RB Global Inc (RBA) 2010 Q3 法說會逐字稿

Good morning. My name is Beth and I will be your conference operator today. At this time, I would like to welcome everyone to the Ritchie Bros. Auctioneers' 2010 quarter three earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Peter Blake of Ritchie Bros., you may begin your conference.

Great, thanks, Beth and good morning, everyone. I am Peter Blake, CEO of Ritchie Bros. Thanks for joining us on the call today, our Q3 2010 investor conference call. I am joined today by 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 start, I would like to make a Safe Harbor statement. The following discussion will include forward-looking statements as defined by SEC and Canadian rules and regulations. Comments that are not statements of fact, 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 and results of operations for the period ended September 30, 2010 and subsequent quarters, which is available on the SEC, SEDAR and Company websites.

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

I would also like to note that, during today's call, we will talk about gross auction proceeds, which represents 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 and 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 our recent strategic development process and some of the highlights of Q3 before opening the call to questions. Our prepared comments will take about 25 minutes.

We are pleased to report that our third quarter represented the highest third-quarter auction revenue performance in our history and reflected solid gross auction proceeds growth and a strong auction revenue rate. Although we are very pleased with our performance in the third quarter this year, we are still seeing considerable uncertainty in our major marketplaces and the used equipment market has not yet returned to what we would consider a balanced state.

Rob Mackay is going to talk in a moment about our impressions of the current equipment landscape, but I will say that we remain cautious because, like many other market participants, we continue to face challenging market conditions, particularly in the United States and we expect this will continue for the remainder of 2010. We believe we have increased our marketshare meaningfully during these many months of economic uncertainty and are therefore well-positioned to capitalize once equipment transaction volumes stabilize.

Many of you will have seen our press release this morning announcing our planned launch during 2011 of a number of strategic initiatives designed to build off our focus on people, places and processes to help grow and enhance our core business, as well as make our auctions more appealing to a broader range of equipment owners.

As we have gone through our extensive strategic planning process over the last number of months, we have been paying particular attention to the reasons why equipment owners do and do not take advantage of our auctions to manage their fleets.

Our recent customer surveys have highlighted the fact that the vast majority of equipment owners do not even know who we are, never mind understanding the compelling value of our auctions. As a result, a major focus of our new initiatives will be to continue to extend the appeal of our auctions to equipment owners around the world. We aim to continue to make our auctions as compelling as possible by providing business solutions that enable equipment owners around the world to easily and confidently exchange their equipment.

At the end of the day, we want to create as many reasons as possible for new and existing customers to participate in our auctions to ensure we continue to capture an increasing share of the large and fragmented equipment market.

Over the last five years, we have been on an accelerated CapEx program designed to expand our auction site network and provide higher quality services to an increasing number of equipment owners in more markets around the world. In that time, we have invested roughly $370 million in our network and $50 million in our systems to provide the highest possible level of service for our customers.

These investments and our focus on innovation have made our auctions more appealing to equipment owners as evidenced by the increase in bidder registrations at our auctions over the last few years and by the increase in unique visitors to our website, which Bob will highlight in a few minutes.

Attracting bidders is an important first step in the evolution of a customer and this is often their very first introduction to our auctions. If we can continue to attract an increasing number and diversity of bidders to our auctions, this will help grow our consignments and ultimately our net earnings.

In response to extensive feedback received from our customers and to broaden and deepen our appeal to new customers and enhance the convenience and ease of our auctions, we intend to introduce some new features during 2011.

One of the more significant changes will be a bundle of new services for bidders and buyers of equipment. This bundle of services will include enhanced equipment information, a customer-financed program and other value-added services designed to make our customers' experience easier and instill even more confidence in the process.

Providing enhanced equipment information will address a growing need among equipment who are simply looking for more when buying used equipment. High on their list of needs are high-quality zoomable photographs to which we have already responded with the recent launch of our new 21-language website. We will be adding substantially more narrative information to accompany these photographs to satisfy our customers' additional needs.

We also intend to amend and simplify our administrative fee structure effective July 1, 2011. We are planning to eliminate the 2% fee charged on Internet and proxy bid purchases and revise the administrative fee currently charged to buyers to address the cost of providing the new and significantly enhanced bidder and buyer services that we will be launching during 2011, as well as the costs of other buyer-focused initiatives launched in recent years.

The current 10% administrative fee will continue to be charged on all lots that sell for $2500 or less and we intend to introduce a 2.5% administrative fee to be charged on all lots that sell for more than $2500 with a maximum fee of $950 per lot. Interestingly, most auction companies already charge similar or higher fees to buyers, but do not offer the range and quality of service that we currently provide.

The changes to our fee structure that will take effect during 2011 are designed to ensure we can continue to deliver the highest possible level of service to our customers and maintain our track record of innovation. We expect the new services that we will be introducing during 2011 will make our customers' experience easier and give them a higher level of confidence when they buy and sell equipment at our auctions. While the services will start rolling out in the first half of 2011, the revised fee structure will not come into effect until July 1, 2011.

We intend to invest in the introduction of these new services and features, which will cause an increase in our G&A costs starting in early 2011. It will also result in an increase in our revenue starting July 1, 2011 with an overall positive impact on our net earnings for 2011 and future years.

I will let Jeremy address the expected impact of our new initiatives on earnings guidance, but let me conclude by saying that the changes we are introducing are an important step in our evolution. Our fee structure needs to keep pace with the investments we have made and will be making, as well as to be simple and transparent for our customers.

I will save further details of our updated strategic plan for future calls. For the time being, please know that we are very focused on growing our business and many of the initiatives we will introduce over the coming months and years are being designed with that in mind. We are looking to do more business with our traditional customer groups, as well as introduce new customer groups and markets into the mix.

The growth, development and productivity of our team will continue to be an important emphasis for us and we will be layering on new business and information solutions that enable our customers to easily and confidently exchange equipment. With that, let me turn the call over to Rob Mackay for an update on what we are seeing in the equipment markets.

Thanks, Pete. Although our Q3 GAAP performance came in strong, it is probably too soon to say that we are out of the woods. There are a lot of signs of improvements in the global economy with some meaningful changes that will positively affect our business in time, including increasing equipment manufacturing levels; demand for new machines returning, albeit cautiously; stabilization of prices and continued improvement for late-model, low-hour assets; and construction spending inching its way back.

We still, however, have a clouded view of activity levels as we look into our business for the balance of the year. Achieving our targeted GAAP for Q4 could still be affected by a number of market factors. In particular, these are supply challenges are an issue by which I mean we are seeing continued tightness of the use of equipment supply; the dramatically lower production levels of new equipment over the last few years and managed distribution for new equipment from the OEMs are affecting supply. Equipment owners are slowly starting to replace their aging fleets and combined with the OEM's managed production, the supply and demand imbalance continues to fluctuate.

Low interest rates; lack of confidence in the economy; some lack of urgency on the part of creditors to react and liquidate assets continue to result in lack of movement by potential sellers. Previously noted apprehension about price increases for Tier 4 EPA-compliant equipment continues to be a very common discussion with our customers. All of these factors challenge the supply of available equipment in the marketplace for RBA to sell.

The second factor we are faced with is competition, which continues to intensify. As the pricing environment continues to firm and most categories of late-model equipment attracts stronger values in the market, the competition for equipment has heated up significantly. We are seeing more competition for late-model equipment coming from dealers. In some cases, they are purchasing this late-model equipment for their rental fleets and in other cases, they are taking these near new items into inventory because of uncertain OEM production and delivery times, along with the potential for price increases on new Tier 4-compliant product.

Brokers also have taken strong confidence in the firming of prices and now are very aggressive on small deals or individual items. As production and sales of new equipment continue to pick up, we expect to see the overall used equipment market become more balanced and rational and this should have a positive impact on our growth.

Factor number three would be dealer consignments. In normal markets, dealer consignment activity is quite regular and provides additions to many of our sales. Today, many dealers are gaining more comfort with their inventories and are able to move their stock as needed, resulting in diminished consignment levels from this customer group.

Factor number four is debt. This still remains a consideration in our business. It is still affecting certain deals that we are pursuing and we are experiencing a fair amount of auction business where consignments get signed and committed to the auctions only to have the banks refuse to release their interest in the equipment because the projected proceeds are lower than their loan balances.

Lastly, a final wild card is the large deals we are working on. Our sales team has a significant number of large deals under discussion that may or may not come to market in Q4. While we may not get these consignments committed to Q4 sales, they may not be lost to other sales channels. A customer may choose to wait for a number of reasons, including they may need to finish current work underway; they may perceive better pricing levels in the spring; and they may be awaiting the outcome of the US election and may have the belief things will improve if their preferred party gains influence.

While we remain optimistic, it is still too soon to say we are close to turning the corner. Although there have recently been a number of articles and industry analyst comments indicating construction spending is heading up, a lot has to happen to give equipment owners visibility into the future and the necessary confidence to make equipment buying and selling decisions.

We remain confident that our slowdown in sales and the contraction of the used equipment market are timing issues and that a return to a more familiar state is inevitable. However, this is tough to predict due to the many factors affecting the global used equipment market. In any event, we are very comfortable in our view that our growth story and business model are very much in tact and only the timing is uncertain. Back to you, Pete.

Okay, thanks, Rob. Clearly, the current used equipment market is complex and we are not the only market participant that are facing challenges. However, we are not sitting idly by and hoping for a return to the good old days. We continue to take prudent steps now to focus on performance in the near term and set ourselves up for success over the long term.

The strategic initiatives that I discussed previously are just some examples of what we are doing and our G&A performance to date is a testament to our commitment and ability to manage our business prudently in the face of challenging market conditions that we see as temporary in nature. Now over to Jeremy for an update on our guidance.

Thanks, Pete. First, let me talk about the remainder of 2010 before talking about 2011. Our previous gross auction proceeds guidance of $3.3 billion to $3.5 billion for 2010 remains valid, though it is now looking like we will come in at the bottom of this range given the continued supply side challenges Rob alluded to in his discussion. Our previous adjusted net earnings guidance of 25% to 30% below 2009 adjusted net earnings is still valid. Our auction revenue rate for the first nine months of 2010 was 10.85% and we expect it to remain above trend for the full year, though we expect some moderation in Q4.

Although we expect to grow our business in 2011, the environment remains somewhat opaque right now and this means accurate predictions remain challenging. We didn't do a good job of predicting 2010 and next year is still too uncertain to forecast reasonably right now. As a result, we are not going to provide any detail about our 2011 GAAP or auction revenue expectations at this time.

Our strategic initiatives and revised fee structure will result in increased costs and revenues in 2011 with an overall positive impact on adjusted net earnings for the year. It is too soon to give more detail about the effect of the new initiatives on specific line items, so it is probably best to think in terms of a lump sum impact for now.

By applying GAAP levels consistent with the current year, we would expect incremental pretax earnings for 2011 to be in the range of $10 million and for 2012, being our first full fiscal year with these new initiatives in place, we would expect annual incremental pretax earnings in the range of $30 million. This is on top of any earnings growth derived from increased GAAP.

I will caution you that these are preliminary numbers and many of our initiatives need to be scoped out further before we can be more precise. However, based on our current information, we believe these to be reasonable estimates of the positive effect we are expecting from new initiatives to be launched in 2011. We are telling you now because we view the expected impact of our new initiatives to be material. Bob, do you want to talk about our CapEx and the expected impact of our new initiatives?

Thanks, Jeremy. We have been very busy over the last few years rolling out systems designed to enhance the level of service we are offering our customers and to create efficiencies and improve scalability. A great example of these initiatives is our time to auction system used for selling many lower value lots and we are on track to have the majority of our permanent sites up and running by the end of this year.

This system helps deliver more convenience and ease to our buyers and value to our sellers while allowing us to be much more efficient and scalable in the sale of these lots. The positive impact on direct expenses is already being felt and once our rollout is complete, we will be able to provide more details of the positive financial impact of this system.

We have also continued our auction site development efforts, though as we have talked about in the past, the accelerated program on which we embarked in 2004 is now winding down, in line with our expected timing. Our current expectation is that we will continue to add auction sites to our network in the future, but the pace will be slower and our CapEx will be lower.

Current near-term replacement targets include replacement permanent auction sites in Olympia and Phoenix, among others. We are on track to have our grand opening sale at our new regional auction unit in Germany in November and that will bring our network to 43 sites by the end of the year.

Based on our current expectations for auction site development and systems and processes we expect to introduce as a result of our new strategic initiatives, we are looking at CapEx in the range of $70 million to $80 million per year for each of the next several years.

I know some people might question the dramatic drop in CapEx from the 2009 peak, but, as a reminder, this reduction was planned and the peak CapEx program was not intended to be sustained over the long term. We currently have excess capacity in our network and we are well-positioned to handle the growth we expect in the coming years.

Before I pass the call to Rob McLeod to talk about the highlights of our financial performance for the third quarter, I want to outline some exciting statistics regarding our online presence. As you may recall, we launched our significantly improved website in May of this year. After the initial teething pains of adapting to new technology, our customers have really taken to our new site. In Q3 alone, we saw a 15% increase in unique visitors to our website and a 23% increase in new visitors, both compared to Q3 of last year. The average time a visitor is spending on our new site was up 12% compared to Q3 last year.

And on top of the stats, we are also seeing activity from customers in countries where we do not even have a physical presence, which points to the power of our multi-language website. A great example is recent online activity from customers in Vietnam who have not in the past been able to navigate through our site in their own language. Now they can and they conduct equipment searches and other activities in their native language, which makes it much easier for them to do business with us. Rob, do you want to talk now about our Q3 performance?

Thanks, Bob. As Pete mentioned previously, our quarter three auction revenues were a record for a third quarter. This was driven by solid gross our auction proceeds growth and a strong auction revenue rate. The auction revenue rate continues to perform above our long-term expected rate and this above-trend performance continues to be driven by our at-risk business.

As anticipated, our G&A for the first nine months of 2010 was higher than 2009 as a result of our ongoing investments in people and facilities. In addition, foreign exchange fluctuations resulted in a $6 million increase in our G&A for the nine months compared to last year.

I would also like to update you on our CapEx plans for the remainder of 2010. As we do each quarter, we have gone through a detailed review of all capital projects in the pipeline to reconfirm the timing of projects. As a result of this review, we now expect CapEx for 2010 to be in the range of $70 million.

We have some important projects in the hopper waiting for the right conditions to proceed. As Bob mentioned, our CapEx is being reduced in line with our plan and previous guidance and we are continuing to focus on making investments that are prudent in light of the current economic environment in which we are operating. Pete, back to you.

Okay, thanks, Rob, and thanks again to all of you for joining us today on the call. Before I finish with our prepared comments and open it to questions, I want to briefly recap the main takeaways from today.

Adjusted net earnings came in at approximately $0.49 per diluted share for the first nine months of 2010, in line with our expectations for the period and on the back of record auction revenues in the third quarter. We are reiterating our 2010 full-year earnings guidance to be in the range of 25% to 30% below our 2009 adjusted net earnings.

During 2011, we will be introducing a number of bidder and buyer-focused services designed to make our auctions more compelling and provide our customers with increased confidence and ease, which are expected to enhance our growth. We intend to modify and simplify our administrative fee structure commencing July 1, 2011 to ensure we are earning a reasonable return on the buyer-facing services we have rolled out in recent years and in the new ones that will be coming in 2011.

The net effect of these changes to our fee structure and the costs we expect to incur to implement the new initiatives is anticipated to be incremental earnings before tax in the range of $10 million for 2011 and in the range of $30 million for 2012.

And most importantly, our business model is very much in tact. We are experiencing used equipment market conditions, primarily in the USA, that are challenging our ability to grow in the short term. This will undoubtedly improve as equipment markets return to a more balanced state. We have made important investments over the last number of years and that leaves us well-positioned for future high-margin growth.

So we remain focused on making prudent decisions to set our Company up for success over the long term. We look forward to sharing more information with you on our next scheduled call in February. Beth, can you please open the call to questions?

(Operator Instructions). Bert Powell, BMO Capital Markets.

Thanks. Pete, can you give us a little bit more detail in terms of what you mean by the enhanced services as it relates to customer finance programs? And then on the equipment information, you talked about more narrative and better pictures. Is there anything more to it than that? Is this starting to look more like a certificate of what the equipment is? Just help us get a little bit more clarity on what you mean by that?

Sure, Burt. I will take the first part, customer finance and I will let Bob speak to the equipment info. On customer finance, it is not intended that Ritchie Bros. take a position or credit risk in this. It will be much like a uShip relationship where we are a platform and we coordinate and match interested loans to interested debtors and creditors.

So you haven't gotten into a white label situation with anybody at this point, kind of back to the Citigroup days?

Well no, no. The intent -- well, even at Citigroup, that wasn't in any form us taking a risk position. But what the intent is is -- the thing that we do best, Bert, is we coordinate a marketplace and so we are going to help coordinate a marketplace. There is already a demand for loans that are coming from people who come and attend the auctions. There a whole bunch of people that want to supply loans and we just have to coordinate and assemble I guess in a coordinated manner all of the lenders to all of the interested people that are coming to the auctions and the intent is for us to create a platform for that. And that will be rolling out prior to mid of next year.

We have been playing around with this since the Citi relationship and GE came in and acquired Citi. So we have been playing with this for quite some time and we felt that now is the time to bring this forward, primarily because of customer interest and demand.

So will you be developing technology to do I guess what sounds like matching? Is that something you are going to do or is that something you are going to do, as you mentioned, Pete, with like the Uship? You bring somebody else in who has the technology and has the hooks back into the providers and let them worry about managing and spending money on that platform and you guys just sort of have it as we are endorsing this approach and we have it on site available for our customers?

Well, rather than get into specifics, Bert, let me just sort of -- to aggregate the comment and say, listen, our effort is to coordinate interested people that want loans and interested people that want to make loans and we are going to act in the middle. We are not going to take credit risk, but we will be assembling a very efficient, very effective and an online type program where people can get connected very, very quickly.

The specifics of that we are not going to speak to today, but it is something that has been in development for a little while here. So let me end with that and I will let Bob speak to the equipment info.

Sure. And I guess a similar background I guess. The reason we got into the equipment finance or getting into the equipment finance side is the same reason we are planning to provide increased and enhanced equipment information. These are just some of the number one requests that our customers have had for us for years and we have been debating internally for quite some time about increasing the quantity and quality of information about the equipment we provide.

You asked the question would we be providing like a certificate and the intention there is no. We are not looking to get away from as-is/where-is, but we do want to significantly increase the confidence level of our buyers and bidders when they are looking at the equipment either in person or online. We know that the way to do that is to provide more and higher quality and more detailed information -- providing photographs, increased number and quality of photographs was the first step. We did that this year. In 2011, we are looking to expand meaningfully the quantity and quality of information that we provide to accompany those photographs.

But it is important to point out it will not be extending to a guarantee of condition and so on. We are still very much and as-is/where-is operation. The goal here is to provide easy, easy access for our customers and give them increased levels of confidence when they are making their decisions. You have to recall here, Bert, we are still marshaling the equipment centrally. It is still on display at our yards and we are still expecting the vast majority of our customers do a physical inspection. We wanted to enhance that experience.

Okay. So out of the $78 million to $80 million in CapEx, how much is going to be directed towards these kinds of initiatives? Because you've said there are going to be costs incurred in the beginning half of the year with the revenue following later and the net for 2011 is $10 million. So I am just trying to figure out how to think about the investment that you're going to make in initiatives? I assume it is more than just what you have articulated here.

Yes, there are two sides to the investment, Bert. There will be some capital investment for certain, some software development for example. In addition, additional staff, so that is why in, I think it was Jeremy's or Rob's remarks, there was comment on increased operating expenses and I think in fairness more of the impact here will be felt on the operating expense side than on the CapEx side.

Okay, thanks very much.

Scott Stember, Sidoti & Co.

Good morning. Could you guys talk about the cadence of auctions towards the end of the quarter? Was there anything that would traditionally happen in the fourth quarter that moved towards the third quarter? I am just trying to nail down the auction count third quarter versus the fourth quarter.

You are talking about auction calendar and timing of auctions, Scott?

Yes, exactly.

No, there is nothing in particular in terms of shifting of timing of auctions in the Q3 or Q4. I am just looking over at Rob Mackay right now. He lives and breathes this every day and he is shaking his head saying -- are you aware of anything, Rob?

No.

Do you have the auction count for this year versus last year for the quarter?

Do you mean like how many auctions were in the third quarter?

Yes, versus last third quarter.

I can get it for you here, just a sec.

I mean, again, Scott, for us, we will happily hold an auction for $1 million or $2 million because for us it is a very, very effective way to introduce new people to sales. And those typically are off-site sales that are held in new regions or regions where we don't normally operate, but --

46 last year, 52 this year.

So 46 last year and 52 this year in Q3.

Industrial auctions.

Industrial auctions, not including the farms sales, yes.

Got you. Okay. And can you talk about your salesforce and how does the evolution of the salesforce play into your plans -- your strategic initiatives for 2011?

When you say evolution of the salesforce, what are you referring to? Are you talking about adds?

Yes, the adds, the adds.

Yes, well, we are still on the same path. Our goal is to keep growing and keep hiring good-quality sales guys and give them the tools they need to be effective and be productive. So that hasn't changed at all. We are just kind of carrying on. What we will be doing is I think getting better in raising our bar on a process to make sure that we are acquiring good talent.

We basically have two programs when we hire a salesman and we call them TMs, or territory managers, that are sort of the front-line sales guys. We also hire in young people, tend to be young people that really don't have as much experience in our industry and we go through a very regimented specific training program we call TTMs, or territory manager trainees. We will probably be focusing a lot more on the trainees as we go forward with more structure and more behind that program. But as we go forward for us, it is -- we understand the importance of quality people. It's like any business. You can't run it without really, really great people and we are very blessed to have some amazing staff with us and we have got to just keep on building on that as we go forward.

I wonder if implicit in Scott's question isn't a question about whether or not these new strategic initiatives are in some way replacing our existing initiatives. And the easy answer to that is no. They are very much in addition to and enhancements to, but we are still motoring on, adding salesforce, adding sites to our system. A lot of the things we have talked about in the past in terms of growing the core business remain unchanged.

I think as Rob Mackay said in the prepared remarks, we are extremely comfortable with our business model and its position and the foundation we have built. We love the way we are positioned as this market returns to more predictable and traditional patterns. So we are continuing to fuel that system. What we are doing today really is announcing a number of strategic initiatives around the side of that, which we think will allow us to attract even more customers and do more business.

All right, just a last question. The salesforce additions for 2010, are we still in the 5% increase range?

I think we are at 4% year-to-date.

Tracking 4% right now.

Got you. Thanks a lot.

Jamie Sullivan, RBC Capital Markets.

Hi, good morning. A quick question just on the earnings guidance. It looks like with what you are saying, that implies something in the $0.12 to $0.16 range for the fourth quarter, is that right?

We actually aren't giving guidance on that specific level on the quarter, Jamie.

Okay. So you are saying down 25% to 30% this year.

For the full year.

You had $0.89 last year and $0.49 -- $0.87 last year and $0.49 year-to-date?

We are saying down 25% to 30% for the full year.

From the $0.87 --

Adjusted net earnings.

Yes, okay. And so that math implies $0.12 to $0.16, if I am doing that correctly.

I will trust you.

Okay, great. All right. And then just a follow-up on the buyers fees. I am just wondering about the timing of the initiative given some of the uncertainty in the market. You have talked about some of the contractors and the buyers having a heightened level of competition for a smaller number of jobs. You have rising equipment prices and it seems like this would be an additional cost to the contractors. So I am just wondering what your confidence is that you will be able to do this without any disruption to your marketplace.

Jamie, it's Bob. I will take a first crack at it. I guess if we just sort of threw a fee out there with no additional value being added, we would be a victim of what you just described, but we are trying to take quite a different approach. We are launching this bundle of new services. Through the first half of the year, we are going to start charging people for it. Essentially by the middle of the year, we are looking to put the value in and then ask people to pay for that, as well as what we have been providing over the last few years without increasing fees.

So I appreciate your question. We were extremely careful in structuring this program to avoid exactly that. We think that we are adding on an extremely high level of value for our buyers. It is responsive exactly to what they are asking for. Our belief will be that while we are already providing a higher value than other channels, we are about to ramp that up materially and we will now be starting to charge a fee that puts us in line with the kinds of fees that the other channels are already charging. So I think your question is excellent. I think we have tried to address it in terms of the quality and quantity of services we are adding, as well as the timing of the fee itself.

Okay. And then just one last quick one. On the direct costs in the quarter, it looked like there were about the same number of auction days as last year even though you had more auctions, so you can see the benefit of the timed auction lots and some other things. But direct costs were down about 8% year over year. I was just wondering have you found some other costs to trim in the operating of the auctions that you have seen some benefits from.

The easy one to jump on, Jamie, was the answer you gave us, which is TAL. The time to auction system has allowed us to sell more lots in fewer days, which is clearly an initiative that has driven the value. I think that is probably the only one that has really moved the needle. There are other things that we have been doing because we have been focusing on operating efficiency for quite some time. So I am really proud of our guys for what they have pulled off there. That is a great statistic for us, especially at a time like this when we are working hard to find everything we can to sell. It is great to see the operating efficiency kicking. But in terms of easy to point at things, I would suggest the time to auction lots is the big one. Rob, do you have any other thoughts?

It's Rob McLeod. Probably the only other factor is having a better view to the size of the auction. At this time last year, probably we were, at individual auctions, we were expecting those auctions to be bigger than they turned out to be and we may not have been doing as good a job planning the costs for that, for a smaller auction. Whereas now we are much more in tune with what the eventual size of the auction is going to be. So we're probably doing a better job of planning the cost for that size of auction.

Okay, great. That's helpful. Thanks very much.

Hamzah Mazari, Credit Suisse.

Thank you. Maybe if you could just touch on your at-risk business and how much of a contribution that was to the quarter, and how aggressive you are being there and what we can expect in that business going forward?

Sure, you are talking about the percentage of our GAAP in the quarter that was at-risk versus the aggregate?

Right.

I think there was nothing unusual in the quarter. I think it was in the 20% range, 20%, 25% range, which is pretty consistent with prior -- Rob is looking up the exact stat.

22.5%.

22.5. Hey, how about that? So it is right in the right range. I think Rob Mackay's comment during the prepared remarks being that yes, competition is heating up and for sure we are prepared to step up and do what we need to do to get the business, and we are not being shy about that in any manner.

That may result in more at-risk or not. Really it depends in the end on the owner. We offer him the alternative of taking a risk or at-risk or not straight commission deal, one or the other, and whatever suits his comfort level is what we try to aim our services towards.

So even through the last quarter with the increased competition that we did see, we are still only at 22% odd of at-risk versus the total. Rob, do you have any comments?

Yes, Rob Mackay here. We are aggressive out there on deals today and there is lots of people chasing it. And as we experienced in past economic downturns, you follow the market down when the recession is starting and then you follow the market up as we go back to more stabilized pricing.

And today we are competing on lots of deals with individual brokers, with dealers, with many others out there in the industry. And each and every deal that we write, and each and every auction that comes along, there is continued surprising events as to what the market eventually produces.

So pricing has been inching its way back up and it has been accelerated on the late-model, low-hour stuff, so we are pushing on the deals out there and we are as aggressive as we can be.

It's ironic, though -- I just have one more comment -- ironic that one of the challenges we face is because there are some owners out there that are perhaps sitting on idle equipment, bidding on jobs that they might not get, there are still lots of people bidding and margins are relatively thin.

They have lots of time on their hands, and when they see the market increasing and pricing they get a bit more comfortable and they believe well, why would I pay Ritchie Bros. a fee to go and sell it for me? I'll do it myself because the market is a little higher now.

What they end up doing is they're selling into a market that is increasing, but they only peg it at a certain point in time. And inevitably, when we get a chance to get the iron and bring it to market, we are still exceeding the expectations, the elevated expectations of some of these equipment owners that are surprised to see the pricing where it is.

So you hate to see it happen where you see a bit of leakage in the market where some of the owners are selling it themselves because they have the time of their hands. But they are still walking by some significant value if they don't access that global market.

So part of our marketing effort for sure and our sales guys effort is to make sure that they understand the impact we can bring and the global value that we can bring to the table when we do the business for them.

Okay. Then just it seems like things haven't really gotten worse, but things really haven't gotten better in the used equipment market besides pricing moving up. What kind of catalyst are you guys looking for for this to turn, particularly in the US? And then maybe frame for us your operating leverage when this thing turns around. Thanks.

It's Rob here. I will answer the first part. You know, what we are looking for is number one, predominately in the US market, is stability. There is a lot of our customers that are waiting to see what happens today, and a lot of them are going to take comfort in the results if it goes their desired way. Or if it goes another way, they may free up their surplus equipment.

So number one in the US market is some confidence returning to the market. And from that will there be more work that comes off the market and will this launch people into freeing up their surplus equipment and starting to trade and buy new or move on.

Other parts of the world we are starting to see the economy return to more stabilized level. Asia, Australia, that part of the world is rolling along quite nicely. Commodity prices are stable and strong, and so lots of activity going on in the mining side of the world all over the place.

Europe is emerging out of it relatively slowly. Manufacturing has increased somewhat, but a lot of the production that is coming out of the European manufacturers is going out of Europe to Brazil, India, and China. So the increase that we are seeing in some of the manufacturing levels there is not being sold domestic. But there is a more calming return going on there, and the biggest issue for us right now is the US and the confidence in the market.

The second half your question was on operating leverage. I will quickly address that. We sort of anticipated a few years ago that we would be doing more volume today than we currently are. So we already have in place the systems and the people and the facilities to do significantly more business than we are at today.

Our view is that during the last several years we increased our market share meaningfully as the market shrunk. We did not, which implies a nice jump-up in our market share. Our plan, our goal, our hope, is that we will maintain that share as the market comes back to more familiar levels.

In terms of our capacity alone in the auction site, our network of sites, we have added meaningfully to that capacity in the last few years while our sales have not been going up. So we have significant capacity which is a real treat for us.

Staffing wise, both on the support side and on the sales side, we definitely have the capacity to handle more volume than we are currently, handling, so we have quite a bit of leverage right there. And the processes and systems that we have laid down and built over the last few years, it is a bit boring to continually say we are laying the foundation. But, man, we have laid an excellent foundation and we are more than ready to handle the volume. So the leverage I think will be quite exciting. We're certainly looking forward to it. As I say, we are currently built to do more volume than we are doing today.

And Bob, I will just add one comment to that. It is Rob McLeod. Over the last couple of years, although our gross auction proceeds have been flat, the number of cosigners, bidders, buyers and the number of lots that we have been processing as an organization have been increasing significantly. And so if you use that as a measure of leverage, we have been doing pretty well in terms of our performance. But granted, for sure, there is capacity in the system for additional growth.

All right. Thank you.

Scott Schneeberger, Oppenheimer.

Thanks, good morning. I guess a couple questions. First one, when you mentioned that you are increasing marketshare, how do you measure that and is that North American-centric, is that global? If you could just give a little bit more color on the granularity there?

Sure, Scott, it's Bob. The way we go at that marketshare comment, and it really is a high scale global one. We look at two components in particular. One is the value of the equipment and the other is the number of transactions. By any measure, our statistics or others, the value of used equipment has been coming down over the last two, three, four years. We would say it has probably been going up this year, but if I was to look at pricing today compared to three or four years ago, it is down meaningfully. And when you are in a business like Ritchie Bros. where you earn a commission, a decrease in the value of what is being sold, I mean that shrinks the market. So the value has been going down.

At the same time, if I pay attention to equipment financing data, particularly US-driven data, which is more readily available, there is good evidence to say that the total volume of transactions has also been shrinking. And I have seen people talk about total shrinkage of transactions anywhere from 20% to 30% over the last two or three years. Again, I think picking up a little bit this year, but if I add a 20% or 30% drop in transaction volume, plus -- I will let you pick the number for the amount that the equipment values have come down -- it is easy to get to a total market shrinkage, if you like, value of used equipment transaction shrinkage, 30%, 40%, 50% at a time when we have managed to maintain essentially flat sales.

So arguably we have had a significant, perhaps even doubling of our marketshare, very large numbers. I couldn't support them on a court of law if I had to, but using the best information and analysis available to us, we come to that conclusion.

Thanks. And then it sounds very top-down and I get it all. Do you -- survey-wise, anecdotally from the bottoms up, are you hearing -- I mean obviously you see competitor pricing, but from a different types of competitors, but anything anecdotally from the bottoms up that you can share on that front?

You are absolutely right; it is very much a top-down thing. There is nobody that does field research in this area. So the best we can do is talk to our own field teams who live in that marketplace and what they are seeing would support the same analysis. It is not possible to put pennies and dollars on it, so it is easier and I think more appropriate for us on a call like this to talk at a high, high level.

All right, thanks. Fair enough. And then on the pseudo-guidance for contribution on the new fee structure for 2011 and 2012, $10 million and $30 million incremental. Just to clarify, that is on a consistent GAAP level in the next two years with 2010, making that assumption obviously and is that all on the fee structure? Is there some of this financing business for you where you are the matching partner? Is that contributing to that as well? And then kind of the follow-up there is I assume that that is going to be a profit center, the financing matching, but if you just speak to that a little bit. Thanks very much.

Hey, it's Rob McLeod. Yes, the financing and the other bundle of services will be net positive, but really the majority of the benefit comes from the revised administrative fee. And also, not surprisingly, the majority of the additional costs, G&A costs and some capital costs as well relate to the revised administrative as well and the enhanced information, equipment information that we would be providing.

Scott, it's Jeremy. Just to confirm the first part of your question, it does assume a consistent GAAP level with 2010.

Okay, thanks. And just to clarify that, so it is predominately the administrative fees makes up the bulk of the $10 million and the $30 million?

Well, let's be really clear here. There is a whole bunch of costs and also some revenues, so the $10 million and $30 million are net numbers and the number one additional revenue piece is the fee, but the costs relate to the entire basket of services that are being rolled out. The fee is the one main way we are going to be earning revenue to cover the costs and I guess receive payment for the value we are creating. So it is important to think here for a second, Scott, that the $10 million and the $30 million are very much net numbers.

Okay, I understand. I got that. That's helpful, guys. I appreciate it.

David Wells, Thompson Research Group.

Good morning, everyone. First off, on the new fee front, does that change your longer-term expectations for your auction revenue rate where maybe you can be more aggressive? Give up a little bit to the seller because you are getting it on the buyer side?

It's Rob here, Rob Mackay. People are aggressive. I don't think there is a requirement to be more aggressive on the consignment side. Our auction revenue rate varies from year to year depending upon our underwritten business and we will continue to be aggressive on that side of the business when and how we need to be. And the fee that we are charging now is for a bundle of services that we are providing to the buyer side, which should enhance more buyers coming to the auction and by way of that, greater selling prices at the auction.

So you don't feel like that moderates the 9.75 to 10.25 range that you have discussed previously?

It is not anticipated to.

Okay. That is helpful. And then jumping to what you are seeing in the marketplace currently, I am just trying to get a sense of if the auction calendar in the third quarter was relatively unchanged on a year over year basis and yet you reported gross auction proceeds kind of near almost 2008 type levels, and you are looking into Q4 and seeing that you are going to finish up the full year probably closer to the low end of your range, what is it that is going on right now in the marketplace that is contributing to some of those headwinds that maybe you didn't see in the third quarter that helped contribute to the stronger quarter then?

Rob here again. It is pretty much the same stuff we have seen for a while. In Q3, we started to see some I guess cracks in the armor, if you will, and we have had a lot of people that were sitting around and we had this overhang of supply that was there because, 12 months back, the market pricing was so low, nobody was interested to move. Financed equipment wasn't going to be sold because of the debt versus the value of it. And we have slowly worked through that over the last 12 months and that overhang of supply has moved sort of across the street to still being a supply because it is idle, yet the owners of it are looking at it from a different point of view.

Some of their equipment managers have been selling off onesies and twosies and they may now have a supply of surplus that is more manageable or more desirable for them to sit on, but they are all out there bidding on work that is very competitive. Margins in it are very thin and many of these contractors have been ridden this crest trying to maintain long-term employees, to keep people employed that have been with them for a long time and they are now reaching the point that they either have to get out for cash flow reasons and take on some of this low-margin work or they have to accept the fact that it is going to be like this still for a while and they are going to lay off people and take that pool of idle assets and bring it to market.

And now that we are seeing some enhanced pricing levels, which is what we saw in Q3, we are starting to see for more and more of our midsized contractors that they are moving off of this indecision point and saying I am not going to bid work like this, I am not going to bite into my money that I have put away for the last 10 years that I have made and I am going to now let some of this fleet or all of this fleet go and when the market returns to something more buoyant, I will reenter it either through rental or I will go back to the manufacturer and start to buy new if I have got enough work on my plate.

So we have seen a fair bit of activity in discussions with customers like that through Q3, and there is lots of dialogue going on with many customers right now for potential Q4 business, but they are still sitting there somewhat in a state of indecision. And as I mentioned earlier, just focusing on the US, a lot of them, their decision I think will be effective on what happens today.

That is helpful. Then just one last look housekeeping question. Where do you anticipate your tax rate finishing up the year?

Hey, David. It's Rob McLeod. The tax rate for the full year will probably be somewhere in the range of the 30% to 32% that we had talked about previously.

Okay, thank you.

Craig Kennison, Robert W. Baird.

Good morning. Thanks for taking my question. Could you just clarify, did you say you expected an impact on the auction revenue rate for this new program?

No -- well, I guess yes and no. On a line item basis, the answer is yes. I think for accounting, some of the additional revenues are going to show up in auction revenue rates, so we will have to find a way to describe that to you guys in due course. But we didn't actually talk about that. We were talking more about a net earnings impact when we talked about $10 million and $30 million.

Got it. But you don't necessarily expect an impact on the gross auction proceed line from this action?

Well, I think there will be an impact, it will probably be a positive one. It is Pete here. And the whole purpose behind what we are trying to achieve here is broadening -- because you look at the big market and it is the $100 billion number or maybe it is $70 billion or $60 billion in a down market, but when you are doing $3 billion or $4 billion, there is a lot of business that is not coming through your channel right now. So the extensive work we do on the marketing side is to say well why not and who else is playing and how are they playing. And the reality is when you zero in and look at the emotional needs of the customers that do or do not choose to do business with us, a lot of the reasons why are around this comfort and ease.

So if we can increase our appeal to that hugely broad market that today doesn't come to our auctions, number one, because they don't even know who we are, which is unbelievable, but true. So let's get off our horse and say, hey, there are lots of people that don't even know us. And secondly, they may know us, but they have a misconception or a preconceived idea about the auction. So we have to create increased confidence and comfort for them and increased services for them.

So I expect that we will -- our whole initiative around this is to increase the number of bidders attending the auctions and when you broaden the appeal, as we have shown in real time, as you broaden the appeal of your auctions, that creates more competition, that creates firming of prices and higher prices. So I expect that you will see even more and that is the reason for the whole -- the whole reason for the initiative is to continue to penetrate more of that bidding audience today that doesn't come to the auctions and let's convince them that we can really add value on the way through here and show them and we have done that in the past and we are just about to hit the boosters and do it in an even greater way in 2011 and beyond.

So ex the fees related to those services, we are expecting no particular change to the auction revenue rate that we currently are at.

Ex the fees.

Ex the fees.

Okay, so I apologize for being dense here, but the fees -- you will get incremental from these fees and it will show up somewhere on the income statement?

Yes, oh, for sure. It will probably be a component of the auction revenue rate. So excluding the impact of the fees, if you have the auction revenue rate today, we don't expect that rate to be diminishing at all. It will be added to by the impact, the gross impact of the fees on the way through and we will give you guidance on that as we go forward. But overall we are saying, hey, the fee that we see -- or the rate, the auction revenue rate that we experienced today we don't expect to be impacted at all in a negative way.

Okay. And as long as I am asking dumb questions, I will follow up with this. If you look at the last year, your issue has not been the fee structure. That has been the one metric that has been surprisingly good. The issue has been more on the gross auction proceed line and then unexpectedly high costs because the revenues weren't what you expected and yet the strategic focus of the Board is really on that fee structure. You guys are a thoughtful group here, so what am I missing about that?

(multiple speakers). We are all jumping in at once.

We obviously did a poor job of communicating, so it is not your poor question, it is our poor script. The focus of the management team and the focus of the Board was on trying to bundle together services that our customers want. That is where we started from. Nothing comes for free though and so the fee is more a -- that is what comes out of the decision to, in particular, provide enhanced equipment information. That is a very expensive proposition. I mean we haven't described how we are going to do it, but it is not free. Our customers want this. We have just rolled out a very powerful website that they wanted putting all the additional photographs on.

We found a number of things we haven't been sort of collecting for. Now we are going to really dial it up, provide significantly enhanced services, things they have been asking for and yes, we are going to charge for that. We are quite comfortable that on balance it is a net positive for our customers and for our shareholders. This was not a -- this wasn't a let's charge a fee initiative. This was let's improve our business and if we have to charge a fee to collect for it, yes, of course, you have to do that.

And lastly, this is, as you said, a material change to your structure. Was this something you could have tested in a local market or given the global nature of your business, you really can't test a change like this on a local basis?

Yes, I think your latter comment is spot on. You can't -- it is a really good question because we did debate that. For us, it is not something that is more systemic and because we operate in such a global environment, we have an auction in Regina, Saskatchewan tomorrow and you will have bidders from all over the US and Canada and probably some offshore guys as well dialing in. So when you have got guys that are bidding in one environment for one fee structure and then another for a different one, it creates confusion and part of our whole mantra is to be transparent and open and fair and consistent and easy. And that doesn't create easy or consistent or any of that stuff.

So it really more was okay, our intent is to raise the bar globally on the buyer services and the bidder information that they can get in advance to create that comfort and ease. And to do that, we need to do this in a measured way and it has to be done in a coordinated manner.

Great, thank you.

Hey, operator, we probably have time for one more question if there is one and then we will carry on.

Gary Prestopino, Barrington Research.

Hi, guys. I have got a couple of questions. First of all, on the D&A, it jumped up pretty substantially in the quarter. I would assume that is due to some of the new sites, correct?

Hey, Gary. It is Rob McLeod. Yes, you are correct. It's the new sites and the new IT initiatives such as the website, for example, that came onstream in the second quarter. And so in the third quarter, you got a full pull, if you will, in regards to those assets and for sure as new sites come onstream, you are increasing your depreciation.

Can you give us an idea of what you're thinking that will run in Q4?

It should be a pretty similar rate because we are not bringing on any new facilities in the quarter.

Okay, all right. And then I will be real quick here. I just want to make sure, with these new strategic initiatives, the contribution that you are saying is after tax, correct?

No, it was pretax.

That is pretax. Okay, because I heard net and then pretax, so it is pretax contribution from these initiatives?

Correct. It is pretax, but it is a net number, netting the revenue on the costs associated with the new services net. So a pretax of $10 million in 2011 full year and full-year run rate I guess because we are introducing the fees halfway through the year, but the costs will be incurred earlier in 2011 as we roll them up. So the full-year impact in 2012 is a net $30 million pretax.

Okay. And then as I understand it, you are adding a 2.5% fee on -- what is that? Some admin pay for lots over what price, Pete?

Yes, so the summary, Gary, it is the fees that are in place today, 10% for items $2500 or less that are sold at the auction. That stays in place. We eliminate the 2% fee that is charged currently to people that don't attend the auction, but still want to bid and buy, so that is on the Internet or proxy and that is a 2% fee that will go away. There is a max $500 on that one. And the new fee that will be introduced to apply equally to all bidders, be they Internet, proxy or on-site, will be 2.5% of items $2500 and up, about $2500, but a cap on that fee of $950 per lot. And that $950 will be in the currency of the auction to be translated into local currencies.

So when you look at that kind of fee structure, it puts your Internet bidder at the same fee level as your physical buyer. Whereas the Internet bidder had a higher fee structure going in before this, correct?

Yes, that's correct.

Okay, so does that beg the question that you continue to get bidders on the Internet every quarter. What would be the rationale for not keeping that fee on the Internet bidders?

I think for us it is consistency and equal treatment. Today, I think the people that come to the auctions -- we still sell about 80% of everything sold is to people that are live at the auction site, so don't forget that. But the people that come to the auctions have probably an advantage because, again, you have got to look, and you have been to the auctions before, the people that attend the auctions are -- these are the people that build the world, these are the guys that are out putting up schools, bridges, and whatnot. And they run machines every day.

So the advantage that they gain in a huge way is to sit on the machines and run them and hear them and try the hydraulics and now they know what the value of that thing is because they know. They are running them everyday, so they are very familiar with it. The people that are buying on the Internet, they can get information. We will enhance the ability to get more information for them, but at the same time, they are buying it without being able to sit and run the engine and feel the hydraulics themselves. So there is an advantage to taking the time to come out and inspect the equipment on your own.

And we make that on purpose, we make that available because we believe it is significant and it is foundational for our bidders who are highly, highly skewed to the end-user population. These are the guys that sit on machines every day, so if you don't make it available to them, you put everyone at a disadvantage.

So we still intend to marshal the machinery. We coordinate it. We have care, custody, control and we allow people to inspect and test the machines. They trust their own eyes, don't trust a report. We will give them information, enhanced information, but trust your own guys and our guys appreciate that. So like I say, 80% of them that end up buying are the guys that by on-site.

Okay, thank you.

Okay, Beth, we will wrap the call up. Thanks, everyone. Appreciate your attendance and we will carry on here and we will look forward to chatting with you on our next scheduled call.

This concludes today's conference call. You may now disconnect. Thank you.