RB Global Inc (RBA) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, my name is Ryan and I will be your conference operator today. At this time, I would like to welcome everyone to the Ritchie Bros. Auctioneers 2012 Q3 earnings call. All lines have been placed on mute in order to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). I would now like to turn your call over to Peter Blake. You may begin.

Thanks, Ryan, and good morning everyone. Before we get started, I'm sure you'll all join with me in sending our thoughts and wishes out to those affected by the severe storm in eastern Canada and the USA.

With that, welcome to the call. I am Peter Blake, CEO of Ritchie Bros. Auctioneers. Thanks for joining us today on our 2012 Q3 investor conference call. I am joined today by Steve Simpson, our Chief Sales Officer, Rob Mackay, our President, Rob McLeod, our CFO, and Jeremy Black, Vice President of Business Development.

Before we start I would like to make a safe harbor statement. The following discussion will include forward-looking statements as defined by the 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, such as our potential addressable market, are considered forward-looking and involve risks and uncertainties. These risks and uncertainties 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, 2012 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 be talking about a number of non-GAAP measures, including gross auction proceeds, which represent the total proceeds from all items sold at our auctions, adjusted net earnings, and EBITDA. A complete discussion of these measures and reconciliations are available in our MD&A for the quarter ended September 30, 2012.

I am happy to report gross auction proceeds of over $2.9 billion for the nine months ended September 30, 2012, and $849 million for the third quarter alone, both of which were new records for our Company and represent strong growth compared to 2011. Our adjusted net earnings for the year to date grew 28% compared to the equivalent period last year.

These achievements occurred during a period when the broader equipment market in general continued to experience turbulence as a result of a stormy macro environment and the resetting of expectation for new equipment production and sales. Some OEMs have recently begun adjusting production levels due to end user demand for new equipment not tracking to their forecasts. Inventory levels for both new and used equipment are rising. We are heading into a much more familiar environment for us with greater predictability of competitive behavior and customer decision making.

I want to be clear. We see the evolving equipment marketplace as favorable for our business and see mounting evidence that our growth prospects will continue to improve over the long term.

At the macro level, specifically in the US, which is our largest market, we continue to see upward trends in construction spending and housing starts. Although we will not pretend to know where these indicators will go in the future, the political uncertainty arising from the US presidential election is about to abate. Regardless of the outcomes of that race, we believe that having the election in our rear view mirror will be another net positive for our business.

We continue to see some customers in both the US and Canada holding off on transactions until they see how the US election unfolds. We have witnessed many times over the last few months some equipment owners are deferring the purchase and sale decisions until that's over. These factors are contributing to a more familiar competitive environment leading to a more predictable supply of used equipment to sell at our auctions than we have seen in recent periods.

Our growth prospects for the remainder of 2012 are consistent with our expectations, and we believe the evolving market conditions are very encouraging for our business into 2013. Given the market turbulence over the third quarter, I am mostly satisfied with our results. I believe we can and will continue to do better going forward, particularly with our auction revenue rate and in filling remaining vacant territory manager positions.

Now I will turn the call over to Steve who can provide some color on the used equipment market.

Thanks, Pete and good morning, everyone. Before going into details of the third quarter and what we expect to see for the remainder of the year, I thought it would be helpful to recap what we have seen in the used equipment pricing over the first nine months of this year.

We started the year with robust used equipment pricing, with Q1 continuing the general upward trend from the fourth quarter of 2011. Demand for good quality, low-houred equipment was strong at our auctions across all regions and supply remained tight.

The pricing remains that carried forward into Q2 only saw used equipment prices at our auctions steadily increase in the early part of the second quarter before plateauing in the latter part. In the last few weeks of the second quarter we saw some gradual softening of prices at our auctions for older equipment, but well-maintained, low-houred machines from good homes stayed flat. OEM production had finally caught up with demand for many categories of used equipment, and lead times for new equipment came down to more reasonable time frames.

In July and August prices at our auctions remained flat. With activity levels picking up in September and continuing to increase in volume of equipment available for sale, we experienced heightened price choppiness in many equipment categories sold in our auctions. This variability and downward pressure in September was driven in part by an increased supply of equipment available for sale and by the changes in the new equipment market, with manufacturers adjusting production levels, dealers facing rising inventories of both new and used equipment, and some industry sectors cutting capital expenditures due to lower commodity prices.

Although there is still some political uncertainty in many of the countries in which we operate, and this has led to more volatility in the used equipment market recently, our results to date in October are meeting our expectations and lead us to believe we are well positioned for the remainder of the year. The competitive landscape has continued to improve, and activity levels are picking up which give us confidence about the rest of Q4 and into next year.

Now over to Rob.

Thanks, Steve. Good morning, everyone. The performance of our at-risk business for the third quarter fell short of our expectations, mainly as a result of price variability in September which Steve has already discussed. It is not uncommon for us to experience volatility in our at-risk business at inflection points in the market, which is what we experienced in June and in September.

When we look at the cause of the shortfall, the majority is attributed to a number of large overseas deals that were signed in the second quarter and sold in September, which means they were outstanding longer than normal. In particular, we saw a dramatic shift in the Australian market and this impacted our at-risk results during September.

On the other hand, although we decline when asked to give specific details about any particular deal, I can confirm that the large mining package we sold in Raleigh-Durham in late September performed well and brought all the money, exceeding both our customer's and our expectations.

Taking a look at the deals in our pipeline and our results to date in October, I am confident we will see measurable improvements in our at-risk performance for the remainder of the year. We still expect the volume of our at-risk business will be in the 30% to 35% of GAAP range for the full year in 2012, but we do believe we are experiencing a downward trend in our at-risk volume. Our at-risk business was 33% of GAAP for the nine months ended September 30, 2012 compared to 35% last year.

We are very mindful of shifting market dynamics and are building that into our deal proposals to ensure our at-risk business performs better going forward. A return to a more balanced environment is leading to more familiar and less intensely competitive market for us, which we expect will have positive influence on our Q4 at-risk results.

Now over to Rob McLeod.

Thanks, Rob, and good morning, everyone. I hope you have all seen our press release this morning announcing our third quarter results. Our MD&A will be filed shortly.

We are very pleased with our financial performance in quarter 3. Although auction revenues fell short of our expectations, we did a good job of managing our costs and delivering solid earnings growth. Our auction revenues increased 13% to $320.8 million during the first nine months of 2012 compared to $282.7 million last year.

Over the first nine months of 2012, our auction revenue rate increased to 11.03% from 10.57% for the same period in 2011, which is primarily a result of our revised administrative fee that was not in effect in the first two quarters of 2011 and had an approximately $25.9 million of incremental effect in the first half of 2012. Our auction revenue rate decreased to 10.88% in the third quarter of 2012 from 11.84% in the third quarter of 2011, entirely as a result of the performance of our at-risk business, as Rob Mackay had discussed.

On a year to date basis for 2012, our at-risk business generated approximately 33% of our gross auction proceeds, a decrease compared to 35%. Our at-risk business represented approximately 34% of our gross auction proceeds in the third quarter of 2012, compared to 30% in the third quarter of 2011.

Our selling, general, and administrative expenses for the first nine months of 2012 increased 7%, to $197 million, compared to $183.3 million during the comparable period in 2011. The increase was primarily due to operating and acquisition costs of $8.1 million relating to AssetNation, as well as incremental costs of $7.5 million related to our strategic initiatives. Excluding these items and foreign exchange effects, our SG&A increased by about $2 million for the first nine months of 2012 compared to the first nine months of 2011, a roughly 1% increase.

Our year to date adjusted net earnings increased 28% and we are pleased with this performance. Our CapEx for the nine months of 2012 was $49.3 million compared to $55.9 million last year. Our expenditures to date in 2012 relate to the completion of a replacement permanent auction site in Raleigh-Durham and Chehalis, Washington, and the construction of a new permanent auction site in Melbourne, Australia, as well as investments in computer software and hardware. We continue to expect our CapEx for the full year in 2012 will be in the $60 million range, and that our sustainable CapEx going forward will also be in the $60 million range.

Now over to Jeremy who will provide an update on our guidance.

Thanks, Rob. Good morning, everyone. We are again reiterating our guidance for 2012, with some refinement. We continue to expect GAAP will be in the range of $3.7 billion to $4.1 billion for the year and believe it will likely come in at or perhaps slightly above the midpoint of the range. This reflects the best available information we have right now, including recent sales results, discussions with our sales leaders and customers, as well as the external factors that we see developing in the market.

Our auction revenue rate guidance for the year continues to be in the range of 11% to 11.75%. Though based on the results to date, we now believe it will be at the lower end of this range. Our actual performance in future periods could be above or below this range depending on the performance of our at-risk business and other factors.

We continue to expect our adjusted earnings before tax for 2012 to grow at least 15% over 2011 earnings before tax. We remain focused on our long-term strategic targets of growing our adjusted net earnings by at least 15% while maintaining an average return on invested capital of at least 15% and a minimum EBITDA margin of 40%, though we will likely fall a bit short on the latter two targets for 2012.

Now back to Pete.

Thanks, Jeremy. Before I open the call to questions, I just want to give you an update on our AssetNation acquisition.

It has been nearly six months since we acquired them and I know many of you are wondering -- what is up with this important strategic investment? You may recall that we acquired AssetNation because of their industry-leading technology and deep e-commerce expertise. And with these we plan to develop a new solution for equipment owners whose needs are not met by our flagship unreserved auctions.

Our extensive research concluded that as many as 50% of all equipment transactions occur without an intermediary, primarily because these owners prefer to have control over the transaction price and process, and put up inefficiencies and inconveniences to have this control. Our acquisition of AssetNation was the key to developing a new on-line marketplace solution to address the needs and preferences of these sellers and help make these private transactions significantly more convenient and efficient.

Our mission is to create compelling business solutions that enable the world's builders to easily and confidently exchange equipment. We believe our new non-auction solution will help give the non-auction segment of the market a compelling solution to help make their transactions easier and more confidence-inspiring. We also believe this new solution will open up a huge growth opportunity by doubling our total addressable market.

We have accomplished a lot over the last nearly six months, and I am very happy with our progress. We are planning to launch our new solution under the Ritchie Bros. banner in 2013 and will be adding new functionality to AssetNation's platform at this time. This non-auction marketplace will offer a unique transactional experience that is unseen in the used equipment industry today, and will set us up far apart from the competition in this space.

These are all the details that we are willing to share with you at this time. Beyond this, I can tell that you AssetNation has continued to perform well since we completed our acquisition in May.

As we previously discussed, a key focus area of ours is the growth, development, and productivity of our sales force. We have made good strides in developing programs to recruit, train, and retain our sales people, ensuring we have the right people in the right place to perform. This is critical to the growth and success of our Company as we move forward.

I am pleased to report that we added 13 sales representatives to the third quarter of this year, bringing our total sales headcount to 305 and reversing the recent no-growth trend. We also have 23 trainee territory managers who will eventually become full-fledged sales people when they have completed their training. I am also pleased to report we recently launched a new sales leadership training program that we expect will further enhance our efforts to recruit, train and retain quality sales people.

In conclusion, we have seen many changes in the market over the past quarter and although our auction revenue rate for the quarter came in slightly below our expectations, we believe that what we see going on in the market is very positive for our business. Higher inventory levels driving increasing equipment supply, a more predictable, competitive landscape, and diminishing political uncertainty are all factors that we expect will continue to benefit our business going forward.

At the end of the day, change is good for our business, because it stimulates transactions and increases the flow of used equipment to our auctions. In the face of this, we are doing a solid job managing our costs and driving operating leverage and free cash flow, which we expect will accelerate as we continue to grow our top line.

Ryan, can you please open the call to questions?

Certainly. (Operator Instructions). Your first question comes from the line of Ben Cherniavsky. Your line is open.

Good morning, guys.

Good morning.

I have a question about the auction revenue rate. Going as far back as I can track, I don't think you have really ever had two quarters in a row where it has been significantly below target or below trend. My understanding is that you have a self-correcting mechanism in your strategy when you see prices fall. You adjust your own internal measurements and your bidding and everything else.

Can you maybe just comment on what happened? I know you made some remarks, but can you add anything more about how you ended up with another quarter where these deals went against you? Didn't you see prices starting to correct? The last time we were talking in August you had indicated that. So isn't your strategy to adjust your underwritten business accordingly and mitigate that risk?

Ben, Rob here. Yes, we did as a result of the latter part of Q2. We had for sure a more analytical view of our risk deals. The unfortunate part about Q3 was we had some inventory in the pipeline that was coming out of different parts of the world and en route to the Australian market place, which was by all accounts the strongest market in the world given the commodity productions and all else that was going on down there.

The majority of the below-par performance of our at-risk business was a result of some inventory that we had on the water heading towards that marketplace. For transactions like that where you have to ship stuff significantly around the world, it remains in our inventory a little bit longer than our traditional at-risk business.

The Australian market, you might say, had its own cliff. And the results of the sale that we experienced there in September were off significantly compared to our expectations.

The market down there has reacted to commodity demands. The mining companies have reacted to carbon taxes imposed by the government, and it had a significant change overnight.

How long would you have that equipment in your inventory? Would you have had these deals signed like three, four months in advance?

Most of those deals would have been signed at some point in Q2.

Okay. Because that seems like a relatively long period of time to hold on to inventory for you guys, isn't it?

It is, but a typical transaction, once a deal is done, it can be up to six or eight weeks to get that stuff on the water and moved that far around the world. And then it has to find its way into your next auction schedule. It would have been on the water during our Q2 auctions down there, and it would have been -- arrived in Australia and available for sale in the September sales.

Ben, it is Jeremy here. I just want to add this is not that common a transaction for us. It is not often that we are putting equipment on a ship and moving it overseas. I would consider this a fairly unique event, unique circumstances.

So it was a relatively uncommon transaction?

Relatively uncommon, unique circumstances.

In most instances we take surplus equipment to our closest auction site and bring the world to the auction. The uniqueness in the demand and the activity in the Australian marketplace made us look at some other deals that we traditionally would have sold in Rotterdam or other parts of the world, and we looked at moving them to Australia.

Okay. That's helpful. Maybe just another comment on your expectations for your at-risk business that you foresee perhaps a decline in the percent of sales that you have to underwrite. Again, it strikes me a little bit counterintuitive to what I remember from the past.

Typically, my understanding is when you go into a period where prices are falling, granted they are not falling off a cliff, but they are declining, that equipment owners would be more reluctant to put equipment into an unreserved auction. As a result you rely more on your underwritten services to get that iron into the yard. What is going on there that would suggest it is the opposite?

I don't think your analysis is all that wrong. What is happening from the point of view of the risk assessment, the risk management today is the competitive nature of the market is changing. Many of the folks that were in there battling for the equipment when supply was short and demand was high -- from the individual brokers, to dealers, to OEM dealers looking for inventory to sell -- they are sitting now today with inventory. As a result, many of them have backed away from the aggressive pursuit of equipment, and when we go to pitch underwritten deals, the competitive nature in the market has diminished somewhat and we are taking a softer stance on where we're underwriting.

So you might -- okay. But you would still expect to see consigners wanting to perhaps sell it outright, like put the risk off to you, but you have a better ability to manage that risk I suppose because you have fewer people bidding on the equipment against you. Am I thinking about that right?

That's correct.

But that still wouldn't explain why you think that the overall percentage or the mix of sales for your at-risk would go down, or am I missing something?

But also Ben at the end of the day our customers who own the equipment, they are looking for the best price that they can get. And the market price -- so whether prices are going up or perceived to be going up or even perceived to be going down, they are looking for the best result for themselves.

And so even if the perception is prices are going up, they are challenging us to pass that risk over. And so it is not necessarily a perfect correlation that when prices are going up, at-risk requests fall, or at-risk requests increase when prices are going down.

Okay. That's helpful, thanks, guys.

Thanks, Ben.

Your next question comes from the line of Ross Gilardi. Your line is open.

Good morning, thank you. Just on your auction revenue rates, you seem to be expecting improvement into the fourth quarter. What gives you confidence, or do you have confidence, that you can sustain an 11% to an 11.75% annual revenue rate into next year and beyond?

Hey Russ, it is Rob here again. I guess our comfort comes from the fact, as we just said to Ben, that number one, the competitive nature of the market has changed, and when there is a deal out there to be had, there is fewer folks chasing it. And hence the requirement to be more aggressive to get the deal is somewhat muted, albeit there is still competition out there every day. That's number one.

Number two is we have taken a pretty aggressive stance since the end of Q2 on looking at our at-risk deals from the point of view of the smaller-type packages, where in the past, particularly in Q2, we tend to have got a bit less results than we anticipated. The Q3 demise in the revenue rate was from some offshore business that we did.

So market is a little bit less competitive on the deals, and number two we are being far more astute on where we are underwriting small packages of risk.

Ross, it is Jeremy here. I might add too that October is pretty much finished here. We have a whole month of results that have been quite in line with expectations. That gives us additional confidence as well, and 30 years of (technical difficulty).

But in terms of growing earnings 15% plus next year, your ability to do that, as you have said, you expect CapEx to remain fairly muted relative to history. You guys have come off a big spending cycle from recent years. What will be the big driver of earnings growth next year?

Because you don't seem to be -- you are not going to be adding a lot of sites. Is it going to be these competitive conditions working to your favor and thus an improvement in the auction revenue rate? Or do you see just more business in areas like mining and ag relative to history?

Hey, Ross. It's Rob McLeod. Great question and great link to our infrastructure and our sites. As you have seen over the last few years we have invested heavily in our auction sites and our infrastructure in the business. And for sure going forward the plan is to take advantage and leverage those investments in that infrastructure.

So to grow the business in 2013-2014 and to grow earnings, we don't need to build new sites. So we don't need $100 million of CapEx to make that happen. What we need to do is leverage the infrastructure that we put in place, to grow the gross auction proceeds, to achieve a more in line historic level of commission rates, and then make sure that we are running our cost structure to take -- to leverage that as well. And that is what is going to drive that earnings growth.

Hey Ross, it's Jeremy here. I might add again, it is becoming a bit of a trend here, but I might add that the auction site network is not the key driver of growth. The sales force is the driver of growth.

The auction site network facilitates high-margin economies of scale, that sort of thing, sustainable growth. But really, the people are the key to driving growth of sales, so gross auction proceeds. That is really the key driver of earnings growth in addition.

Got you. And then I just want to ask about China. My understanding is you are holding your first auction in China in early 2013. How will those deals be structured? Will there be a high proportion of at-risk business there, and if so when do you expect to start entering into some of those transactions? Or will the vast majority be sold via straight commission?

Rob here again. Right now I am not sure we can give you the whole answer. We plan to have our first sale in China in Q1 of next year, and we now have all of our administrative requirements and paperwork tidied up and sale site sort of picked out. Our team now is in dialogue with OEMs, finance entities, rental companies and many others over there with regard to starting to build the sale.

We will approach it like we do every sale and have an assessment of what portion of the sale we might be interested in underwriting, and the portion of the sale that would be under a consignment basis. There is some mix as we go along as we build a sale that we will evaluate on a case by case basis as we go.

So right now we are just starting to really engage people because we have got a time set for it. Our sales team over there is now in dialogue and having discussions.

And Ross, it is important to remember just like every marketplace we ever entered into around the world over the last 50 years, those first auctions and those first probably couple of years of operations, it is not going to move the needle in terms of looking at our gross auction proceeds of $3.9 billion, $4 billion. If we are doing 50% at-risk or 20% at-risk in China, it is not going to have a big impact on the consolidated results. That's a long-term play for sure.

Great. Got it. Thanks, guys.

Thanks, Ross.

Your next question comes from the line of Burt Powell. Your line is open.

Pete, I just want to get clarification in terms of the ARR in the quarter. That one deal that was on the water, was that most of it or all of what accounted for the shortfall in the quarter? Or there was a whole bunch of other stuff as well?

Hi, Burt, it is Rob. I am not sure if you asked Pete that question, but I will just jump in.

I did, but go ahead.

Burt, I am sitting in Louisville so I am detached from these guys. So they're handling the questions. If you need anything from me, just yell, okay?

Okay.

Burt, as in any quarter for sure it is a mix of deals in various jurisdictions, various locations, and various looking deals, if you will. The ones in Australia really were highlighted just because there was the unusual nature of them. As Jeremy and Rob were saying, the length of time that it takes from signing the deal to actually selling it, just because of the geography and the transporting across international borders, that's really what made it unique.

And also what made it unique is the -- how quickly the Australian market changed. When you talk to our guys and our customers in Australia, they said -- our customers were saying their heads were spinning because that market changed so quickly which again is also very unusual in the used equipment marketplace.

Those deals made up a decent portion of the underperformance, if you will. But for sure there was, as there always is, deals in all of our other jurisdictions that contribute to that, as well as tons of really great deals that exceed our expectations.

Okay. So let me ask another question then just sticking on the ARR. If I go back to the experience in 2009 and 2010, it was above the -- the ARR experience was well above the guidance range, the pre-buyer's fee guidance range at the time of 9.75% to 10.25%. Then post that positive experience in 2009 and 2010, you kind of upped the guidance range 50 basis points.

And I am just wondering, is the experience that happened in 2008 and 2009, with pricing rising, and perhaps with the credit markets being what they were, you guys being one of the few places to go for liquidity, that there is a risk here that the ARR, if we exclude the buyer's fee, that we could mean-revert back to that period? That maybe the uptick in the guidance is not really that sustainable based on what happened in 2009 and 2010.

Hey Burt, Rob McLeod again. Our revenue rate in 2009 and 2010, if you recall, certainly if you had a conversation with me, my guidance was do not take those numbers and extrapolate them in your models out two years, let alone 10 years. That was again particular circumstance where our -- the competition was, I don't want to say nonexistent. It was not nearly as aggressive or present in 2009-2010 as it had been prior to that.

And our commentary at the time was that competition will come back. I think all the competitors got the same memo on January 1, 2011. They came back as expected.

So when we increased our guidance on our revenue rate, it absolutely wasn't based on the performance of our at-risk business in 2009-2010. We knew that that was an anomaly. Loved it. But we knew that competition would come back, and so the uptick in guidance wasn't based on that.

So remind me, what was the uptick, and has anything changed that would cause that to not be sustainable today?

A couple things I guess over time, one was the performance of our straight commission business that generally makes up 70%, 80% of our business. And so the strength of that and the just slight incremental increases in that over time which you just need a slight change in that to make a difference, and then also of course in 2011 the addition of the effect of the new administrative fee and the incremental increase in the revenue rate as a result of that.

Okay, last question. What was the buyer's fee revenue in the quarter?

Actually we don't have a buyer's fee. We have an administrative fee.

Right, but that's -- yes. Yes, but you are mixing apples and oranges again.

We actually don't disclose that explicitly. If you look in our MD&A, there is a chart in there that distinguishes between our commission rate and our overall auction revenue rate. So you can see the impact of effectively of the administrative fee in there.

Burt, it is Jeremy. I will add that in the first six months of the year, this year, which is the only period that is not comparable, it was $25.9 million.

That was the incremental effect.

That's the incremental effect. In Q3, where the fee was in place last year Q3, it's in place this year Q3, so we will no longer separate that out going forward other than in that graph in the MD&A.

Okay. Thanks.

And in the financial statements.

And we have a chart, yes.

Okay. Thanks.

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

Thanks. Guys could you speak to -- you anticipate, I sense, supply of equipment coming back in the fourth quarter a lot more healthy than it had been this summer and the fall. How much of that is attributable to the US elections? And obviously they have not occurred yet, but it sounds like you are tracking well in October.

So I guess, two-part question. Can you speak to the magnitude of the elections? Are you anecdotally speaking with sellers who are holding off until after that? And then if you can put that in a rank order with other reasons that you think that you might see better supply flows? Thank you.

It's Rob here, Scott. People have been talking about the US election now it seems for 20 years. But I guess it is about 10 months or maybe more. The uncertainty around the election, of course, is what dictates whether people buy or sell or transact.

We saw a little bit of relief from that sort of anticipation of the election early on in the year when the market picked up, and we saw a nice lift in pricing and transactions and manufacturing output increased as the year went on. Then we got ourselves to the end of Q3. What we have seen with the election side of it, particularly in the last month or so, is more and more uncertainty, as many of the contractors and equipment owners are awaiting the outcome of the election.

Honestly, whether one side wins or the other, I guess anybody can look into their crystal ball and figure out whether it is going to result in a massive influx of equipment for sale because people don't like the results, or people are going to start going out and buying more equipment because they have confidence that work is going to happen. If I had that crystal ball I would probably be retired.

But I think you can say that no matter what happens, you are going to see people finally settle down and accept what it is, and then determine a path for themselves, whether they are going to stay in business and await work that might be coming or whether they are going to be displeased with the outcome and get out of business. So I think we are going to see activity as a result of the election ending.

The flip side of what is creating activity for us in the marketplace is now we have seen, as we do with just about any upswing in the economy, the manufacturers sort of run back to the trenches so to speak and they gear up production and demand has picked up, so they start to produce again, and unfortunately it is not a precision art. Typically what happens is you under-produce and you can't keep up the demand and you lose market share as a manufacturer, or you over-produce and when the economy catches up supply and demand, there starts to be a surplus. That's particularly what we are seeing right now.

So there's numbers -- a fair number of manufacturers sitting around with surplus new inventory now. And there is various offerings in the marketplace where we are seeing some discounted price on new equipment which is causing various entities to start replacing. If they can get a better price on new, and they have the comfort to buy it, then they start to flush out some used. So we are starting to see more activity from the point of view of quantum in the marketplace to trade.

Thanks. And I guess following up to that and looking into the fourth quarter -- I realize that timing of auctions can be scattered, but is there a rule of thumb you can remind us of in the fourth quarter? Is October the strongest month historically or traditionally? Is there a dramatic slowdown in December? Ways that we should think about timing in the quarter? Thank you.

Scott, it is Rob McLeod. Q4 is generally, you are going to have a lot of volume in the first two weeks of December. So it is a very concentrated period in December. The last couple weeks -- actually I think this year we have an auction on December 20th or something. So it has gone -- the calendar has extended this year more than it has in the past. But probably December those two and a half weeks in December are your -- will be the busiest period through the quarter.

And then October-November probably relatively consistent. Actually if you go to our website and you'll see a chart in there that gives a monthly GAP for the last 10 years, and you can do a whiz-bang analysis on that super quick.

Thanks. And then one final one if I could. You were commenting before on straight commissions and their impact. Could you give us a little bit of a granularity, has that -- versus three years ago, when you were discussing the environment where that was fairly absent of competition, and maybe going back to five years ago?

And then just of the past 12 months, could you give us comments of how straight commissions have trended? Thank you.

Rob McLeod again. The straight commission is a very steady, consistent chart, if you will. As I said, small incremental changes. There is not a lot of variability in that commission rate. It is very steady progress and just slight incremental increases year-over-year. When I say slight, I really do mean slight. You have got to get a pretty big sized piece of paper to put the graph on to see it.

But over time it has an impact. Just because as I say, that's 70% to 80% of our business, so that slight increase year-over-year, particularly over five years has an impact for sure. And there is not a push to say, hey, let's increase our straight commission rates by 1.5% or 2%, because we would probably deter a number of our customers if we did that. But just slow, steady, consistent work on maintaining and slightly increasing that commission rate makes a difference.

So when we are talking to our sales team and we suggest to them, when you are talking to our customers and you are setting up a deal and proposals, and we will propose a guarantee deal, we'll propose a straight commission rate, it doesn't have to be 9.5%, 10%, 10.5%. It can be 10.13%. It can be 10.19%. Those slight changes, when you multiply by nearly $4 billion, it has an impact.

Okay. So, I'm just trying to get a feel how much that would have impacted year-over-year third quarter or sequential versus second quarter versus more the at-risk.

Scott, it is all about risk. The variability in our auction revenue rate is all at-risk.

Okay. Thanks, guys. I appreciate it.

Ryan, can I just jump in? Burt, if you are still on the line, your question on our commission revenue -- sorry our commission revenue and our fees revenue, if you actually go into our financial statements in Note number 4, it is broken out right there for the three months and the nine months. Thanks. Go ahead, Ryan.

Your next question comes from the line of Nate Brochmann. Your line is open.

Good morning, everyone.

Good morning, Nate.

I wanted to talk a little bit -- we talked a little about maybe the general environment in the US becoming a little bit more stable and predictable. How are you guys feeling about the rest of the globe right now? And how much equipment is moving offshore from the US and where is it going in terms of the trends today versus the normal percentages that you see?

Hi, Nate. Rob here. I don't have the exact numbers and percentages, but the amount of equipment that has been flowing out of the US vis-a-vis the past peak periods for sure has diminished. Around the world today, Europe of course is into its own current challenges. As a result of that there is a fair amount of activity for us in Europe, particularly in the southern part. The northern part of Europe tends to be a little bit more unchanged from the point of view of activity, although there's pockets of it that are starting to open up. But we're seeing a lot more activity for us in the south.

The Middle East is an interesting part of the world today. It has hunkered down a little bit. The local economies do a lot of trade, of course in Dubai a lot of trade occurs there with the surrounding countries. There's a lot of uncertainty in the minds of the people we deal with over there with regards to Iran and the interaction between them and the other countries and what is going on in Syria.

And then that in itself has caused a lot of pause for some of our buyers in that part of the world. So we are not seeing them in the same velocity seeking out equipment in North America and other markets right now. So it has pulled itself back a little bit.

Australia we have talked about. It has dramatically shifted in the price in the market, albeit there is still a fair amount of economic activity going down there in the construction sector.

Africa is still bubbling along, and the demand for the older equipment is what they seek in that part of the world. For sure they are not after Tier 3 or Tier 4 type commodities. You still see activity from those people with various sales around the world. And Canada is rolling along fairly well.

Okay. That's great. And then in terms of the pricing environment, you know you talk about it getting to be a little bit more stable at this point. If we get through the election, as you guys kind of alluded to, and maybe demand even picks up a little bit more, how would you expect pricing to trend at least relative to history given the supply of or the balance between supply and demand? And how does that kind of usually then, in terms of the pricing reaction, go up or down?

Rob here again.

What if we told you it was going to go -- it was going to increase 3.26%, would you believe us? Probably not.

Well, it is a better guess than I might have.

Go ahead, Rob Mackay.

Okay, 3.28%. No, I think if there is a positive sentiment in the US after the election is over, obviously that is going to return confidence to people. That's been what is missing out of our customer base for quite some time. So if confidence returns, and there is -- I think it would be unlikely that there is any immediate stimulus or spend that is going to cause anybody to go out and start buying massive amounts of equipment and hence drive the prices up.

So I don't know that in the early part of post-election that you are going to see any real significant change other than the fact that it is over and you will have more confidence or something else. Today the manufacturers have caught up with the past demand for equipment. So we got a bit of supply sitting around. It is just a question of how quickly is confidence and demand for equipment going to overcome the current supply that is sitting out there. That's a million-dollar question.

That's fair enough. And then just one last one, just speaking about that OEM production a little bit. I mean, obviously with the falloff in production back in 2008, 2009, that was a big hindrance to your business and created all of this extra demand here up until very recently. Is the recent pullback in OEM production enough to give us any pause for what then the flow of equipment might look like a year and a half or two years from now?

Or is it just a fallback here temporarily to kind of normal levels, which is a net positive in terms of just a little bit more constant of an environment?

It is my feeling that it is somewhat temporary. Over the course of the last couple years there has been quite a number of announcements from the manufacturers on new plant development. And in most instances, excepting a few that I can recall, most of the manufacturers are plowing ahead with their CapEx spend on new production facilities around the world in anticipation of one or two years out into the future.

To affect what is going on today in the supply-demand change, all they are doing is pulling back on how many shifts they are running or how many units they are outputting each day to sort of level off on what the demand is today. So it is my view that it is sort of a temporary pause here to see where the economy is going. They have caught up to the demand, so they are just setting an adjustment.

Okay. Makes sense. Thanks, guys.

Thanks, Nate. Ryan, operator, if we could maybe just have the last question here and then we'll wrap up.

Certainly. Your next question comes from Craig Kennison. Your line is open.

Thanks for taking my questions. So first question on real estate, I think you booked a loss on the sale of property that cost you about a $0.01 this quarter. First, is that excluded from your adjusted EPS growth target? And second have you taken a look at your broader portfolio to ensure that you don't have losses elsewhere?

Craig, it is Rob McLeod. Yes. We exclude property transactions from our adjusted net earnings. That is the reconciling item, if you will, between adjusted and GAAP earnings.

And when we look at our portfolio of assets, yes, we look at the -- what it is worth. Because often the property is worth a fair bit of money, and does it potentially make sense for us to relocate? But really what we are looking at is, what is the value of that property to us in its use as an auction site, and is it generating a return on that? In all cases, yes, they are generating a return to justify that asset.

Thank you.

I think Rob was going to -- sorry, Greg. I want to throw in on that because this is a bit of an unusual thing. This is a site that we had acquired through a Forke acquisition that we did way back in 1999. It was acquired at net book value. It was just part of the deal. So there was never any relation to fair value particularly, although we look at all the assets and cash flows and we do our math on them to make sure that we are incorporating them adequately.

So this is by no means reflective of the value of the portfolio of assets. I think if you did your math and looked at where our locations are around the world, there is a fairly significant lift in fair value versus book value in that instance.

Thank you. And then just with respect to Hurricane Sandy, wonder if you could put that into context and past massive natural disasters like this, whether you see any impact on your auction activity in the area, and whether over time that changes the dynamic of your auction, creating potentially more demand for assets, things like that?

Rob here. Obviously there is a fair amount of damage from the storm. It is uncertain -- or I guess I am uncertain sitting here as to what that damage is, and will it require significant infrastructure rebuild that's going to take a lot of construction equipment to do it. Typical with a lot of these storms, there's a lot of flooding damage, there's power line disruption. I'm sure there's going to be the odd road and that sort of thing that has to be rebuilt.

But I'm not sure that it's going to really drive a lot of construction-type equipment demand, usage, or renewal. There for sure is going to be some construction activity that will occur out of this, but I'm not sure that it's that much that it's going to have any major effect on us one way or the other.

Were there any auctions at risk?

You mean like changing the dates on the auctions?

Right.

No.

Not currently.

Good. Thank you.

Thank you.

Thanks Craig.

Okay, Ryan. Thanks, everyone. I appreciate you guys dialing in, and we'll get after it. I think we're scheduled for our next call in February for the year-end. But thanks for dialing in, and we'll carry on here.

And this concludes today's conference call. You may now disconnect.