RB Global Inc (RBA) 2011 Q2 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the Ritchie Brothers Auctioneers 2011 Q2 earnings conference 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) Thank you. Mr. Peter Blake, you may begin your conference.

Thanks, Stephanie and good morning everyone. I'm Peter Blake CEO with Ritchie Brothers Auctioneers. Thanks for joining us today on our 2011 Q2 investor conference call. I'm joined today in Vancouver by the 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'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 and other items are considered forward-looking and involve risks and uncertainties. These risks and uncertainties that 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 June 30, 2011, which is available on the SEC, SEDAR, and Company websites. Actual results may differ materially from those contemplated in the forward-looking statements, and 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 be talking about gross auction proceeds, which represent the total proceeds from all items sold at our auctions. Our definition of gross auction proceeds may differ from those used by other participants in our industry. 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 revenues we earned in the course of conducting our auctions. After our prepared, which should take about 15 minutes, we will open the call to questions. All of the details of our performance are included in our MD&A, so we're going to focus on the highlights and our thoughts for the remainder of the year.

I'm very pleased to report that we achieved gross auction proceeds of $2 billion, auction revenues of $203 million and adjusted net earnings of $0.38 per diluted share for the first half of 2011. This is the largest first half gross auction proceeds in our Company's history, and growth of 16% in the first half of 2011 demonstrated that the operating decisions we made over the last two years, in the face of some difficult market, are starting to pay off. We are seeing improved sales force productivity and better operating metrics at our auction sites, and the outcome is improved net earnings and return on invested capital for our shareholders. We've also benefited this year from strength in equipment pricing at our auctions and generally improved dynamics in the used equipment market place. I'm also pleased to report that we have successfully launched a number of new initiatives on July 1. It took a tremendous amount of hard work from a lot of very good Ritchie Brothers people around the world and the results so far have been very positive. I'm going to let Bob talk in more detail about these initiatives, but at a high level, it is clear that our customers appreciate the level of service we are offering at our auctions and have not objected to our is revised administrative fee structure that helps fund the added cost of these enhanced services.

This morning, we also announced the 7% increase in our regular quarterly cash dividend. Our Board of Directors has reiterated their desire to see our dividend grow at a rate that approximates our 15% long-term earnings growth target. Though there remains some near-term economic uncertainty that warrants a measure of caution before raising our dividend either any further, the fundamentals of our business have improved, and we remain committed to returning excess working capital to our shareholders in this and potentially other manners over the long-term. We maintain a guarded optimism about the near-term future in the used equipment market.

It seems like the used equipment pricing has leveled off somewhat compared to the increases we saw in early 2011. Construction spending remains low in the United States and Europe, and is acting as a bit of an offset to replace on equipment demand, which has been a key driver of used equipment market to date in 2011, and it makes it difficult for us to be confident on the robust construction sector recovery right now. Although we feel good about the way things are going in so far in 2011, we still believe economic uncertainties in the world give us cause to reflect. With intense competition for late-model equipment and questions about the sustainability of the used equipment market, and until constructions spending improves, we believe caution is still warranted. Signs of ongoing economic turbulence over the last few weeks, and no end in sight to these fresh economic headwind created renewed uncertainty in the used equipment world. It's hard to predict how equipment owners will react to this uncertainty. In typical previous down-cycles, we have experienced increased demand for used equipment over new, and increased supply of equipment from owners re-calibrating their fleets, or lenders reacting in a more traditional manner with non-performing loans. It remains to be seen if we are in fact entering into a double-dip scenario, or other key economies in the world are contracting from current levels. And if this will in fact result in more typical behavior that we have experienced in our 50+ years in business. Either way, we feel confident that we are well-positioned to serve the market. Let me now pass the call over to Rob Mackay.

Thanks, Pete. Good morning everyone. My key takeaway see is about the market. Pricing continued to improve in the second quarter compared to last year and the first quarter of this year. We saw strong pricing across most categories of equipments at our auctions in the first half and the ongoing scarcity of supply of new and near-new equipment has helped drive that. New equipment deliveries still vary from weeks to over a year, depending on manufacture and model being sourced and these long lead-times have contributed to robustness in the used market. That being said, in the latter part of Q2 and subsequent to June 30, we have not seen the price increases that we experienced earlier this year, and it appears the price levels have stabilized somewhat. We expect the scarcity of supply of new and near-new equipment will help sustain used values, but we are not expecting the same trajectory of increases that we have seen to date this year. Competition for late-model equipment has continued to be intense, mainly because of shortages of new and near-new equipment. Dealers, brokers and other auction companies are all very active in the market.

As OEM production ramps up and lead times for new equipment shrinks, and equipment owners continue to get more comfortable with the 2011 tier-4 USA and stage 3 European engines, the market will become more balanced which should help alleviate this challenge. As discussed previously and in response to this competition, we have been more aggressive on our underwritten business. You may recall on our last conference call that I mentioned that the percentage of business that is at-risk could go as high as 40% in the early part of 2011. We ended the first half of 2011 with 36% of our business at-risk. Although it is a higher level than seen in recent periods, it reflects our current strategy rather than a change in our model. In fact, we view it as one of our key strengths. If the market becomes more competitive with more participants, particularly brokers and dealers, chasing a scarce supply of used equipment, the performance of our underwritten business has come down from the above trend levels we've achieved in 2009 and 2010. We expected this to happen, and have seen it occur in the past. It is now at a more sustainable level.

We will carry on using our balance sheet and financial strength to be aggressive on deals on which we need to be, and continue to believe the percent of our business that is at-risk in the short-term until supply and demand balances returns to the marketplace, will be above the range we've experienced in the past few years. At the end of the day, underwriting is an important tool we use and we have always used industrial auctions since 1963 to get deals. Being able to use our financial strength wisely and creatively to secure business is an important competitive advantage in which we are currently benefiting. These are the key points I wanted to discuss today. Bob, do you want to provide an update on our ongoing strategic initiatives?

Thanks, Rob. Good morning, everyone. Our main focus over the last few months, apart from growing our business, has been the implementation of a bundle of new value-added services for our customers. These new services, which include detailed equipment information, real-time auction results through RBAuction.com, equipment financing, power train service warranties, and property and cargo insurance, complement and further enhance the wide-range of customer services that we already offered. Our free detailed equipment information program, or DEI as we are referring to it, has so far been very well received by our customers and users. It's free to our consigners and free to our bidders. They can now download from our website detailed information about many of the items we sell at our auctions, which is making it easier for them to do business with us and helping our customers to bid with more confidence. Our customer finance, warranty and insurance programs have also been showing promising early success, with the financing and insurance programs experiencing higher than expected levels of activity from customers. We continue to believe that this bundle of services will go a long way to helping our customers feel more confident when buying at our auctions and will help us attract new customers to our platform. We have more work to do to complete the rollout of some of the services in countries outside of the United States and Canada, but we've been very pleased with the success of these initiatives to date and the very positive reactions from our customers.

We've also been happy that our customers have accepted the changes to our fee structure that we announced previously. We've all been on the ground at the first auctions where these changes have taken effect, talking to customers, listening to concerns and our expense has been very positive. We're hearing that our customers appreciate the new services we've introduced, as well as the existing services already offered; including our first class facilities, our flexible bidding auctions, convenient on-site refurbishing services, and last year's announced 21 language website. And they're very understanding and accepting of the new administrative fee structure. We do not believe that there has been any negative impact on our auctions, or the prices achieved at those auctions, as a result of the fee changes. Now over to Rob McLeod.

Thanks Bob. Good morning, everyone. I hope you all have seen our press release this morning. Our MD&A is being filed as we speak, so I won't go into too many details now. There are a couple of key metrics and line items I would like to focus on this morning. First, our auction revenue rate for the six months ended June 30, 2011 returned to a more sustainable level compared to last years above-trend performance, albeit it was below our expected range of 10.25% to 10.75%. As anticipated, this decrease in our auction revenue rate was driven by the performance of our at-risk business, which is made up of guarantee and purchase contracts. As Rob mentioned, one of our competitive advantages is our ability to bring our financial resources to bear when pursuing packages of equipment in a competitive environment. It is a much more competitive marketplace than it was a year ago, and we have strategically used at-risk proposals to win business and get significant packages of equipment into our yards. One of the positive results of this is a 16% increase in GAAP that we achieved in the first half of 2011, and the 21% increase in quarter 2 alone. Our GAAP growth came from a combination of better prices achieved at our auctions and a great proportion of higher-valued lots compared to the equivalent period last year. We did sell slightly fewer lots in the first half of 2011, with over 90% of that time attributed lower-value lots.

The second element of our performance that I'd like to address is our selling G&A expenses, excluding depreciation, which increased by 11% in the first half of this year compared to the first half of last year. $3.6 million of this increase was related to the foreign exchange impact of translating our non-US dollar denominated SG&A into US dollars for reporting purposes. In addition, costs related to our strategic initiatives accounted for a further $2.5 million of the increase this year. Personnel costs, including incentive compensation accruals, made up the majority of the balance. Including the strategic initiatives and foreign exchange impact, our other SG&A increased by approximately 4% compared to the first half of 2010. I wanted to emphasize that while we did incur some SG&A related to our strategic initiatives in the first half of 2011, the revenue from these initiatives has not kicked in until now in the third quarter. The vast majority of our 2011 spend on strategic initiatives will be incurred in quarter 3 and quarter 4, split about evenly between the two periods. Also, the revenue will be generated entirely in the second half of the year, split between quarter 3 and quarter 4, more or less in proportion to our business volumes. Hence, a more positive impact on earnings in quarter 4 compared to quarter 3. The end result of these factors being hired GAAP, a lower auction revenue rate, and SG&A growth has adjusted net earnings growth of 6% for the first half of this year. Jeremy, over to you for guidance.

Thanks, Rob. Good morning, everyone. Let me update our guidance for 2011. We are reaffirming gross auction proceeds in the range of $3.4 billion to $3.8 billion for the year, though we are currently tracking towards the upper end of that range. We've had a strong year-to-date and we are pleased with the results. However, as Pete mentioned, caution is still warranted so we're not going to make this range anymore precise for the time being.

We continue to expect auction revenues in the range of $385 million to $415 million for the year. This range includes estimated incremental fee revenue of $25 million in the second half of the year from our expanded administrative fee that took effect on July 1 and will be recorded in auction revenues. As a reminder, our current expectation for the incremental revenue benefit of this expanded fee on a full-year basis in 2012 is approximately $50 million. Our auctions to date since July 1 have confirmed that this is a reasonable range for the expected impact of the amended fee structure, and we will provide further updates on our next call when we have more auctions under our belt.

We expect our action revenue rates for the full-year in 2011 will be at the bottom end of our expected range of 10.25% to 10.75%, excluding the expected impact of the incremental administrative fee revenue in 2011. As always, our actual performance of future periods could be above or below this range, depending on the performance of our at-risk business and other factors. We're still tracking towards incremental SG&A costs associated with our strategic initiatives in the $15 million range for this year, with corresponding revenues of $25 million, resulting in incremental pre-tax earnings of $10 million in 2011. Some of these are one-time costs, but the bulk of them represent a step-up in SG&A for 2011 and future years. So far we have incurred costs of roughly $2.5 million, so the bulk of these costs and all of the revenue will kick in, in the second half of this year. Based on currently available information, the annual run rate for this incremental SG&A in 2012 should be approximately $20 million. We continue to believe adjusted earnings before tax will be at least 10% higher than last year's earnings before tax. Actual results could be above or below this range, and in the near term there remains uncertainty, so it is difficult to forecast with any precision. Our long-term target remains annual adjusted EPS growth of 15%, while maintaining an average return on invested capital of 15% over the long-term. And we will provide refinement in our guidance on future calls. And now back to Pete.

Okay, thanks, Jeremy. Before I leave you with some concluding remarks and open the call to questions, I'd like to comment briefly on some people-related developments this year. First, is our sales headcount, which contracted by about 5% during the first half of 2011. This is in part a result of our decision to slow our sales force increases and allow GAAP growth to catch up with territory manager addition we've made in recent years, and partly attributable then higher than normal turnover, both voluntary and involuntary. Were not seeing any particular trend that causes us concern and do not believe this modest contraction of our sales force will have any impact on our ability to grow our GAAP in the future. We also expect to correct this situation before the end of the year.

The other people change I'd like to highlight is our efforts to update our organizational structure to better align with and support our strategy. We announced these changes internally in July, and the new structure will take effect on January 1, 2012. A key component of this new structure will be the creation of a senior leadership team, comprised of me and the 6 senior leaders who will report directly to me. This team will be responsible for our strategic direction and will include the newly created positions of Chief Sales Officer and Chief Strategic Development Officer; as well as that our President, CFO, our newly recruited Head of Human Resources, will become our Chief People Officer; and our Head of Marketing who will become our Chief Marketing Officer. I'm very pleased to announce that Bob Armstrong will be stepping into the Chief Strategic Development Officer position. Rob Mackay will may remain our Present and will be taken over many of Bob's operational responsibilities. Steve Simpson, who is currently our Senior VP for the US west will be promoted to the newly-created Chief Sales Officer position and will take-on Rob's sales responsibilities. These are all exciting changes that we expect will help sharpen our focus and set us up for further success in the future.

Another important change to take effect on January 1, 2012, will be the re-allignment of our sales and operations teams to allow our sales leaders to focus entirely on the development and productivity of our sales teams. We will be creating senior operations roles to work closely with our sales leaders, to look after all aspects of our operations and administrative duties. We expect this evolution to create clearer reporting lines and increase our sales force productivity as well as improve our employee engagement and management bench strength. The projected costs for all of these initiatives are included in previous strategic spend guidance that Jeremy mentioned earlier.

To conclude, we believe the fundamentals of this globally equipment market have improved in recent months and we are very pleased with our results to date. We remain cautiously optimistic, and believe we are well-positioned to meet the needs of our customers, the builders of the world, and help them easily and confidently exchange their equipment. That being said, there is still reason for caution, particularly with ongoing economic turbulence in the United States and Europe. We are confident about our ability to continue to execute our strategy, though it's hard to predict how recent economic developments will affect our customers behavior when it comes time to selling their equipment assets. Stephanie, can you open the call to questions?

Certainly.

(Operator Instructions)

We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Hamzah Mazari from Credit Suisse. Your line is open.

Good morning; thank you. A couple of questions -- the first one is, are you guys actually seeing any change in behavior right now from your customers? Or are you just assuming that you may see it in the second half, because of renewed uncertainty in the macro? And that's why you're leaving your guidance how it is? Is that fair, or how should we think about that?

It's Rob Mackay here.

We have seen a change in the behavior of our customers in the first half of the year, where many of them have moved from a stage of uncertainty to a stage of willingness to move some of their surplus equipment based upon the increased market value that's out there today. Whether or not that will continue with the balance of our customers and other customers we're not doing business with yet -- to move them from the uncertainty state to the transition of selling, is a question mark that still remains to be seen. The biggest driver in the US remains confidence -- lack of confidence -- and uncertainty that our customers have in the market place. And then the quantum of work that's coming up. And so, pricing levels have increased to a level that is interesting to more owners of equipment to now move their market; but still, many of them are uncertain as to whether it's time to sell now, or wait and see for more work coming down the pipe.

Thanks. And then, second question on your address business -- it seems like that's going to continue to be higher going forward, given the scarcity of late-model equipment and the competitive dynamic that you guys are seeing. Maybe if you could help investors understand the impact of that at-risk business, and the dynamic of that business, and how that impacts your auction revenue rate, both in an up-cycle and down-cycle?

Sure. As we go into what would be for us an up-cycle in activity -- more prices raise, people that have retracted from being aggressive or taking on risk in the marketplace in the previous downturn -- i.e., dealers and brokers -- if they come back to the marketplace willing to play, willing to risk their money; and as the market increases and we see pricing increasing and more people having a willingness to sell, everybody jumps on the bandwagon chasing deals. And that results in more competition -- sharper pencils, if you will -- and deals that may have, in the end, lower margins than anticipated. As you work through that cycle, and the buyers of the equipment that took on the risk turn around and sell it and realize thinner margins, they become more cautious.

We've seen good price increases in the first half of the year. It's now leveled off, and many of the players out there that we compete with have experienced the ultimate outcome in what they've risked their money on. And some of them have made decent buys, and some of them have had very thin margins. So they start to curb their appetite for aggressiveness on risk fields, and I believe we are in that period right now. So we saw very aggressive competitive market in the first half of the year. There's probably a leveling of aggressiveness, which in turn will affect how much risk you have to go after, and how competitive you have to be for the balance of the year.

That's very helpful. And last question -- are you guys seeing any change in foreign buyers at your auctions, and how much is going overseas? If you can comment on that, thank you.

Yes, Hamzah. This is Pete.

We saw increasing interest from foreign buyers, largely as the result of 2 reasons; 1 being supply of equipment that was there and they needed it; and 2, was the US dollar being where it was. So I think the buyers are pretty astute. We haven't seen a dramatic rise over the last 3 months, although we sure have seen over the last, probably 18 months, an increase in foreign buying -- out of the United States, when I say foreign buying. Lots going to Canada, lots going to South America, lots going to Australia -- which is not surprising, because, you know, Canada, Australia being commodity-based economies and the currency being stronger, that's where the equipment is needed.

Ultimately it's still a global marketplace, our job is to make sure that we create a platform where global participants can play. We've seen a significant -- I would call a significant increase in non-English visits to our website, because we could track all that stuff. We've got lots -- our web stats are going very, very well. We are extremely pleased with the activity of users that are coming to the site.

We've seen a real marked proportionate higher increase of the non-English visits to the website; and that will ultimately translate into that comfort that we talked about, with them being able to get more equipment information through the DEI and other services that we provide. The comfort that they have knowing that equipment has been centralized and it's all in a secure yard, so they can buy it and know that they can coordinate shipping through our service or through their own. We've talked to lots of foreign buyers, and they say that's a big, significant comfort level that they get when they're buying equipment, because they've dealt with us in the Middle East, or in Australia, or wherever it may be, and they know that we're looking after their interests.

Thank you.

Your next question comes from the line of Yuri Lynk from Canaccord. Your line is open.

Hey, good morning, guys. Question for Rob Mackay. Last quarter, you mentioned you thought that the at-risk business would decline throughout the year, from -- I think it was 32% in Q1; it's now 36%. So -- has the market become more competitive than you originally thought, causing you to continue to go out and be aggressive on the underwritten business?

I'm not sure that's exactly what we talked about, Yuri. We talked about on our last conference call -- the question was asked, how high could your proportion of risk business go? And our response was -- we could see it bump up to the 40% mark, which would be quite high for us, based upon historical averages. And, as a matter of fact, it has grown through the first half of the year, to levels that we traditionally haven't seen. So the competitiveness of the market that we predicted was in fact there. The aggressiveness that we had to be, on the deals, was there; and as a result, the proportion of our at-risk business grew as we anticipated.

So, asking the question another way -- is Q2 versus Q1, and what you're seeing now -- is it kind of steady state in terms of the level of competition; or do you see any of that beginning to abate?

I think it's flattened right now. Our feeling is that prices have reached a plateau, and as a result of that, you're going to see the aggressiveness and competitiveness on deals perhaps also plateau. Because the upside that everybody was anticipating in the pricing side of it may not be there anymore. So could it dissipate a bit? It's very possible. Typically, the last half of the year, based on what we've done in the first half -- it's our feeling that it should go down somewhat -- our proportion of risk.

Just trying to get a handle, better handle, on the performance of your underwritten business in the quarter. You did mention that your used equipment prices have sort of leveled off. Does that help explain the performance of the at-risk business? Maybe you were more aggressive in underwriting business, expecting prices to continue to increase, and it didn't happen -- or am I reading too much into that?

Sure. Well, much of the business of course in Q2 that was underwritten, was done so early on in the quarter. So stuff that we sold in June may have, in fact, been written in May. So during the early part of Q2, we were seeing a continuing price increase through the early part of Q2, the middle of Q2. And then, basically, all the risk deals were already in the hopper and signed, anticipating that this price increase was going to continue somewhat. And then we saw a flattening -- or since the flattening of it towards the end of June; and then reality saw a flattening at the end of June and in early July so far.

Thank you. I'll turn it over.

Your next question comes from the line of Steve Volkmann from Jefferies. Your line is open.

Good morning. I have 1 quick question, maybe for Jeremy, just to make sure I understand this right. We're looking for the auction revenue rate to be 10.25% to 10.75%, excluding the new fee structure, and so forth. And am I just reading this right that, that will actually slightly depress the revenue rate?

The new fee structure will actually increase the revenue rate, because it's an incremental auction revenue. So it should result in a blended average rate that's slightly higher.

So you have increased revenue, but the costs are below that, so more down than the SG&A line or something?

That's correct.

Got it, okay, that's what I was looking for. Thank you. And then, I have a big picture question, maybe this is for the Chief Strategy Officer, I don't know. But, I wonder about the shift that we're seeing in the US and parts of Europe to the new Tier 4 engines; and I'm wondering -- we've talked a little bit already on this meeting about how the international business is so important. What happens down the road when we have much more Tier 4-compliant business, but folks in the emerging markets probably don't want to pay up for the Tier 4 product? Does that change the mix of how you're going to be able to reallocate equipment around the world?

It's Rob Mackay here.

That's a very big discussion point today, amongst everybody in the industry, including the leading contractors in the US, us, our customers. It's hard to anticipate what will happen in the next recessionary period. In a marketplace that only operates Tier 4 engines and other markets of the world that want something other than Tier 4 engines. So manufacturers will be producing Tier 4 engines for the North American market, and Euro 3-4 engine for the European market. But also they're re-manufacturing equipment with Tier 1 or Tier 2 engines for Asia, Africa, and other parts of the world. So it very much could be that Tier 4 engines in the future will have a more limited disbursement, or area that it can be re-sold in. But the population of Tier 2 and Tier 1 engines will still have to grow by the manufacturers to support the emerging markets who won't have the availability of fuel for Tier 3 engines in the near-term.

Steve, it's Pete here too.

Rob's right. It's really a topical question that a lot of guys are trying to theorize about. No one will really know in the end. But I think what the bottom line is, is the importance of having a global selling channel will be even more relevant for people that have equipment. And there is a ton of equipment out there, so it's going to be years and years and years until the Tier 3D and the Tier 4 engine, US [mark] Tier 4 engines really become more prominent. And Canada, as an example, will be switching to that same level of EPA equivalent requirement next year. So countries will start to adopt -- like in the US where California sort of sets the lead for some of the engine emission and environmental issues -- that will happen over time, so there's a bit of an evolution.

If you've got less than Tier 4 engine product in your fleet, you can re-sell it with the local market, but really the big buyers may well be further flung. And if you can't get access to those markets, then you're not maximizing value. So we think that plays well into what we provide to consigners in terms of the marketplace that does attract the global buyer, that does attract the global pricing. And it does facilitate ease of use in an environment where you must have care-custody control of these assets in order to create comfort for people to want to buck-up the significant dollars that they do to buy into. It's change. For us -- change has traditionally been very, very good for us. Because change create a transaction, and we are basically a transaction platform. So as that change continues to filter through the marketplace, that usually and predictably would be a good thing for us in the long-term.

Okay. Good -- at least I'm asking the right question. (Laughter) Do you have a sense of the average -- this probably not an answerable question -- but the average piece of equipment that you guys transact -- is it 5 years old? Is it 7? Is it 3? Does it not even make sense to ask that?

No, it's a good question, Steve. It's Bob here.

Last time I read numbers on that, 50% of what we sold was between 3 and 7 years old. I wouldn't be surprised if it's somewhere in that range still. So kind of the meat of your order is that 3-, 4-, 5-, 6-, 7-year-old machine. And then probably the second biggest chunk would be older than that. And as I think was commented earlier, while we love selling the late-model gear, there's just not as much of it around, because they didn't make very much of it.

Okay. So it'll be that long before you start to see any of these Tier 4 things anyway, I guess?

Oh, for sure, yes. I think, traditionally, people don't usually trade out of a new asset until at least 3-, 4-, 5-year mark, traditionally. And as you were talking about, very like broad averages and broad proportions here. It's like a new car syndrome -- somebody will buy a new car and run it for 3, 4, 5 years, maybe, and then trade-off and buy another brand new car. It's the same kind of selling and buying behavior that you get within the equipment markets as well.

Okay. Thanks for your help.

Your next question comes from the line of Bert Powell from BMO Capital Markets. Your line is open.

Thanks. What's the dollar value outstanding, in terms of what you've committed to for underwritten, or equipment that you would have purchased outright to put into auction for the balance of this year?

It's I think -- in our MD&A, our commentary was that by the time of this call, we will have sold approximately 60% to 70% of what was on the books at the end of the quarter.

Typically, though, I think in the past you've disclosed in your financials, and I haven't had a look at them -- what's sitting there outstanding to come?

Sure, yes. Yes. It is --

Rob's just looking through his financials right now, Bert.

It's still there, and it's in our commitments notes. And -- sorry, I'm just getting to there -- and what we disclosed was our guaranteed contracts. And we had $25 million outstanding at June 30.

Okay.

Compared to $7.8 million at December 31, 2010. Oh yes, the inventory balance at June 30 was about $40 million. December it was about $26 million. March was about $60 million.

Okay. I'm trying to get back to the comments that Rob made, in terms of stuff that you would have sold in the June quarter would have been stuff that you would have had 60, 90 days commitment into that. I'm trying to get -- at the high end of the guidance range for the balance of the year, it would imply GAAP of $1.8 billion. How much of that would be stuff where you would have committed capital to that? What percentage would that be?

As of right now, Bert?

Yes.

Oh, very little.

Very little? Okay.

Yes. Lead time is not that long.

Okay.

I think our average is like 40, 50 days, for a typical guaranteed deal.

Okay. And then I wanted to move to the fees or the revenues associated with the enhanced fees. The $50 million, as I recall, was kind of a back test on 2010 activities. And given what we've seen going forward, and the guidance that $50 million is still kind of the outlook for 2012 -- that seems a little bit conservative to me, given an expectation of renewed health in your industry.

Hey, Bert, it's Rob.

That $50 million was actually based on our volumes in, really, 2009; it was based on volumes of about $3.5 billion of GAAP. But also it is a few moving pieces in there; 1 being the average value of what you're selling, because there's a cap at $950. In addition, it is related to the volume of purchases on the Internet, because we're no longer collecting that fee. And so when we talk about the incremental revenue, it is -- also obviously includes what you've lost in the Internet fee. We seen a pick-up in the last 6, 12 months, in Internet purchases. And potentially you'll see that, here in the second half of the year, people are perhaps having a little bit more incentive to buy on the Internet, because there is no different fee structure.

Did you back-test against the first 6 months of this year?

You bet.

Okay. And so the $50 million looks consistent against that on a run-rate basis?

Yes. We haven't changed the $50 million.

Perfect. Okay. Thank you.

Your next question comes from line of Nathan Brochmann from William Blair. Your line is open.

Hello, guys. Actually, this is Paul calling in for Nate. Thanks for taking my call. I got a few questions related to the new fee. And I understand there's a couple moving parts, but do you guys expect it to scale? Let's say if GAAP goes up 10%, would you expect the fee to go up 10%, or will it be on a lower lever?

Hey, Paul. It's Rob.

There would be some pretty close correlation to that. Don't know whether it would be exactly that because of those moving parts and the average price of what we're selling and what shows up in our yard. But there will be a relatively close correlation to it.

Okay, great. And will you guys be breaking out revenue collected from the fee, going forward?

On our financial statements, we won't. It will be included in our auction revenue line, because it is directly related to what we're selling. Just like how we do now with the fees that we do -- that we currently collect. But for 2011, and into 2012, we'll be updating you on our confirmation of the -- achieving our expectations. We won't break it out.

Great, okay, I understand. Thank you. The other thing I'm curious about -- and if my math is correct -- that your auction revenue rate for the first month 6months of the year is just a tad over 10% -- a little bit below the bottom-end of your guidance. So is that to imply that Q2 2011 is the low point of the AR for 2011 for the base business?

That's what we're anticipating. But again, we have in our commentary here, you heard the word caution and uncertainty a few times.

Paul, it's Bob, I'll jump in here.

Whether it's a low-point or not, I guess what we do when look at each quarter coming up, we don't know how that quarter's going to come out. So there's no change in particular that takes us off our range; so we're expecting Q3 to be in that 10.25%, 10.75%; and we're expecting Q4 to be 10.25%, 10.75%. And if that's the case, then in fact looking, Q2 will have been a low point. But it's quarter by quarter, and we just don't know. There is nothing structural happening right now that has us moving off our range, so we are reaffirming that. But the reality is, the first half has come in at the lower end or below, and so we have no choice but to say the full year probably comes in at the lower end. That's just math.

Also -- perhaps it's off your question, but it's an important point to make in it. -- We're not moving off our aggressiveness in terms of deals. We are going after the equipment and going after the deals. We're continuing to be aggressive.

I understand. I was wondering if something came in to the direct expenses for them to take up 30 basis points as a percent of GAAP sequentially?

Oh, you mean Quarter 1 to Quarter 2?

Yes.

I think that Quarter 1 is traditionally a little bit lower, partly -- which is really due to the Orlando effect. Because Orlando is such a big auction in Quarter 1, and a relatively small quarter; and it's a very efficient auction, if you will. So your Quarter 1 DU rate generally will be lower.

All right. Great. Thanks for your time, guys; I appreciate it.

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

Good morning. With pricing flattening out in the back part of the quarter and so far in July -- have you seen any changes in the level of equipment that's been coming into your auction so far this quarter?

Too early to tell, I would say. Early on in the quarter, we're in line with what our expectations are in the auctions to date. And for the balance of the quarter, some of our sales are looking a bit stronger, and some are looking at little bit thinner. So the combination of it may be flat. There's still a lot of activity out there from the point of view of discussions with our customers; and the number of appraisals, the number of deals that we're looking at is up. Question is how, many of those will you get ink on, and how many of them convince the owner of them to sell?

I think the people now realize that there is some flattening to the prices, and it's going to affect some of their decisions. But there is a lot of uncertainty out there, as we've heard the news lately; and that side of it makes a lot more people interested to react, because it's slowed, or perhaps leveled some of their upside in their views of what could go on in the rest of the year, and it may be the catalyst now for them to decide to sell.

It's almost ironic, but in some cases, some respect it's helpful -- it helps push people into a decision about -- if they're not seeing the same trajectory of pricing going on. So they know that -- the negotiations, from our perspective, become a little bit easier, because there is more certainty and more consistency in pricing. And if they see some uncertainty economically going forward here, it might lead them to create a different -- or cause a different end result rather than sitting on their equipment. It's like we talked earlier, with Steve Volkmann -- typically, we're a transaction platform, and change is good for us. So changes that occur in any kind of instance, typically are very good for us. It was a weird experience we had through 2009, 2010, when there were sort of economic massive pause button put on, most economies around the world became unusually and difficult to react for many businesses including ours.

Great. And, last question about the sales force. Last year, I know you guys have put the brakes on adding, and were working on productivity and making sure that the guys that were there were learning how to sell better. Can you talk about the productivity of the sales force, and what you would expect for the balance of the year?

That's a tough question to answer. We're still in the mode of making sure that we're replacing guys that, if they voluntarily or involuntarily decide to move along, then we're backfilling and chasing. One thing we're sure noticing, is there's a lot of really, really good people out there in candidates. So we're focusing on a strategy to make sure we go in higher. And typically, we would focus more now on what we call a TTM, or a territory manager trainee; somebody who may not have deep equipment experience, but they're very bright, they're usually college-educated; and we train them in the way of Ritchie, and then put them to play into the market. So we've got a very structured training program around that's been very, very successful. So we're ramping proportionally more into the TTM program than we would have in the past and that will continue through the fall.

But I think productivity-wise, our guys are tooled up to be more successful now than ever. The systems and the support that we give them, even the selling tools that they have now in terms of what we provide on the service level, has been so enhanced -- the ability for people to have that comfort in terms of the buying side creates comfort from a consignment perspective.

Interestingly enough, I was just talking to a client the other day; we were out and chatting away, and he pointed out the fact that he's quite happy that we're providing this inspection service, because for him it's free. And he just gets more data out there to create comfort with buyers that are interested in looking at equipment, and it's free. So he sees that as a huge net positive for him, to be able to provide more data and more comfort to the masses of the market that are tracking to our website to at least do their initial research on equipment; and we've some terrific spiking of users into the website to support that movement. So it's good.

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

Your next question comes from the line of Anna Kaminskaya from Bank of America. Your line is open.

Hello, guys. I wanted to follow-up once again on used equipment pricing. And I was wondering if you would be able to quantify, maybe, the rate of growth changing, maybe early in the second quarter, and through July. Are we still in the growth mode? Is it single-digit year-over-year? And would appreciate any color, maybe by region? (Laughter) I think it would be helpful given what's happening in the market today. You guys are the leading indicators of anybody we cover.

Well, we're pointing at Rob and laughing. He can take this question. (Laughter)

I'm not sure which of one those points to bite off. (Laughter) But year-over-year, from this period last year, earlier on; and last year compared to today -- we've seen price increases in the 15% to 30% range, depending upon equipment type, equipment models. And some of it has been due to demand from around the world in commodity-producing countries; and some of it's been due to the lack of supply of equipment. And it's all -- in our minds -- plateaued at this point in time. And as we go forward from here, there's no doubt going to be some peaks in various types of equipment and models that we may see other increases in; and there's going to be other stuff that we're going to see a decline in the value levels that it's reached. So going forward --

Is it still 15% year-over-year in July or --

Sorry?

Is it still 15% to 30% year-over-year growth in July, or are we seeing --

We don't look at it month-to-month. You can't narrow down comparisons month-over-month, because the 2 points are not the same point in time. It's traditionally different, so we look at it on a point of averages over a period of time. So you can say -- what was 2010 to 2011? You can say -- what was the first half in 1 year versus the first half in the next year? But narrowing it down any more than that -- it's not an accurate assessment.

I think, Anna, it's fair to say that what we've communicated today is that we believe that the trajectory we saw in Q1 -- that lift out of Q4 last year into Q1 this year -- was very prominent, very meaningful trajectory; did not continue into Q2. And the latter part of Q2 we did see some leveling. And where it goes from here -- we're not anticipating any continued trajectory like we saw in Q1 at all. That return to a more balanced and predictable marketplace works in our favor in terms of creating some more confidence in the performance of at-risk, and then performance of pricing deals, and not having to chase the market up in some instances.

Great. And a follow-up on working capital. You continued building it up through the quarter -- what is driving it? Is it mostly shift towards more at-risk business? And maybe you can update us when we might see positive free cash flow for you guys?

Hey, Anna, it's Rob McLeod.

Yes, the working capital has picked up and it's a reflection of, obviously, the profitability -- but also the slowdown in our CapEx program. And so it's building up as a result of that, which it has done a bit prior to 2008, when we started really ramping up our CapEx. And there, again, that free cash flow will potentially show up here in 2011, but it will more likely be in 2012.

Great. Thanks for answering all my questions.

Your next question comes from the line of Neil Forster from Scotia Capital. Your line is open.

Hey, guys. Don't want to belabor the at-risk business issue -- but want to make sure that I understand it clearly. So it sounds like you are at an inflection point in terms of competition due to pricing. So you would expect a proportion of at-risk to remain above trend in the back half of the year; but not expecting it to go any higher from here, and may actually scale back a bit. Is that accurate?

Yes.

Okay. Perfect. And then, second question -- we saw a nice improvement in average GAAP per auction in the quarter. You mentioned mix was working in your favor with higher-valued lots. Did see a price increase in the quarter, although plateauing now. Wondering if you could break that apart and tell us what had the larger impact here on the performance in the quarter?

Well, you're talking about price versus mix?

Yes. If I take GAAP per industrial auction, it was -- saw a nice sequential in year-over-year improvement. I'm wondering, what's driving that?

That's a more difficult question to answer specifically about the efficiency of a particular auction. In general, though, you've seen some positive movement in pricing, and I think positive movement in mix. And because of the pricing improvement that you saw in Q1 you've got to have a lot of guys that were sitting on assets that were on the sidelines, hanging on and waiting. Low interest rate environment, difficult to find a replacement iron, so they didn't decide not to sell at the time. And finally, as their debt levels became more in line with their equipment values, they decided to pull the trigger.

So we saw more favorable and probably, in fairness, more traditional mix of that, as you would otherwise see at an auction, the more proportionately from 2010, probably of more newer iron, albeit it's scarce. But the mix of assets relative to 2010 period was more in line with what we've seen impacts cycles, in past quarters. So we saw improvement in both pricing and in mix. But to try to quantify the exact amount of what was the pricing effect, what was the mix effect -- we don't break it down to that minutia. In the end it doesn't matter. We're just trying to get what's for sale in the marketplace into our platform and into our trading programs.

And did you guys experience efficiencies in the quarter that allowed you to push more equipment through your auctions? And thinking about the timed auction lot system here?

Well, for sure, Neil. That's 1 of the -- timed action auction lots has allowed us to take a number of 3-day sales down to 2-day sales; and some 2-days' down to 1-days'. So for sure, on a lots per auction basis and GAAP per auction basis, we're able to be more efficient. In regards to GAAP per day and lots per day, we should be able to become more efficient. That's been a big win for us.

Okay, thanks. That's all I had. Thank you.

Stephanie, we probably have time for one more question; then we'll wrap it up.

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

Hello -- good morning, everyone. A quick question -- for the 60% or so of GAAP that's not at-risk, could you talk a little bit about what's going on, on the commission structure around that? Because of the competition that's out there, are you seeing some softness in that?

We generally don't disclose the mix differential between 1 or the other. We can say that the performance on the auction revenue side -- auction revenue rate being in the quarter being below our long-term traditional average in our guidance -- was primarily substantially as a result of performance of at-risk business.

Okay. That's helpful. And then, looking at the financial services business -- you said it's trending well. Any updates on that in terms of what you mean by trending well? Are you seeing lots of quotes, or are you actually seeing some deals getting written? I guess I'm more curious what the appetite of financing institutions are right now for equipment-backed paper?

Yes, David, it's Bob, good question.

The Ritchie Brothers Financial Services, or RBFF, hit the ground running. They turned the lights on, on July 1, and had very limited expectations for the month of July. And have already had millions -- in excess of $10 million worth of applications, a majority of which has turned into pre-approved lines, and a whole bunch has already been funded. I would not have been surprised -- if I was quiet on this call, not even talking about it. It's hit the ground running. It turns out there was more of an appetite there than perhaps we expected. So that's been great, good feedback from customers.

Part of your question, though, was interesting -- you're talking appetite of the financial institutions. That's not been the issue. It really hasn't been a big issue for a lot of our business. The financial institutions who have been chasing the assets that we sell have been there throughout, and some walked away during the crisis. But customers who have a cash flow-generating job have been able to get financing for the last 2 or 3 years in our industry, and that's not changing now. When we set up RBFFs and went out to the financial sector to look for financing companies to join the stable, we received far more applicants than we could handle. So we've had to say no to people. It's been a good part of the project.

Interesting. That's helpful color. And then, lastly, and I'll wrap up -- as you look towards the end of the year and -- touching on our earlier question about cash flow -- would you expect to be a free cash flow generator this year, after CapEx?

Hi, David, Rob McLeod again.

Yes, we said potentially free cash flow after CapEx and after dividends, is how I define that in 2011.

Great. Thank you very much.

Okay, great. Thanks, David. And thanks to everybody on the call. We appreciate your questions, and we'll get back to work here; and we'll speak to you on our third quarter sometime in -- I think it's late October is our schedule. Oh, it's early November, my apologies. But in the meantime, we'll carry on, and look forward to seeing you out on the road. Thanks everyone.

This concludes today's conference call.