update our strategic plan to make sure it is still relevant and to reset our strategic targets for the ensuing year. It has been a few years since we undertook a thorough review of our plan, and we initiated a new strategy development process last year that we are currently in the middle of right now.

We've had some stimulating sessions with all of our senior managers and Board and have more to come. And the process will culminate in the presentation of management's plan to the Board for their further input before we roll out the plan to our full company in the fall. Although we are not necessarily predicting any major paradigm shifts in our business, we are excited about some of the new initiatives that are already on the table for consideration. This is a very healthy process to go through particularly during these GAP challenged times and we are approaching it with our usual vigor and desire to set our company up for success over the long term.

It's Rob McLeod again. While we're talking about strategy, I'd like to update you on our CapEx plans for the remainder of 2010 and beyond. As we mentioned on our previous call in July, we have gone through our regular detailed review of all of our capital projects in the pipeline to ensure that timing of projects is still appropriate given the changes in our expectations for the remainder of this year. As a result of this review, a number of projects, both auction site development and IT developments, have been delayed.

The net effect of this delays is that we now expect CapEx for 2010 to be in the range of $80 million. And for the time being we are looking at a similar level in 2011. We have some important projects in the hopper waiting for the right conditions to proceed and we will continue to monitor projects closely to ensure we are making those prudent investment decisions while still being opportunistic. Pete, back to you.

Thanks, Rob, and thanks again to all of you for joining us on the call today. Before I bring the discussion to an end, I'll give you some -- and give you some time for questions, I want to briefly recap the main takeaways from today. Adjusted net earnings came in at approximately $0.36 cents per diluted share for the first half of 2010, in line with our expectations for the period. The board authorized an increase in our quarterly cash dividend by 5% as a signal of our confidence in our long-term growth prospects and strategy. And most importantly our business model is very much intact. We are experiencing used equipment market conditions primarily in the USA that we have never seen before. These will undoubtedly improve as the economy returns to a more balanced state, which we believe will allow us to return to more normal rates of growth.

We are well positioned for future high margin growth and we hope that you don't lose sight of the fact that this is a temporary phenomenon, and all evidence to us suggests that our long term growth strategy is very sound. We can't tell you precisely when the used equipment market will bounce back, how fast it will bounce back or whether it will return to its previous level of price and/or activity. But it remains our view that the used equipment market will get back on track and we are not planning any substantive course corrections. We remain focused on making prudent decisions in the face of challenging market conditions to set our Company up for success over the long term. We look forward to sharing more information with you on our next call in November. Andrea, can you please open the call to questions?

(Operator instructions). Your first question comes from the line of Nate Brochmann with William Blair and Company. Your line is open.

Good morning, gentlemen.

Hello, Nate.

Good morning.

I want to talk just a little bit more about, maybe, the competitive environment for used equipment. You touched on this in terms of where you're seeing some of the equipment going but yet still gaining some share. And you also talked about in the last call about that we should suspect -- or expect the auction revenue rate to diminish a little bit sequentially because of that competition. But, just was wondering what extra you might be doing in the marketplace right now to be attracting some of that equipment to your auctions?

It's Rob here. Obviously, in today's market when a customer has equipment to sell or a package of equipment to sell, he's seeking what they believe to be more normalized returns, and a lot of people still hanging back on pricing that we saw in '07 and '08, and the reality that most people are having is that we are not going to return to those levels of used pricing. But each equipment owner goes to the market today with his equipment and is seeking out the best available return to him and hence, goes to as many alternatives as he can, to get offers on his equipment. It's our job with each and every one of these guys to sell them on our model, our marketing, our global reach and our ability to extract the best prices.

Buyers very much today are comfortable when they go to the auction and compete against other bidders at a live auction, or a combination of, and are comfortable with the pricing that they're getting. So, we have to sell to our customers the fact that we can reach those buyers, we can attract them, and we have over the last two to three years in this recession, increased the number of bidders that are in the seats at our auction theaters. So, it ultimately comes down to, in many cases, who is willing to guarantee these customers the best return, or the best net, or the best of whatever for the value of their equipment.

And so, that's based upon everybody's view of the market and as we spoke about earlier, there is increased competition, particularly on the later model stuff from the dealer network out there today, who's more apt go after late-model equipment and put it into their inventory to resell. Or in many instances putting it into their inventory to rent, vis-a-vis taking a new machine off the shelf. So, it's who's willing to stand up to the plate and offer these guys the most money based upon what they see in the current economy.

And kind of along those lines, are you seeing somewhat of an increase maybe in some of those potential sellers wanting guaranteed deals from Ritchie Brothers?

They're interested in seeing what your number is. You know, lots of customers want to see all your options because what they look at is what are you willing to put on the table as a guarantee. And if you're comfortable in doing that, then the question for many of the sellers is, do I take the guarantee and pay the premium in the insurance rate for the commission or do I take a lower straight commission rate and take the risk myself? And they want to see what you're willing to guarantee to see how comfortable you are and then it varies on each individual customer whether he's willing to take the straight commission offer or take the guarantee.

And, hello Nate, it's Pete here. One thing I'll add, is the other player in the transaction typically is the creditor or the finance company that happens to hold interest in it and most often those individuals or the companies are looking for some specific coverage of that debt exposure that they may have. And some of the challenges that we have talked about in the past facing these guys, are they financed it when the equipment pricing was '06, '07, very, very high, pricing came off and, you know, lack of willing to take a haircut on this thing and not believing that that pricing decline was real or sustained. They sort of sat in the weeds and waited and we were not willing to step up and guarantee the numbers that we didn't believe were achievable. So, we said no to many, many deals in the last several months, that we believe were not achievable because they were based on rates that were--or equipment pricing that was driven in a higher market.

Those guys today we're seeing and waiting really that catalyst and one of the catalysts we are waiting for is those people--the companies that hold the paper to become more normalized in their view of what their returns will be. And when they look at their own balance sheets and try to rationalize where they are headed, try to understand what exposure they have in that, meantime, hopefully that debt has been paid down a little bit further. So, that difference between the exposed debt and the fair value is starting to creep a little bit closer together, now we are starting to see, hopefully, some tipping over of some of those people that, okay, now they will accept net proceeds or they will accept the straight commission contracts or they will accept a lower guarantee than they might otherwise want. But that's where the market is and it's not going to be moving a whole bunch higher in the next little while.

That's very helpful I appreciate that. And is it fair to say that -- or surmise, then that there has been a little bit more interest at least in terms of the percentage or number of potential buyers regardless of what category they come from that are at least trying to get a fixed bid?

Consignors you mean?

Yes.

When you say a fixed bid you're talking about a guaranteed contract?

Yes, correct, sorry.

I don't think we've seen a higher propensity. Like Rob says, everyone is interested in trying to find out kind of what our number is. They're shopping around trying to figure out where their best deal is, quote/unquote and some of that near-new equipment, you tend to get higher competition because it's less available. And the dealers that are out there, that are also competing with us, effectively in some of this iron that might be for sale from an end user. It becomes more competitive and that's one of the reasons why we talked about we would expect our auction revenue rate to be a little bit compressed from the lofty 11-point range that we had in past quarters, but nonetheless we still believe we'll perform above our top end of our range for the year.

Fair enough. I'll turn it over and get back in the queue. Thanks.

Thanks.

Thanks.

Your next question comes from the line of Scott Stember with Sidoti & Company. Your line is open.

Good morning.

Good morning Scott.

Could you just refresh us again on the plans for adding to your sales force this year and maybe just talk about some of the gauges that you use to judge whether these investments are paying off?

Joe, Rob here. We've come from our recent summer meetings and talked at great length about our sales force, and really have focused our guys in on looking carefully at their team and seeing who is producing and who is not. And the intent for the balance of the year is to upgrade and add to the team when we deem that we are focused on a, what we call, a franchise player.

Obviously, you're always looking to hire the best people, but in some of our areas today, predominantly in the US, where they are struggling in some of our yards, we are slowing our hires in TMs unless they are really good franchise players. And we are pushing our managers out in the field to take a look at their team. And now is the time to make some trades and do some upgrading.

And Scott, Bob here, the second part of your question was how do we measure, how do we gauge success in our CapEx investments. I'll split that into two. We have our technology investments and our property investments being the two major categories. And we definitely look at the success or lack in each of those areas.

On the IT side, project by project, there's different metrics we follow. Two that spring to mind. Our website that we recently launched, one of the best measures there really is simply traffic. Numbers of searches, numbers of unique visitors. And we are quite excited in the second quarter of this year, in our most recent statistics, I don't have the numbers in my hand, but we saw meaningful increases in all of our traffic measures. We're quite pleased by that. And our guess is that one of the main drivers of is that is significant enhancement in language capabilities on the website. It's simply accessible now to a whole new category of potential customers.

The other IT project that we mentioned on the call was our timed auction lot system and one of the key measures for us of success on that one, is the increased efficiency of the auctions. And we have at every single auction where the timed auction lot system is being used, we have been able to reduce our staffing because we have either moved from a two-day to a one-day sale literally, half the staff level required because you've got half the days. Or we've reduced the number of, we call the rings, where auctioneer teams are working simultaneously. So, we have been able to leave people at home or send them home earlier in every auction we have used, and that was one of the key objectives, so that's great.

On the capital side, which relate to properties, that's a bit harder to judge on a short-term basis. We take a much longer-term view to the success or failure, if you like, of those projects. So long, in fact, that it's rare that we would ever even conclude it's a failure. We have a very long-term horizon on these investments because they are 20-, 25-year projects, so the return span at least a period of that time. But we definitely watch quite closely the growth in GAP in the region, not just at the site but in the region that's anchored by the site following the introduction of the new facilities. And in almost all cases we're quite pleased.

There's no question we've had some challenges this year with our GAP in some areas and so that's perhaps masked the ability of these sites to generate activity. But in 2009, for example, I believe more than 10 of our sites set records for large [dever] auctions, so we're continuing to see good growth at our site investments.

So, just back to the sales force. Obviously in absolute numbers, slowing down the additions but more just trying to improve the quality of what you have?

Temporarily, yes. At some of the sites. At some of our other sites, we are still looking to -- for those sites to add to the forecast of numbers of TMs that they started the beginning of the year with.

An example is, for instance, Australia. We've had nice growth this year in Australia and we're still looking to add to that team. It's the other areas or the areas that are challenged by GAP to date that we're really evaluating it. And in instances where we may decide that a planned TM should be put on the shelf for a while, we are looking at replacing or -- replacing that with TTMs, and TTMs are our territory manager trainees.

These are young guys that we go out and find at -- post secondary educated, we put them into a training program that pretty much starts in the yard and they learn everything from the ground up through a one- to two-year course and we grow them into salesmen. So, we may pause on -- in certain areas on the hire of a TM but we are looking to put TTMs lower down into the ranks that we can grow out in one- to two-years.

And last question with regards to the $80 million CapEx run rate for the next year and a half. What's the implied number of new facilities to be added?

Scott, Bob. Within the $80 million you'll see some maintenance CapEx, you'll see some IT, some cars, that sort stuff and probably we'll be working actively on three or four projects. In terms of actual grand openings next year, maybe only one or two, it really depends on the timing of different projects. You probably see us open a few regional auction units, though which are the leased sites. They don't have a major CapEx component but they still add a dot to the map, if you like, so I can't give you a strong number. Nothing like the record pace of grand openings you've seen over the last two years, that will stand out in the annals of Ritchie Brothers history for decades to come.

Got you. That's all I have. Thank you.

Your next question comes from the line of Ben Cherniavsky with Raymond James. Your line is open.

Good morning, guys.

Hello, Ben.

Good morning.

You know, if you listen, a lot of what we are hearing from the equipment manufacturers and some of the dealers is that even in North America there's an improvement in demand for machinery. Maybe not so much on end market conditions but replacement demand -- the replacement demand cycle seems to be kicking in. As you guys obviously know, it's been a long time since contractors have upgraded, re-fleeted, invested in new machinery and now they're getting to the point where they're doing more of that.

This is at least what we're hearing from a number of other sources. A, would that -- do you guys see the same thing and B, if so, why would that not be translating into turnover of the used market where guys are trading in used for new?

Hello, Ben. Rob here. Yes, we're starting to see it, albeit it's what I would refer to as somewhat thin still, some of the larger companies out there that we deal with, the multinationals or national companies in North America in particular, they are starting to have a little CapEx available to them. And yes, you're correct, they are starting to move out some of the older stuff that they've retained for an extra year or two years. But I guess it's part of our optimism that we are looking at here in the second half of the year, is we've seen some of that activity.

Our guys have been quite busy over the summer inspecting and looking at equipment. Starting to get more calls and discussions with some of our ongoing customers that are making the right comments. So, I guess that's what's giving us somewhat of the optimistic view that we're seeing in the last half of this year, so we're just unsure of the quantum of it right now.

Ben, that's one of the catalysts, it's Pete here, so that's one of the catalysts in that OEM sort of production and sort of turn CapEx interest in some of the equipment end-users and dealers and what not. There's lots of other catalysts that we're waiting for to happen. One of those being that there are still people sitting waiting on Tier 4, there are people sitting waiting and realizing slowly, I think, that some of the stimulus spending particularly in the United States based stuff is not the panacea they perhaps hoped it would be. So, they are still seeing ten, 15 different guys bidding on a particular road or a contract bridge project, whatever it may be. And that's a historically high number and when that number starts to comes down a little bit, and you start to see more normalized bidding of contracts then that will be another indication that things are returning more to normal.

Interest rate environments still low. Some of the creditors you're seeing a little -- very, very early signs that some of the creditors are starting to return to more normalized behavior and looking at -- harder at their portfolios and making decisions. But you know, Rob's right, we've seen a little bit of that. I think we are hearing the same things that you guys are hearing, but we are just a little more cautious in our outlook. I think that might support a higher latter half of 2010 for us and we're trying to give you guys a range of what realistically, where we can expect to see 3.3% to 3.5%, we think is a fair range.

Fair enough. One follow-up if I may? Another thing that I heard from one contractor in particular just stood out as I think an interesting observation, and I wonder if you guys could comment on it, Was--he was of the view that right now it's easier to get financing from the OEMs than the banks. And as a result, there's a migration of transactions to the dealers away from the auction. Have you seen -- do you think that's affected your business at all?

Rob here, Ben. I don't think so, no.

No. In fact, we haven't seen that propensity for financing to be available through dealers easier than through other sources. There are other competitive lenders out there today that are very aggressive in looking at the right kind of deal and if there's enough equity in it, they're pricing them fairly sharply. So, there's not a -- perhaps the changes -- I think there was a point in time where some of the OEM financiers stepped away from their normal transactions and now maybe, they're returning to more a normal state.

Yes, and I'll just add to that. If that was the case then, I think we would be seeing pressure on attendance at auctions and yet we continue to have record attendance. I get the sense, just from customer behavior itself, that the financing is not there. That's not the concern.

Okay. Good. That's helpful. Thanks, guys.

Your next question comes from the line of Jamie Sullivan with RBC Capital Markets. Your line is open.

Good morning. Thanks for taking my question.

Hi, Jamie.

Just curious as you talked to your bank and creditor customers, it sounds like what you're hearing is that they need to either accept kind of lower than historical returns that they're used to getting through the cycle or we need to see a real pickup in prices that get to those returns or the debt pay-down as part of the deal before they would sell. Is that kind of the moving parts there?

We are seeing a bit of convergence in values. You know, values have come up. They came up in -- early in the year. We have seen them sort of flatten off a little bit except for the nearer new stuff, still pretty supportive pricing there.

So, I think a lot of it is just simply a realization that this is where the market is right now with the lend from the lenders' perspective and the lenders also have seen, you know, performing loans hopefully, so that the debt levels have come off where they were before. So, that convergence of debt level versus value of portfolio has started to narrow, and I think it's allowing lenders to make more prudent decisions around their portfolios today than there were maybe six or 12 months ago.

Right. But I guess that -- I guess my question is more that could be kind of a slow process as the debt continues to get paid down unless, you know, we see another acceleration in pricing. Is that right?

Well, I think it's the individual lender by lender and it's -- to me it's one of many, many catalysts that are out there in the market today.

Well I'd add to that for sure, Jamie, people could be waiting for better pricing but I don't think that's the only thing that might trigger a change. They may also just decide it's time to take their medicine. But you can only wait so long. I suspect there are portfolio managers and loan officers out there who are not getting their bonuses here, they know it, so on a very personal level I suspect there's no motivation for them to crystallize any losses and lock in the fact that they're not getting a bonus. So, they are holding on and hoping. At some point that changes.

Reality has to kick in and a decision gets made to, you know, take the loss and move along and that's the kind of thing we are starting to get little whiffs of right now. We are seeing some banks making those tough decisions. It's what normally would happen during a downturn and for some reason we are seeing -- I'm not going to call it irrational, but it's unusual behavior on the part of banks.

In part, they're waiting for a day that may never come but in part they are just -- they're looking at losses that are so large that they're scared. Eventually they have to deal with it.

And part of it also may be their ability to absorb that loss and their -- depending what their balance sheet looks like, and whether they have been wisely building up reserves in anticipation of that as well. So, it may be their ability to make that decision to take that haircut.

Okay. That's helpful. And then if we look at -- as you look out to the OEM production schedules, when would you think those would roll through to the dealer fleets to relieve some of that competitive pressure you're getting from the dealers that are buying used equipment for a number of reasons?

I think --

Ask OEMs.

Yes. You got to ask the OEMs. You know, obviously things we hear on the street, lots of OEMs are increasing production and I think many of them have got some challenges with their supply chains for the products that they are building. And, you know, we only hear what we can from our customers that are out there buying and there's some fairly lengthy delivery times now on some products out there in the market. And even up here in western Canada in the timber industry, some of the manufacturers producing some of the timber stuff, you know, they're, five, six, seven months out now on delivery of certain items so really it's a question of how fast they can gear up their production and how fast their supply chain can feed them.

Okay. And then just one last question. Just looking at the auction calendar, and just trying to make some sense of a number of moving parts given the GAP challenges this year. You have some increased efficiency coming in from the timed auction lots and it looks like you're having a number of extra auctions in the back half of the year at a number of sites including some more mature sites like Orlando and Dubai. So, just kind of wondering, you know, what the thinking is there and, you know, how we should think about that with, you know, there might be some extra costs associated with marketing and what not.

Well, we have auctions, Jamie, when there's equipment available for sale, and this year you saw an additional auction in Orlando and we've always tried to get our Orlando sites moved from three to four sales a year. The challenge in the past was if you put the fall auction too late, people will linger and wait until the February auction. So, you can't go too late in the year, so you got to put one in between the May and the October auction. And this summer there was enough opportunity down there in the southeast region that it was quite apparent that we could hold another auction, so that's what we do. We scheduled one, slotted it in and have managed to collect fairly decent sale together there.

Other opportunities that exist come along day by day, and we have customers that, you know, they are still trying to maximize the return and if need be, that they don't want to haul their equipment down the highway 300 miles to Ritchie Brothers' closest site, and they want so-have an auction sale in their yard, we will satisfy their needs. Obviously, when we have these smaller off-site sales we have got to focus in on managing our direct expenses for them, but we are there to service our customers and when they want to have a sale somewhere that's other than our yard, we're there to look after them.

Okay. That's all I have. Thanks a lot.

Thank you.

Thanks, Jamie.

Your next question comes from the line of Larry De Maria with Sterne Agee. Your line is open.

Thank you very much. Just curious guys, what gives you the confidence that equipment is not going through alternative channels? I know obviously the market is not cooperating by and large for anybody in this market. But looks like some of the other channels are growing at this point, so if you could just address that and then I've got a follow-up, please.

Yes, sure. Pete here. You know, our guys are very tuned into competitive channels and what's going on, you know, you might look at the online as one opportunity. There's the dealer channel as the other.

You know, we monitor numbers fairly closely, we have watched IP in their effort to try to do an IPO and we haven't heard much of that since March so I don't know what's really going on there. So, I think if you look hard at their numbers as we can and do, we see what they are doing and you should look at their Q2 to get a sense of where they're thinking -- I think that will help you realize what is going on in the marketplace if you think it's slowing that way, then you might check a second go around.

Yes, no I understand that. Obviously they had extraordinary growth in the first quarter of about 40%, I think, and you know, the numbers I've been tracking there are probably for growth of, I don't know, mid- to high-single digits so I sense that they are growing. And I guess that you're arguing that they are not taking market share away from you guys at this point, right?

Yes, I think what we are seeing, you know, we are competitive as heck on everything. So, we will get out there and start swinging with the best of them and our job, our number one job is to add customer value and customers measure that lots of different ways, some as full service, some as process.

Ultimately, it's measured by net return and when we look at, competitively, when we look at what we sell versus what another auction company may sell, whether it be an online guy or a CAT auction services or whomever it might be, and we have got lots and lots and lots of examples that we trot out in front of our customers to say, listen here's a like item that we sold for X and they sold for Y and it's very similar and our numbers are better. So, you know, for us it's a process of selling the value proposition that we put in front of these customers and helping them understand how much more they get for what they pay us.

Right.

And in fact, I think if you look at the costs of what our fees are, in fact, they're lower than some of these other guys that are out there quoting and, you know, purporting that they're taking share away, so -- Yes, I think we would be obtuse to think we haven't lost some element of business through other channel like the advent of the online or the advent of some other auction players. But for us, I mean, it's interesting because auctions become more the standard way of transacting equipment, the more people that get into the industry and for us -- to me, I think it's a huge blessing that now we have an opportunity to really show people what value we add, because if you're the only guy out there doing it or the dominant guy out there without a whole bunch of other competition, people get a little bit complacent and it's always nice to have choice.

But now we can line up, look at our value proposition, show people what we do, show them the evidence of what we're delivering them, and make them feel even better than they already might feel about what they are doing. And also get people off center that might not even consider auctions, now there's two or three or four guys knocking on their door and all of a sudden an auction becomes more legitimatized, more the standard way of trading, and I think that's going to continue on into the future.

Larry, this is Jeremy here I might add that it's important to realize that the market is still very large, it may have contracted during a time when our GAP has remained flat, but the market is still very large. And to pick up on what Pete's talking about, these other competitors helped, as Pete says, legitimize the auction channel and allow the auction channel, in general, to take a bigger share of the market. So, there's lots of room to play in the sandbox and we are still there.

Right, and then on the pricing front, have you guys been more aggressive on pricing lately, lowering prices in other words to get more volume and then, you know, obviously, like Peter I think you just mentioned, others may be charging more than you guys are but think don't have -- your consignors don't have the added cost of shipping per se obviously to your auction site. So, how does that flow through and can you just talk a little about the competitive pricing?

Rob here. Are we more aggressive? It's a case-by-case deal. The late model OR stuff that we always speak about, the price -- prices for that type of stuff has been on the increase, so obviously we've got to be more aggressive on it. There's lots of asset classes out there of late model stuff that we haven't sold for a while, so the big million dollar question is how high is the price, what is the market and since it's been quite a time since we have sold some products and some product lines, it's a bit of a guesstimate. But we are aggressive on any deal that we are out there today that we believe is the right deal to be aggressive on. And some are more aggressive than others.

And that's changed in the last month, two months to become even more aggressive?

I would say that it's been like that from the beginning of the year. There's deals we worked on earlier in the year that we got extremely aggressive on because they were the domino deal that we wanted to have, that built an auction sale or was the catalyst to building a sale. So, we're very aggressive on the stuff that we believe we have to be aggressive on.

Right. No, fair enough. And then just finally if I could ask, how, you know, Q3, obviously, you guys are not myopic folks, and you're viewing things in the long term, the business is lumpy, but just curious how Q3 is tracking? Your comments a little while ago were that you're optimistic on the second half. Just curious how things are going so far because obviously we don't get as much auction data as we used to get get.

Larry, it's Pete here. Other guys can chime in, too. Very early for us in Q3, only into the first month being July or the lion's share of many of the auctions that we're going to be holding are in September and the latter part of August, so it's pretty early. But, you know, we have given you guidance for the year, we're comfortable that those numbers are within the range of our achievable and expectations and you know, I think it would be folly for us to discuss just a few auctions in July to see where it's heading, because it's a very, very small data point.

Thanks very much Thanks, Peter.

Your next question comes from the line of David Wells with Thompson Research Group. Your line is open. Your line is open.

Good morning, everyone.

Good morning.

Good morning, David.

First off, just looking at the move at auction revenue rate from the first quarter to the second quarter, 47 basis point decline or so. How do you think about that on a seasonally adjusted basis as we go into the back half of the year? Would you expect that to continue to moderate at a similar rate? I guess kind of tied into one of the earlier questions, but just trying to get a sense if there were some unique factors that drove that here and if you feel like we are more sustainable in the nearer term at current levels?

Hey, David, it's Rob McLeod, and the auction revenue rate in quarter two was still well above our expected range. And as expected, that's mainly due to the performance of our -- the at-risk business as well as some strengthening in the straight commission and -- straight commission business that we are seeing as well. And the -- I guess following on Rob's comments about being aggressive and being as aggressive as we need to be, we don't have any illusions that that at-risk performance will continue at those rates over the medium and long term. And as we say, we will be as aggressive as necessary to get the deals that we believe are the right ones.

It's Rob here. Maybe I can add to that. As we went into Q2, there was lots of deals out there that had been lingering around for three to six months and we have had constant contact with the owner and after numerous visits and a couple of tries at putting deals together, opportunities came along that if we got a little bit more aggressive, there was an opportunity there to get a deal.

And some of that stuff came through our ag world, and the strength of the used equipment pricing in the ag world has lagged behind the construction. So, we felt a little bit of that as we did a few ag deals in the second quarter and there was a couple other at-risk deals that we chose to take on because we thought they were the right deals to get. And a couple of them didn't turn out as well as we anticipated, so we saw in Q2 a little bit of a downward turn in our at-risk auction revenue rate. But, how we see that panning out on the balance of the year will determine on what deals are out there and where we believe we need to be to get them.

But all that said, David, you know, we are still in the view that that will be at or above or long-term guided range. We usually guide to upwards of 10.25 and we have said that we will be performing above that range.

That's helpful. Kind of jumping back to this expectation that at some point there's idle equipment that's on the sidelines that's going to come to market, I guess if we look back at the downturn, how much of a contractor's given fleet was over equipment that they were -- I mean, were they more likely to liquidate that earlier, and then the fleet that they did keep simply, you know, hasn't been utilized a lot so it still has a number of useful hours? You know, I guess I'm trying to understand what the magnitude of that possible, you know, basket of idle fleet that could be out there or is it a lot smaller than it actually could be because of some of those dynamics from just simply aging out what you do have?

It's a great question. And I don't think there's enough data out there for us to be able to answer the question. But just anecdotally, we didn't see a pile of movement on any iron, the contractors sitting on stuff and waiting, because these guys fleet according to what they believe their project appetite can hold and when projects are on hold or stimulus is around the corner, they don't really want to get rid of anything. You know, the odd piece here or there but a lot of guys didn't even go through the process of trimming their fleets. They just sat with everything and it's all still parked and stuffed into yards that you wouldn't believe.

You drive around and see this stuff and it's all there and you talk to the guys and they say, oh, we're waiting. So, you know, again there's no real hard data point to go to but I would suggest that there's more of that happened than certainly guys say trimming off their older fleet and keeping the new stuff. We hardly saw any of that. Rob?

I guess every customer that we deal with is different and early on in the decline we had customers, you know, that had a substantial fleet of equipment that chose to take the latest model equipment that they had and to dispose of it. And in order to do that and meet the debt payments, they would take four, five items that had debt and they'd take four or five items that had no debt and collectively put them together and sell them in the auction and net out what was required on the debt. And they would sit there with older equipment in their yards with little or no debt on it and be ready to bid on jobs at a lower cost point because the cost of their fleet was lower.

We had other customers that went through the boom cycle and had a whole beautiful yard full of nice equipment and it's all financed and they had a little money in the bank and a decent relationship with their financial institution and they've chosen to just keep it parked. And they are feeding the debt on it as required by the finance company. So, we've got lots of those customers out there today that are still sitting and waiting and, you know, some of them are reaching the frustration point because when they go to bid on these jobs, where there used to be two or three bidders, they are now walking into the tender lettings and there are 10 or 12 guys sitting in there and it's very, very competitive so --

That's helpful. And then last question and I'll drop back in the queue, with the franchise players that you're adding on the sales force side, are you having to do some things more creative on the -- on a compensation basis to incent them to leave their prior shop and come over to Ritchie Brothers and if so, you know, what kind of impact could that have on your margins here going forward?

Nothing out of the ordinary. I would say there's a few tweaks here and there that we may look at. But a number of these guys that we're looking to hire that are coming to us in their current jobs they are working for companies that aren't doing that well either. So, depending on their compensation plan at these other companies, which many of them is more commission-based than ours is, they're not doing that well over there.

So, they are looking for opportunities that are out there and we're not doing anything substantially out of the norm.

That's very helpful. Thank you for your time.

Thanks.

Your next question comes from the line of Scott Schneeberger with Oppenheimer. Your line is open.

Thanks, good morning. I was wondering if you guys could speak a little bit to timed auctions. You mentioned a very broad roll out by year-end. Could you speak a little bit to quantifying the efficiencies you're going to get there and specifically the quantification I know, you know, added day in the field for sales folks, but how do you think about what benefit that will be to the bottom line?

Scott, Bob here. Three main benefits to the project. The one you're hinting at, I'll go there last. The other two are customer related. Buyers are convenienced greatly because they can now access these lots all online as well as in person, the bidding period is open longer. The result has been that we are getting far more bidder activity on these lots which is great.

The sellers are doing well because now they're able to expose these lots to a larger range of bidders and, on average we are seeing better pricing so that's a good thing and then your point, the third one, is the Ritchie Brothers advantage and it shows up in both cost savings and we believe revenue -- this time I'll call it revenue potential because I can't put a dollar on it, but we believe it should be significant. On the cost side, I'm putting less people at my auction site. I'm able to staff with a lower number, fewer auctioneers, bid catchers, clerks, customer service in general. I'm able to get away with a lower staffing level, either by reducing the staff at an auction in total or by sending the staff home earlier, so I have a direct benefit there to direct expenses which is the line item you see it on.

Not a material change. But, over the longer term you'll see it will help us with the downward trending and direct expenses. And then what I believe is likely the largest win of all, it's what you hinted at yourself, leaving the territory managers our front line sales managers in the field rather than having them come to the auction allows them to have another revenue producing day. And each day they're out there, they are meeting with customers. That's one of the most critical assets we have as a company is the number of hours of our territory manager's time and anything that guy is doing that doesn't involve sitting across the desk from a customer is time that could be better spent.

So, if he's working an auction or if he's on an airplane or if he's at a training course or anything like that and he's not with a customer, we better be really sure that's valuable time. And if I can cut a couple of days out of his month of working at auctions and then leave him in his territory, that's a huge win. I can't put a number on it because I don't know whether he's actually going to sign a contract that day, but territory manager productivity is one of the key metrics for our company and this is a -- this tool will assist us to increase that.

Okay. Thanks for that. I'm sorry. The -- one other factor. The rental companies, they have been de-emphasizing use of the auction channel. And I'm just curious, are you seeing that in practice? Are your relationship managers witnessing the same and what are they hearing directly from those from the rental companies involved with auctions? And this is not only on the selling side but also just what you're seeing from them on the buying side as well? Thanks.

I don't know that they're -- it's Rob here. I know they are de-emphasizing it. The rental companies, the big guys have always had a multitude of channels to dispose of equipment and first and foremost, if they can sell it themselves that's their choice and down from there, they have alternatives. As we've seen during the first part of the year, many of the rental companies' disposals have declined, their CapEx has declined so hence they are keeping their assets longer, renting them longer. And so the business that we have done with many of them has been down this year.

We got a couple of them that our business has actually been up. So, as we go through towards the end of the year, I suspect they're going to have a requirement to move some other assets off their books, and hopefully through our sales force and our relationships with these guys, we're going to be the catalyst that they use to do it. One -- it's Pete here. Scott, one thing I'll point out as well and we point out to the rental companies with great love and affection, is that typically when we get equipment from them, it's already and attempted to be sold by themselves through their own retail channel, websites whatever it is, and sometimes it's 90 days, 120 days. And if they have 10 like items that are able to sell five, six or seven on their own and they give us the other three, there's a reason they are giving us the other three, is that usually the condition of those units is likely not as shiny and new as -- and inoperable as the others so -- and then they line up the average price that we got for our three or four versus the average they got for their six, and they say look how good we are versus how good the auctions are.

Boy oh boy, our clear preference is to sell it ourself and so it's a little bit of apples and oranges and we are always mindful to gently point out to our customers that, that in fact, is really what we are seeing, what's happening, so that's also -- you know, it's a selling point for us to get across to these guys. You know, we do -- on occasion we do get direct items right off their fleet, right to the yard and we're able to perform.

If we get it in time we can do our proper marketing and if refurb is necessary we can do that for themself as well if they choose and then we end up getting pricing that, I believe, is very attractive. But they have so much fleet and they end up doing analysis by averaging because that's really the only human way that you can with the thousands of items that they're selling. So, we are mindful that that's a challenge for them but also, you know, mindful that we have to point out to them we believe there may well be a non-level playing field that they are trying to compare what we do versus what they're doing on the retail side, so just a takeaway for you. Hey, Andrea, we probably have time for one more question and then we should wrap it up.

At this time, your last question comes from the line of Matt McGeary with Sentinel Investments. Your line is open.

Good morning, good afternoon almost. Could you just remind me of what your thoughts are, you know, if we step back a little bit just on free cash flow. I know you guys have been spending aggressively over the last few years, with the exception of this year, I guess. But you know when you step back and look at your business maybe over the next five to 10 years, is it reasonable to assume we should see some significant ramp in free cash flow and just sort of talk about how you -- you know, how CapEx spending works in your business. Is there, you know, leverage to be gained as you get a little bit bigger on the top line?

Hey, Matt it's Rob McLeod and, yes, you are correct. The model does have free cash flow ramping up probably in 2011, 2012, beginning in that, and the CapEx, as Bob had said, our levels of CapEx in 2008, 2009 when we look back will be record years of CapEx. So, we are not expecting to have CapEx in the $150 million range, which obviously has a direct impact on the generation of free cash flow. So, yes, the expectation is for free cash flow to be ramping up certainly over the next five years for sure.

And do you think about -- I mean, is there a reasonable way to think about, you know, I'm sure maintenance CapEx is sometimes a hard number to get to, but can you think about it in terms of, you know, percentage of revenue? I'm not asking you to pinpoint a target, but just kind of how you think about things in the longer term, where you want to see your sort of capital efficiency.

I think really how -- the main drivers for our capital expenditures will be auction sites. And so, the amount for IT projects or for maintenance CapEx is going to be a small portion of it, so the -- how much we spend on new auction sites is really going to be a significant factor and if we are -- if we continue, which we will, with the expectation of about two new auction sites a year, you're not going to have $150 million of CapEx going forward. So, two new auction sites a year with some replacements, so it's a relatively modest, modest CapEx compared to our recent $150 million level.

Can you give me a ballpark number where it costs to open a new site, which I understand that obviously they vary quite a bit.

Matt, it's Bob. The average cost right now is averaging sort of in the $15 to $25 million range per site, and a very wide range because of a number of different factors. My guess is that we'll be spending well under $100 million for the next few years and that should translate into meaningful free cash flow within very short period of time.

Great. Thanks.

Thanks, Matt, and thanks everyone for joining us on the call. We will look forward to chatting with you again for our Q3 and in the meantime, Las Vegas is on and we are about to get back to work here so, thanks.

This concludes today's teleconference. You may now disconnect and have a great weekend.