RB Global Inc (RBA) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Ritchie Brothers' Q4 and 2013 year-end earnings conference call.

(Operator Instructions)

I would like to remind everyone that this call is being recorded on Monday, March 3, 2014. I would now like to turn the conference over to your host, Peter Blake, CEO; Rob McLeod, CFO; Bob Armstrong, Chief Strategic Development Officer; and Steve Simpson, Chief Sales Officer. Please go ahead.

Thank you, Chris. Good morning, everyone, and thanks for joining us on our fiscal fourth quarter and 2013 year-end earnings conference call.

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, such as our potential addressable market, are considered forward-looking and involve risks and uncertainties.

The risks and uncertainties that could cause our actual financial and operating results to differ signify from our forward-looking statements are detailed in our SEC and Canadian securities filings available on the SEC and SEDAR websites, as well as RBAuction.com. 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.

Finally, we will be discussing adjusted net earnings, which is a non-GAAP measure. We define adjusted net earnings as financial statement net earnings, excluding nonrecurring items such as the after-tax effects of sales on excess property. A reconciliation is available in our MD&A for the quarter.

Our quarterly and 2013 year-end results were made available early this morning. We encourage you to review our earnings release, MD&A and financial statements which are available on RBAuction.com, and will be available on EDGAR and SEDAR later today.

Now on to our quarterly results discussion. As you learned in December, our gross auction proceeds during the fourth quarter where a record $1.1 billion. This, combined with a strong revenue rate and the operating leverage inherent in our business, helped us to achieve record fourth-quarter adjusted earnings of $30.3 million, or a 36% increase from last year, and a record for adjusted net earnings generated by the business in the fourth quarter.

This quarter results were affected by two nonrecurring items. Including these items, net earnings for the quarter where $33.7 million. The revenue rate for Q4 was 11.82%, marginally above the revenue rate we generated in the same quarter last year and within our expected 11.5% to 12% range as discussed last quarter.

Turning to our annual results now, Ritchie Brothers generated $3.8 billion of gross auction proceeds during 2013, a slight decline from the $3.9 billion GAAP we achieved last year. Revenue during the year increased 7% to a record $467 million, while SG&A expenses, excluding amortization and depreciation, grew only 5%, supporting an increase in our adjusted EBITDA margin for the year to 36%.

Importantly, our core auction business alone generated an adjusted annual EBITDA margin of 39%. Adjusted net earnings for 2013 were $90 million, or $0.84 per diluted share, a 9% increase from 2012, due primarily to the strong revenue rate we achieved throughout the year. Including the impacts on the sale of property and other nonrecurring items, net earnings for 2013 were $93.8 million, or $0.88 per share.

The number of new customers choosing to sell through our auctions continues to grow, an important growth metric as shows the progress we are making in reaching new customers. In fact, during 2013, the number of consignments, lots, auction registrants and buyers all increased, which is a positive indicator to our continued market share growth despite GAP headwinds.

During 2013, we held 356 auctions, including 245 industrial auctions worldwide. Average GAAP for industrial auctions during the year was $14.3 million, compared to $16.5 million last year.

The increase in auctions held and decrease in average GAAP per auction is due in part to holding more off-site auctions, meaning sales held at sites other than our 44 fixed locations, which we often do to meet our customer's needs or to enter or grow markets we believe we can build further brand presence. Since the start of 2014, we've already held seven auctions in three countries, and while the first quarter is typically one of our smallest of our business, our recent six-day Orlando auction held in February was another success. We sold over $166 million worth of equipment at that sale for a record number of consignors for that auction.

While we have fewer lots sold at this year's Orlando auction, down 6% from last year, the mix and the age of equipment resold showed signs of improvement. Overall, we have more low-hour, high-quality machinery in key equipment categories at this year's auction, which is indicative of our expectation as the equipment age headwind we faced in recent periods is starting to dissipate. We plan to publish our February GAP on Thursday, March 6. And I'll take this opportunity to remind you that the timing of our auctions differ from year to year and this February's GAP will be positively influenced by the timing of our first auction at Edmonton this year, which we held last year in the month of March.

We are now well into our first quarter of 2014, and while we don't expect to out perform the first quarter of 2013 in terms of GAP, we are seeing signs of positive growth for our second quarter and beyond, with a very strong pipeline of activity building. We are on plan and optimistic for 2014.

We are seeing younger pieces of equipment coming to market and the equipment replacement cycle is speeding up, triggering -- triggered, in part, by Tier Four final regulations in the US. There are also seems to be a bit more confidence about the economy coming from our customer base. Overall, this is an environment that's more positive for us than the market and supply dynamics that we have faced in recent periods.

With that brief overview, I'll pass the call over to Steve Simpson, who's down in Conexpo, Las Vegas, to provide some more background on our sales performance and the market environment. Steve?

Thanks, Pete. Good morning, everyone.

During 2013 we saw significant improvements in certain geographies, including Mexico, which had a nice lift in a second half of the year. Our experience in the US was mixed, but certain regions of the US had strong year and continue to show strong growth, and we are encouraged by what we are seeing there, particularly in the Western United States.

Our Canadian operations had another banner year, generating over CAD1 billion in gross auction proceeds during 2013. This supported by continued steady growth across most provinces, including some of our most mature markets.

In Europe, our sites in Italy and Spain performed well, with a strong team and a challenging economic environment. Not surprisingly, volume for equipment in Australia during 2013 was impacted by the downturn in mining, and volume for equipment in Dubai was affected by the downturn in construction activity.

Overall, as you learned in December, gross auction proceeds for 2013 where down 2% from 2012, due in part to the mix in age of equipment available for sale. We are seeing some improvement, as younger machinery is coming to the resell market, so this headwind is starting to lesson.

More recently, in the first two months of 2014, we are seeing renewed demand from US buyers. In fact, at our recent Orlando auction, we saw an increase in the proportion sales going to the domestic buyers, which we view as good news as it indicate stronger confidence by equipment owners in our largest market.

Interestingly, a greater portion of the equipment sold at the auction left Florida for other states compared to last year. Another take way from Orlando auction was that we saw a lot of support for trucks, wherein the depth of demand and the number of buyers was particularly strong. In fact, we had high-quality contributions from major trucking fleets at this auction, which generated favorable pricing.

The unusually harsh weather experienced by -- in North America the past few months delayed many construction projects, with equipment sitting longer on these sites to finish work. We expect this has shifted some of the volume that would've otherwise occurred in Q1 into Q2.

While pricing was pretty stable through all of 2013, we've seen some lift during the first two months of 2014. Pricing for trucks, loader backhoes, excavators, lift equipment and skid steers has been encouraging. As well, the mix of equipment improved in overall increase of newer machinery coming through our recent auctions.

On the territory manager front, we ended 2013 with 272 TMs, up 5% from the end of last year. The productivity of our new TMs continues to improve and tracking is along our expectations. Our pipeline of new recruits is also promising, and were working hard to ensure we continue to grow our sales team by another 5% to 10% by the end of 2014. In fact, we've already added 11 more territory managers to our sales force since the beginning of year, a 4% increase of December 31.

With that, I'll now turn the call over to Bob Armstrong to provide update on our strategic initiatives.

Thanks, Steve.

Our priorities for 2013 were straightforward. We were focused on growing our core auction proceeds, adding new revenue streams to our business and enhancing the science and productivity of our sales team. While it was a challenging year to attain GAP growth that we'd hoped for, we did end the year with a record fourth quarter and some momentum to carry forward.

We added 13 net new territory managers to our sales team in 2013 and they are ramping up the full productivity nicely, and, as Steve mentioned, we have already added another 11 in the first two months of 2014. We have also been investing in new training and technology tools to improve the productivity of our entire sales team, including prospecting tools that have allowed our TMs to spend more time actually meeting with potential customers, rather then looking for them.

2013 was an important year for us, as we launched EquipmentOne and diversified our service offering to provide equipment sellers with a choice of sales solutions tailored to meet their specific needs and circumstances. It still very early for our EquipmentOne business, as it is been commercially operational for less than year, but we are pleased with how traffic to the site and sales yield is progressing, and we are pleased with momentum it's carrying into 2014. Sales yield, or the percentage of listings that end in a transaction, was over 85% in 2013, which exceeded our expectations.

In 2013, EquipmentOne had total gross transaction values, or GTV, of approximately $100 million, revenue of $13 million, and a negative EBITDA contribution of approximately $3 million, due mostly to the up front and development costs associated with commercially launching and improving this web-based business. We continue to view EquipmentOne as being in a start-up phase, and we expect the business will contribute positively, but not materially, to our results for the next couple of years. We continue to see significant growth potential for this business.

The Company's priorities for 2014, as supported by our Board, are largely unchanged from last year. We are focusing on growing our GAP in revenue in our core auction business and capitalizing on the operating leverage in the model. We are expanding and training our sales team to capture more market share, and enhancing our sales force productivity, and we are continuing to develop and grow EquipmentOne, our online equipment marketplace.

We have a well thought out strategy, and resources to complete it. Our priorities for 2014 are based on executing this strategy.

I'll now pass the call to Rob McLeod for a review of our financial performance.

Things, Bob, and good morning, everyone.

As you saw in our press release, our net income for the fourth quarter was $33.7 million, or $0.31 per diluted share. Included in our fourth-quarter results are after-tax gains on the sale of -- sorry, the sale of land in Prince Rupert, BC, totaling $6.8 million, which was partially offset by $3.4 million of after-tax costs related to the CEO separation agreement.

Our land that was sold in northern British Columbia had never been used in our business in and is acquired more than 25 years ago. We received an unsolicited offer, so we took the opportunity to sell it during the fourth quarter. We don't own any other land similar to this. The CEO separation agreement was developed by the Board and is based on Pete's contribution as CEO over the past 10 years, and his ongoing contribution to the firm throughout the CEO selection process and transition to the new CEO.

On an adjusted basis, excluding these nonrecurring items, the income was $30.3 million, or $0.28 per diluted share in the quarter, an increase of 36% compared to adjusted net income for quarter four last year. This is a new earnings record for our fourth quarter.

Revenue for quarter four was also a record at $131.2 million. This revenue growth of 12%, combined with an adjusted SG&A growth of only 1%, drove earnings growth of 36% in the quarter, demonstrating the operating leverage inherent in our model. Our revenue rate continued to be strong, due to the performance of our at-risk business, which is 34% of our total GAP in the quarter.

Direct expenses were higher than usual, similar to quarter three at 1.55% of GAP. The main factor in this uptick was that we held a larger number of offset auctions during the fourth quarter of 2013, in fact, 13 more than in the same quarter last year, and these auctions have higher relative costs associated with them than auctions held at our permanent auction site. We expect direct expense to return historical levels in 2014.

Now I will focus our full-year results. Net earnings for 2013 were $93.8 million, or $0.88 per diluted share. Excluding the impact of nonrecurring items, adjusted net earnings were $90 million, or $0.84 per diluted share, an increase of 9%, compared to 2012 adjusted net earnings of $82.6 million.

Total revenue for our business grew 7% in 2013 to $467 million. This increase in revenue is primarily due to the record revenue rate we achieved during the year and the performance of our at-risk or underwritten business. At 12.24%, our 2013 revenue rate was more than 100 basis points higher than the revenue rate last year.

We were, and continue to be, disciplined in our approach to securing underwritten contracts. In 2013 underwritten contracts, which consist of guarantee and purchase contracts, comprised 28% of our gross auction proceeds. This is a slight decline from 32% last year, and a good indication that our disciplined approach isn't resulting in fewer underwritten transactions and that we continue to pursue profitable GAP.

SG&A expenses continue to be an important focus for us. Overall, our adjusted SG&A expense increased 5% over 2012, to $239 million. As per our strategy, the increase in SG&A was directly attributable to creating a larger sales team, including sales-support functions.

Overhead costs associated with admin and corporate support functions decreased compared to the prior year. Overall, our EBITDA margin on an adjusted basis for 2013 was 37.3%.

Our core auction business, so excluding the results of EquipmentOne, continues to perform very well. 2013 revenue generated by our auction operations grew 6%, compared to 2012, and most importantly, our core business generated record adjusted earnings, increasing 13% over 2012. It is clear our auction model is working as planned, and is generating the kind of operating leverage and earnings we know this business can achieve.

CapEx for 2013 came in at $53.7 million, primarily for auction site improvements, maintenance and systems development. During 2013, we saw impressive results from our financing business, Ritchie Bros Financial Services, which provided approximately $100 million of financing to our buyers during 2013. This represents 122% increase in financing activity over last year and a demonstration of the momentum we are building through this service offering.

During 2013, our financial services business, which we own 51% of, generated $1.6 million of income. Of this, over $800,000 was recognized in our consolidated earnings. The remainder is attributable to the minority shareholder in Ritchie Bros Financial Services. You will notice that the first time this year we have presented this minority interest in our financial statements.

Also, as most of you are aware, financing services through this business does not leverage Ritchie Bros balance sheet. Revenue from the business is generated from fees we earn by matching equipment buyers with our financial institution partners.

Looking forward into 2014, we expect a similar market environment to what we experienced in 2013, albeit with an improving mix of used equipment coming to market. As Steve mentioned, pricing continues to be stable and strong and construction activity in the US continues to improve, although at a modest clip. With this improving macro environment, and an expanding sales force, we believe 2014 annual gross auction proceeds will come in between $3.9 billion and $4.2 billion.

While the elevated revenue rate we achieved in some quarters of 2013 cannot be easily duplicated, we believe there are opportunities to capture some revenue rate improvements in the year ahead. As result, we are adjusting the top end of our revenue rate range from a historic annual range of 11% to 11.7%, to between 11% and 12% for 2014. And, based on achieving our 2014 GAP expectations, along with a more normalized revenue rate, we believe 2014 pretax adjusted earnings growth will be between 5% and 10% over 2013.

As I mentioned last quarter, we believe capital expenditures will come in below $50 million in 2014. We are comfortable with the auction site infrastructure we have in place today, and we believe we can build our business on the capacity already available within this auction site network. The majority of our CapEx for the next several years will be focusing on maintaining our auction sites and ongoing investments in our technology platforms.

We still believe we are on track to achieve our long-term targets of 15% average EPS growth per year, at least 15% return on invested capital and EBITDA margins of at least 40%. Our core auction business is already near these measures.

Before I pass the call to Pete for closing -- for his closing comments, we received a few questions recently how the lower Canadian dollar could impact our results, so I'll just take a moment to address that now.

The effect of currency fluctuations were negligible on our 2013 results, and we expect them to be negligible going forward. While currency fluctuations can have an impact on each line item of our income statement, they generally offset one another as a result of our organizational structure, resulting in an immaterial effect on the bottom line.

So with that financial overview, I will turn back over to Pete.

Thanks, Rob.

Before we open the line for questions, I'd like to provide a brief update on the Board's progress in selecting a new CEO to lead Ritchie Bros future growth. There's been a lot of interest in the role. The Board is very pleased with the quality of candidates that they are seeing. The process is progressing well, but given the sensitive nature of the selection process, no other updates will be provided until the new CEO is announced.

The timing of that announcement depends on many variables, and because of this, there can be no certainty regarding when the appointment will be made. However, given the progress of the CEO search to date, we have every reason to believe we can land a great new leader for the Company without any meaningful delays.

The Board and I are absolutely committed to ensuring a seamless leadership transition, and as result, Bob Murdoch and I have both agreed to stay on the Board until the CEO transition and transfer of responsibilities is complete. We believe this is a prudent measure to ensure a proper handover to the next CEO of the Company.

As result, we will both stand for reelection on the Board at our 2014 annual general meeting, with the expectation that, soon after the CEO transition is complete, we will both step down. At that time, as the Company previously disclosed, it is expected that Beverley Briscoe, one of our longest-serving Board members, will become Chair of the Board.

We believe this is an exciting time for the Company as we inject new perspective and energy into the firm. We have a great platform with exceptional operating leverage and now we are focused on driving more revenue through the model. To this end, a new sales-focus leader with experience growing top line will help to generate future growth.

With that, I'd like to open the line for questions from analysts and institutional investors, and as with our previous earnings calls, we would ask that you please limit yourself to two questions as we have a lot of participation on the call today. So Chris, can you please open the line for questions?

Thank you.

(Operator Instructions)

Your first question comes from Yuri Lynk, Canaccord. Yuri, please go ahead.

Good morning, guys.

Good morning.

I guess I will start with the guidance. At the midpoint you are looking at 5% or 6% GAP growth. I think your sales force is going to be up at least that starting the year, plus you've hired some additional territory managers year to date as you mentioned.

Keeping in mind the productivity takes time to ramp up, I think just with the higher head count and pricing flat/up, I thought we might get a little bit higher GAP guidance. What are the puts and takes around that -- around the guidance there?

Hey, Yuri, it is Rob. As you know, our sell cycle is incredibly short, so it's trying to forecast out 12 months, let alone 6 months, is a bit of a challenge. So we're doing our best to anticipate that growth in the sales team. Also, frankly, anticipate attrition and turnover in our existing sales team and the new territory managers that we add during 2014.

Build that into a model, and from that forecast GAP in whatever it is, 12 different currencies. It is, for sure, a challenge of forecasting GAP and we want to make sure that we are being prudent on that.

Okay. That's fair. I guess my second one will just be on the territory managers. Can you give us some color on, I guess, one are the areas -- regions where you have pretty low penetration, US Northeast?

How many of these new territory managers have gone to that region? What's the retention rate like in that region and just any update on how the business is trending in some of these lower-penetration areas that we don't necessarily get press releases on?

Yuri, it's Pete here, but maybe I'll get Steve to add color after I speak. We don't generally break down the ratio of territory managers per region, but I will tell you that what we've gone through is, if you've got a dollar more to spend somewhere, you want to spend it where you're going to make the most penetration in the most optimal marketplace.

We've done our analysis and looked at where our biggest and best opportunities lie. A lot of it, for sure, is in the US and a lot of it is in big-growth markets, like in Alberta in places like that. So our allocation of territory managers is done and it is very artistic in some ways, and Steve takes his guys and they go into a big huddle and they decide where they are going to invest their next dollar for territory managers.

I would say for sure that an area that is underpenetrated is the Northeast of US and we just got a brand new site that's got its grand opening coming up at the end of March in New Hampshire and we've got a decent team of guys up there and they are expanding that as well. We are not going to comment on specific numbers that area, but I will tell you that there's an awful lot of thought put into where those territory managers get placed. Steve, you want through in a comment?

Can you hear me okay?

Yes.

Okay. I'd agree with that, Pete. The focus of the opportunity in the northeastern part of US is, for sure, is significant. We recognize that. We've recently added a few more guys into the mix of that area.

Also made some recent changes with our Senior Vice President there. We are moving a guy down from Canada and our other guy's moving over to our strategic accounts. We are focused on our US business. We recognize the opportunities for us in the Northeast and it will continue to be a focus for us for several years going forward.

That's it for me, guys. Thanks.

Thanks, Yuri.

Thank you. Your next question comes from Nick Coppola, Thompson Research Group. Nick, please go ahead.

Good morning.

Good morning.

Another question on guidance. I think I heard you say for ARR that you'd expect to be in that 11% to 12% range. Why do you think ARR will go lower in 2013 and why can't we stay in that north of 12% area?

Nick, it is Rob again. As I mentioned in the comments, there's certainly some of the quarterly results and our revenue rate that were unusual and extraordinary, particularly obviously quarter three, where you had revenue rate in excess of 13%, which as we mentioned in quarter three was a result of a few phenomenal deals where we really took advantage of our competitive advantages in bringing that the table. Those types of deals don't come around every quarter, every year, necessarily. So we don't expect those extraordinary quarterly results.

Also, there's perhaps an upper limit on the performance of that business, of the at-risk business, because we will continue to be aggressive on those deals, because part of our strategy on those deals is all around marketing around our competitive response in the competitive environment, and also around building relationships with customers that may be new to the unreserved auction model. So we want to have that flexibility to be aggressive on those deals to achieve our objectives that aren't necessarily the outsized revenue rate generation.

Okay, that make sense. And then my second question -- for the year we saw lots up about 5% year over year, GAP was down a tad, so your showing a smaller-sized, lower-valued lots. What is that do to your ARR, having smaller lot impact there based on your commission structure?

Yes, it is a great question. It is important to remember that 40% to 50% of the loss that we sell, sell for $2,500 or less, and that's the physical lot. So we sell a lot of small stuff, but the proportion of gross auction proceeds that those small lots contribute is mid-single digits. It is very small.

So that adding a bunch of small lots probably isn't going to move the needle on your revenue rate or on your revenue dollars. It is your larger lots that have the biggest impact for sure.

Okay. That's great. Thanks for your help.

Thanks, Nick.

Thank you. Your next question comes from Bert Powell, BMO Capital Markets. Bert, please go ahead.

Thanks. Pete, just wanted to come back to the comments you made around weather in the first quarter. I'm wondering, your comments around shifting GAP from Q1 into Q2. Are there specific deals that you have or had that were delayed because of weather, or is this simply when you look at the schedule, that's how it is going to fall out?

No, there was some specific business that was delayed for -- you got to remember, on the road when the weather turns, two things happen. One is, people have more work to move snow. Well, actually three things happen, when you move snow.

Two is the existing jobs they're on have to be delayed so they cannot get them finished and their plans have to be pushed back. And the third is the road bans go on and when you are trying to move heavy equipment, particularly from jurisdictions North of Atlanta, or even in Atlanta, for that matter, with road bans those kinds of things get delayed. So it happens. We're not going to sweat about it.

We are not, certainly, going to sit here and say it was the weather or blame the weather, because that's not the kind of business that we do. We are broader and transactional in our outlook and where the equipment is going and how much things sold and what value we are adding and all those other fundamental things that we talk about as a long-term view of our business. So yes, there was some impact in some of the early stuff that we saw and we see some things shifting into Q2 that would normally have occurred in Q1. This part of the business. It is not a big deal for us.

Okay. And turning to the G&A -- down in admin and support, but I guess up because of investment sales. Can you give us a sense just in terms of the G&A for the year after we back out what you got paid as part of the separation agreement?

How should we'd be thinking about G&A next year? Can you continue to make cost savings that offset some of these additional TTMs that you are planning?

Bert, it is Rob. Yes, great question. For sure in 2014 our desire, our plan, our strategy is to grow our sales team 5% to 10%, as well as grow some of those sales support functions. In the last few years we've added some particular positions that will take some administrative burden off of our salespeople and also help our sales people refine their leads and their attack on particular opportunities. We will absolutely do that in 2014, so we will continue to invest in our sales team.

Whether there are cost savings to be had elsewhere in the organization? That isn't part of the strategy. That isn't the model that we have.

The model, for sure,, is to grow the business, grow the top line, which is growing GAP as well as, obviously, then growing revenue, and growing our expenses at a slower pace than that. So if we are going to grow -- we know we are going to make an investment and grow the cost associated with our sales team, the growth in our admin and operations teams will be even slower than that, but I wouldn't say that our model is looking for cost cuts or cost savings.

Okay, but the G& A is a leverage point in the business model so that should start -- we should start to see the leverage on that. That rate should be going slower?

Exactly. Slower than our revenue for sure. And one of the mantras that would like to use around here is grow before we spend.

Thank you.

Thank you. Your next question comes from Scott Schneeberger, Oppenheimer. Scott, go ahead.

Scott who? (laughter)

Sorry, Scott Schneeberger.

We are just kidding you. It is not your fault. (multiple speakers) Where did Scott go?

Scott, your line is open. Moving on --

Wait, wait. Can you hear me, guys?

We can hear you, Scott.(Multiple speakers)

Good, sorry about that. Making a mishap in the mute button is bad start.

First question is with regard to the sales and lead tracking software roll out for the first half. Can you give us an update on that and how it is going to roll? How far along are you, if it all yet, and how are you going to do it that geography by geography? How does that roll work?

Scott, it's Bob. You called it lead tracking software? I'm going to assume you mean the Salesforce.com implementation which is the new CRM package we are rolling a our whole sales force. We'll be rolling that out region by region with in-person training through the end of (technical difficulty) We'll have the entire sales force and operational teams using the Salesforce.com platform by June 30 this year.

Okay. Thanks. Also, could you guys comment with regard to your pursuit of government contracts -- what you're targeting and what you think your outlook is for mix of business going forward and anything specifically you are pursuing. Thanks.

Hey, Scott, Pete. I will speak to it and then I'd like Steve to maybe chime in as well. For sure, government contracts are interesting to us. I think it was -- I'll share with you an anecdotal incident that's occurred in the last short while that really illustrates the value of our proposition that we put forward to owners of equipment. With EquipmentOne now in the saddle, we've got sort of a duel-pronged approach and we are approaching some of the government agencies that would formerly (technical difficulty) commission and we want to control the price and the process is a bit unique for the (inaudible) auction program, so we are not really sure that our RFP will line up with what you guys do.

Today it is very different. We walk in and we've got a duel solution. We had a very favorable experience with the Texas Department of Transport recently where we went in with the dual solution and they look at about there was a great idea, sat with them and we put a contract together with them.

And funny enough, the majority of the outfits that are coming to market-- I think it is 6,000 of items to be sold by September -- the majority of those will probably go to the auction, yet we entered the contract negotiation with the view that we can meet their needs under the RFP because of EquipmentOne and what we offer in terms of control of price pricing process with EquipmentOne and the auction solution providing liquidity in global value. It is really, pick your asset and pick your method of distribution and we can supply what you need.

It was a great win for us -- a great win for EquipmentOne, a great win for us as a Company. That was an example of one government contract that we've recently landed that, that is part of our -- within our cross hairs going forward. Steve, you want to throw some color at that?

As Pete said, we have, for years, been out trying to get some traction with some of these government entities and always been a bit challenges because we most often did not comply with the RFPs due to the unreserved part of life for fees or our rates and so on and so forth. To have, now, EOne in the mix is really opened up a lot of doors for us and we are actively pursuing a bunch more of it and ideally to get something with these folks and have a dual solution, give them either option, is pretty attractive to them.

As Pete said we -- and for us, we are happy. As long as we get the business, we don't care which way it goes, but I think there's some real opportunity for us there and we are on it and we are pursuing more of it.

Thanks very much guys.

Thanks, Scott.

You're next question comes from Nate Brochmann, William Blair & Company. Nate, please go ahead.

Good morning, guys. How are you?

Good morning. Good.

I wanted to talk a little bit just on the mix side. It seemed to take a little bit about positive turn at the Orlando auction even though maybe we didn't have as many cranes there or whatnot, but overall it sounded like we had a pretty decent mix that has had, been such a big negative for the last couple of years. Does it feel like we are starting to bottom out a little bit in terms of that mix of the older value lots and smaller stuff?

Yes, Nate. Pete here. For sure, we are seeing a definite shift in the age of equipment we saw. We did a bit of analysis in Orlando, sort of the one- and two- and three-year-old equipment we saw in February of 2013,and the same for 2014, over a number of key categories like [artics] and dozers, excavators, loaders, telescopics and skid steers and things like that.

We saw for three-year-old equipment, as example, we saw more than double the number of items that we would have seen prior-year for three-year-old equipment. So if you think about -- again, back to, we've talked before about back to the adage of that 2009, 2010 were down years for OEM production, so in 2013, which was a year ago, the three-year-old equipment really was in very short supply.

We didn't really sell that much of it and this year, three-old-equipment, by definition, is 2011 model year and guess what, we sold within double what we do have sold in Orlando last year. So it is a bit of a -- it is one data point, an interesting one, and we are seeing that happen in more than just the one location.

So it's starting to shift. We are seeing more transactions coming to market now. There is a little bit more iron in the channel, if you will. KAFT, I think, came out with recent stats which they published in an 8-K on late February showing retail sales of their dealer network was up substantially in the construction industry side, across the world and across the board, and their results are more adversely effected by the mining side, but encouraging stuff from the construction sector, especially in North America, where the dealer channel is starting to fill.

Not only KAFT, but all of the other dealers that we speak to right now are back more in the more normalized mode of where their inventory levels are and what's moving in the product marketplace. The housing market is supporting that as well.

The tier four that's out now is being well-accepted by the marketplace. It is product that people are comfortable with now that it is performing as expected.

Fuel efficiencies and things like that were counted are actually being experienced by customers, so there's that new model factor that people tend to shy away from in the first go, the tier four final now rolling in the US. I think it is getting back to a more normative state for people's buying and selling habits and we are seeing that convert to transactions, too.

Okay. That's great. The second one, what are you guys seeing in the competitive front in terms of, obviously, if we go back a year and half ago or so we're seeing a heck of a lot of competition for that newer tech equipment that was in scarce supply. That obviously has kind of come off a little bit.

But can you just -- in terms of what you guys are seeing in terms of some of the various competitive channels? And also, too, maybe specifically what you're seeing out in the rental channel in terms of the sell-through at your auctions? Thanks.

Sure. Thanks, Nate. Steve, do you want to speak to that?

Yes, sure. Yes. Competitive channels -- still a lot of competition out there. We are out there fighting for deals every day and I don't think the competition has abated at all. I think there's a lot of people out there that are still scrambling to try to find the particular assets that are in the sweet spot of the late-model, low-hour whole spec stuff that is still hard to get and it doesn't matter of your are an auctioneer or if you are a broker or one of the OEM dealers, it is tight out there.

The rental fleets are still at all-time high utilization so those guys are really having some nice wins right now as far as having stuff out in the market. And then equally, the sales teams would be the rental companies. They seem to be moving a fair bit of their product, albeit we are still getting some of it. But with the utilization so high they are not selling as much as they were.

As far as the competition goes, it will continue to be out there and it is out there every day. That was one of the reasons, too, when we talked about our auction revenue rate and putting it down to a more modest -- similar rates to where we typically are, because we are going after that business and sometimes it is going to be a little bit skinny and hence the need to adjust the rate down a bit.

Okay, great. Thanks, guys.

Thank you. Your next question is from Jamie Sullivan, RBC Capital Markets. Jamie, please go ahead.

Hi. Good morning.

Morning, Jamie.

So question I guess just on the outlook. It typically seems like this a fair amount of optimism exiting Orlando early in the year. You are guiding 1Q to flattish it sounds like, maybe down a little bit. So just maybe if you can just help us -- what are you assuming in the marketplace that gives you confidence that the volume in the larger categories is going to inflect in the next couple quarters and maybe why this year is different than prior years?

Sure. Steve, you want to take that?

Yes, I think as far as in the market in the assets and the availability the stuff is still, it's still tight out there. The demand is getting better and the more we are getting out -- I think one of the parts of the marketplace that will continue to be tight is, we talked earlier, is the construction stuff, the yellow iron, that we typically call it. That stuff is going to be -- there's a lot of competition for that.

Of course you want to have as much of that is you can get your auction sales because it is a big draw. Equally, we are continuing to diversify our sales force and making sure we are out there and we are calling all the people in the ag business and all farmers and all the truck and trailer guys and the energy companies. So we are continuing to diversify in that and we are getting some nice winds because of it, but in a lot of cases it is a lot of work to get some real momentum going in that marketplace. Maybe we are being a little bit cautious, but it is probably a safe bet to be.

Okay, that's helpful. Then maybe just on the sales force front. It sounds like one of the key metrics going forward is going to be the stability and growth of the sales force, so maybe in 2013 you can tell us what was turnover in 2013, what are the targets as you go into 2014 here?

Do you want to take that one Steve?

Sure. (multiple speakers) The sales force, yes, you are exactly right, Jamie. The good word is all the stability and the growth of the sales force and our attrition, in particular our voluntary attrition, actually was -- fell in 2013 compared to 2012 and latter half of 2011, which was excellent and was, we believe, partially due to some of the programs that we put in place, particularly some management training programs that we put in place for our sales management. So having that fall in 2013 was positive. We want to continue that. For sure, there will continue to be attrition, voluntary and involuntary attrition, within the sales team as any sales team would have.

And then on top of that, add the growth of 5% to 10% a year and that's -- you are exactly right that it is a very big focus and is an important metric, that growth of the sales team, because it is so challenging to find new territory managers to sell unreserved auction services and to get them trained and on board and moving up that productivity line. That takes anywhere 12, 18, 24 months to get someone moved up that line.

And we are continuing and probably reinforcing some of the programs we have in place to help with that productivity, one of them being our trainee territory manager program which has yielded great results in the last few years. We want to be focusing on that and embellishing that program in particular to help with that -- well, frankly, with the stability and with the productivity of the sales team.

Okay. I guess in terms of numbers, you're not comfortable providing us what it was in 2013?

Yes, no. We generally don't publish it, no.

Okay, thank you.

Okay.

Your next question is from Adam Fleck, Morningstar. Adam, please go ahead.

Hi. Good morning. Thanks for taking my questions.

Good morning.

Just a question falling back on the at-risk business. It was up as a percentage of your GAP and first time in several quarters and I appreciate the comments that you're using it, of course, as a strategic tool, but how should we think about that business as GAP starts to grow again? Is that going to continue to fall, or should that grow in line with overall GAP, do you think?

The quantum, yes, will grow in terms of the growth in GAP, but the percentage of the volume? It will fluctuate quarter to quarter for sure, just depending on the environment and what package of equipment are available in particular quarters.

And we would expect it to be, as we talked about last year, we expected the volume to decrease from 2012 through 2013 which it did, back to a little bit more historical levels. So probably that volume is going to be 25% to 30% going forward, but it will fluctuate quarter to quarter, for sure.

Okay. No, that's great. That's really helpful. And just wanted to follow up on the fourth quarter GAP. December looks like it was a record month. Of course, quarter four is a bit ahead of your original guidance.

Is there any thought or concern that some of that may have been pulled forward due to some of the tax law changes and engine emission standard changes, or was it just a timing issue?

Yes. Obviously, incredibly difficult to understand the motivations of equipment owners and when they make the decision to sell, and we are not necessarily privy to that decision-making. If there was any, I think it would be relatively minimal, a minimal impact, particularly moving from quarter four from quarter one in 2014.

Okay. That's helpful. Thanks, guys.

Your next question is from Cherilyn Radbourne, TD Securities. Cherilyn, please go ahead.

Thanks very much, and good morning.

Good morning.

The first question I wanted to ask relates to your comments on the action revenue rate for 2014. You did raise the top end slightly and I think commented that you did see some opportunities for some upside, albeit not as good as in 2013. Can you give us some color there, please?

Sure, Cheryl. It is Rob. I think that top end change -- couple things going on. One was our disciplined approach to the at-risk business and how we are tackling it and how we are really using our competitive advantages to bring to bear on those packages of equipment that will help some.

The other thing -- it is a smaller proportion, for sure, is really our fee income and that fee income from our financial services business. That revenue ends up being as part of your revenue rate and so that gives a little bit of a lift as well.

That's helpful. I also wanted to just ask for bit of perspective on EquipmentOne, because the auction revenue rate on that business in the fourth quarter, and I think since it is been reported, has actually been higher than what you achieve on your core business, which is a bit surprising, at least from my point of view, given that it is a lower-touch business. I just wonder if you think that, that's sustainable long-term?

Cheryl, it is Bob. Yes. Sustainable for sure. The revenue model with EquipmentOne is very different than the auction business because it is a very different business. The majority of the revenue comes from a buyer's premium of 10%, but we also charge a seller's commission to most of our larger customers because of event of services we provide to them, so depends on what they get. But the average -- the equivalent to the auction revenue rate for EquipmentOne last year was in the range of 13%, and there's no reason to think that will change dramatically in 2014.

Okay, thank you. That's my two.

Great, thanks. Chris, we probably have time for one more question.

Your next question comes from Neil Frohnapple, Longbow Research. Neil, please go ahead.

Thanks for squeezing me in. Maybe a question for Bob, just a follow up to EquipmentOne. What are you targeting for sales yield in 2014? I think you mentioned that it hit 85% this past year, which was above your expectations. Any color you can provide there would be hopeful.

Sure, Neil. We've actually taken 85% and called that the target for this year. We want over 85%. We know we can do 85%, so our goal now is to improve on that. But I will be honest with you -- I'm quite happy at that level. It is a pretty high level and if we can just maintain that or above it, that will be a good success.

Great. And then you mentioned EquipmentOne was at $3 million EBITDA drag for 2013. Just to clarify, you said you expect it to be roughly neutral in 2014 and beyond?

I think what we tried to say is that we expect it to be marginally positive in 2014. Have not spoken about past that, but we have said that we don't expect to see material for the next couple of years.

I'll restate that as clearly as I can. 2014, we should have positive but immaterial EBITDA and 2015 as well.

Great. And then just one final one. If I rewind to three years ago, I think you'd typically see a little bit of a G&A spike in Q1 from Conexpo, I think in tune of $1 million or so. Is that what you are expecting for this first quarter as well?

Yes. Conexpo is occurring in -- actually this week, in 2014 so yes, there will be a little bit of a spike in there, because -- the equivalent trade shows is Balma and Intermap, and probably -- which occur in different quarters., I think they are usually quarter two events, and so just whether the quantum that we spend on each one is equivalent or not. But yes, it is a timing effect.

Great. Thanks a lot, guys.

Okay, everyone, thanks. I appreciate you guys dialing in for the call and we'll look forward to -- maybe we'll see some of you down at Conexpo. Most of us are heading down there right now, so we'll look forward to seeing you down the road here. Thanks very much for participating.

Thanks, Chris.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.