RB Global, Inc. (RBA) Q3 2012 Earnings Report, Transcript and Summary

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. [Operator Instructions] I would now like to turn your call over to Peter Blake. You may begin.

Great. Thanks, Ryan, and good morning, everyone. Before we get started, I'm sure you'll all join with me in saying 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'm Peter Blake, CEO of Ritchie Bros. Auctioneers. Thanks for joining us today on our 2012 Q3 Investor Conference Call. I'm 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'd 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 on this call, which speaks only as of today's date. I'd 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'm happy to report gross auction proceeds of over $2.9 billion for the 9 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 macroenvironment and a resetting of expectations 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, and 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 U.S., which is our largest market, we continue to see upward trends in construction spending and housing starts. And although we will not pretend to know where these indicators will go in the future, the political uncertainty arising from the U.S. presidential election is about to abate and regardless of the outcomes of that race, we believe that we -- that having the election in our rearview mirror will be another net positive for our business. We continue to see some customers in both the U.S. and Canada holding off on transactions until they see how the U.S. election unfolds. And we have witnessed many times over the last few months, some equipment owners are deferring 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'm 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 management positions. Now I'll 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've seen in the used equipment pricing over the first 9 months of this year. We started the year with robust used equipment pricing with Q1 continuing a general upward trend from the fourth quarter of 2011. Demand for good quality, low-hour equipment was strong at our auctions across all our regions and supply remained tight. The pricing remains carried forward into Q2, [indiscernible] used equipment prices at our auctions steadily increased 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 while well-maintained, low-hour machines from good homes stayed flat. OEM production had finally caught up demand for many categories of used equipment and lead times for new equipment came down to more reasonable timeframes. In July and August, prices at our auctions remained flat with the activity levels picking up in September and continuing to increase in volume of equipment available for sale. We experienced heightened priced choppiness in many equipment categories sold at our auctions. This variability and downward pressure in September was driven in part by 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 lead 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 gives 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's 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 declined when asked to give specific deals 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'm 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 9 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've all seen our press release this morning announcing our third quarter results. Our MD&A will be filed shortly. We're 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 9 months of 2012 compared to $282.7 million last year. Over the first 9 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 2 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 and decreased 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 9 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 cost of $8.1 million relating to AssetNation, as well as incremental cost 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 9 months of 2012 compared to the first 9 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 9 months of 2012 was $49.3 million compared to $55.9 million last year. Our expenditures to-date, in 2012 relates to the completion of our replacement permanent auction sites 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, and 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 2 targets for 2012. And now back to Pete.

Okay. Thanks, Jeremy. Before I open the call to questions, I just want to give you a brief update on our AssetNation acquisition. It's been nearly 6 months since we acquired them and I know many of you are wondering, what's 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 underserved 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 with the inefficiencies and inconveniences to have this control. Our acquisition of AssetNation was the key to developing a new online marketplace solution to address the needs and preferences of these sellers to 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 6 months, and I'm very happy with our progress. We are planning to launch our new solution under the Ritchie Bros. banner in early 2013, and we'll be adding new functionality to AssetNation's platform at that time. This non-auction marketplace will offer 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're willing to share with you at this time. Beyond this, I can tell you that 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've made good strides in developing programs to recruit, train and retain our salespeople, ensuring we have the right people and the right place to perform. This is critical to the growth and success of our company as we move forward. And I'm 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. And we also have 23 trained trainee territory managers, who will eventually become full-fledged salespeople when they have completed the training. I'm also pleased to report that we recently launched the new sales leadership training program that we expect will further enhance our efforts to recruit, train and retain quality salespeople. In conclusion, we've 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 increase in equipment supply and 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.

[Operator Instructions] Your first question comes from the line of Ben Cherniavsky.

I have a question about the auction revenue rate. Going back, as far back as I can track, I don't think you've really ever had 2 quarters in a row where it's been significantly below target or below trend and my understanding is that you have a sort of self-correcting mechanism in your strategy when you see prices fall, you adjust your own internal measurements in 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? I mean didn't you see prices starting to correct, from the last time we were talking in August you indicated that. So is it then 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 a, for sure, a more analytical view of our risk deals. The fortunate 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 marketplace, which was by all accounts the strongest market in the world given the commodity productions and all else that was going on down there. And majority of the below par performance of our at-risk business was the result of some inventory that we had on the water heading towards that marketplace. And for transactions like that where you have to ship the stuff significantly around the world, it remains in our inventory a little bit longer than our traditional at-risk business. And the Australian market you might say had its own cliff and the results of the sale that we experienced during 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? I mean, like in terms -- would you have these deals signed by 3, 4 months in advance?

Most of those deals would've 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?

Well, it is. But the typical transaction, once the deal is done, it can be up to 6 or 8 weeks to get that stuff on the water and move that far around the world and then it has to find its way into your next auction schedule. So it would've been on the water during our Q2 auctions down there, and it would've been arrived in Australia and available for sale in the September sales.

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

So it was a relatively uncommon transaction?

Relatively uncommon.

Uncommon, yes, okay.

Unique circumstances.

In most instances we take surplus equipment to our closest auction sites 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've sold in Rotterdam or other parts of the world and we looked at moving them to Australia.

Okay. That's helpful. And then 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. And again, I just -- it strikes me a little bit counterintuitive to what I remember from the past. I mean, when typically -- my understanding is when you go into a period where prices are falling, granted they're not falling off a cliff but they're declining, that equipment owners would be more reluctant to put equipment into an unreserved auction. And as a result, you rely more on your underwritten services to get that iron into the yard. What's going on there that would suggest it's the opposite?

Well, I don't think your analysis is all that wrong. What's happening from the point of view of risk assessment or risk management today is the competitive nature of the market is changing. And 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 OEMs looking for -- OEM dealers looking for inventory to sell, they're sitting now today with inventory. And 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're taking a softer stance on where we're underwritten.

So you might -- okay. But you would still expect to see consignors 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.

That would 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're 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're looking for the best results for themselves. And so even if the perception is prices are going up, they're challenging us to pass that risk over. And so it's not necessarily a perfect correlation that when price is going up, at-risk requests fall or at-risk requests increase when price is going down.

Your next question comes from the line of Ross Gilardi.

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 11.75 annual revenue rate into next year and beyond?

Ross, it's Robert again. I guess our comfort comes from the fact that as we sort of said to Ben, that number one, the competitive nature of the market has changed and when there's a deal out there to be had, there's fewer folks chasing it. And hence, the requirement to be more aggressive to get the deal is somewhat muted albeit there's still competition out there everyday. That's number one. Number 2 is we've 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. And we're, in the past, we've, particularly Q2, we tend to have got a bit less results than we anticipated. And the Q3 lies in the revenue rate was from some offshore business that we did. So market's a little less competitive on the deals and number 2, we're being far more astute on we're underwriting small packages at risk.

Ross, it's Jeremy here. I might add, too, that October is pretty much finished here. So we've got a whole month of results that have been quite in line with expectations. So that gives us additional confidence as well.

But in terms of growing earnings 15% plus next year, your ability to do that as you 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're not -- you don't seem to be -- you're not going to be adding a lot of sites. It's just going to be these competitive conditions working to your favor and that's 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, Rob McLeod. Great question and great link to our infrastructure and our site. And as you've seen over the last few years, we've 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 to leverage the infrastructure that we've 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're planning our cost structure to take -- to leverage that as well. And that's what's going to drive that earnings growth.

Ross, it's Jeremy here. I might add again. I think it's 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 as sustainable growth. But really, the people are the key to driving growth of sales. So gross auction proceeds. And that's really the key driver of earnings growth in addition.

Got you. And then I just want to ask about China, my understanding is you're holding your first auction in China in early 2013. How are 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 in to some of those transactions or will the vast majority be sold via straight commission?

Rob here again. Right now, I'm not sure we can give you the -- we could 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. And our team now is in dialogue with OEMs, finance entities, rental companies and many others over there with regards to starting to build the sales. We'll approach it like we do every sale and have an assessment of what portion of the sale we might be interested in underwriting and a portion of the sale that would be under a consignment basis. And there's some mix as we go along as we build the sale that we'll evaluate it sort of on a case-by-case basis as we go. So right now, we're just starting to really engage people because we've got a time, a times set for it and our sales team over there is now in dialogue and having discussions. And Ross, it's important to remember, just like every market place we've ever entered into around the world over the last 50 years, those first auctions and those first probably couple of years of operations is not going to move the needle in terms of looking at our gross auction proceeds of $3.94 billion. And so if we are doing 50% at risk or 20% at risk in China, it's not going to have a big impact on the consolidated results. Long-term play for sure.

Your next question comes from the line of Bert Powell.

Peter, 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 counted for the shortfall in the quarter or there was a whole bunch of other stuff as well?

Bert, it's Rob McLeod. I'm not sure if you asked Pete that question but let me just jump in.

I did. But go ahead.

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

Yes, Bert, as in any quarter for sure, it's 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 are saying their heads were spinning because that market changed so quickly, which again is also very unusual in the used equipment marketplace. And so it will sit back -- 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 '09 and 2010, it was above -- the ARR experience was well above the guidance range, the pre-buyers fee guidance range at the time of 9.3/4 to 10.25. And then you post that positive experience in '09 and '10. You kind of up the guidance range 50 basis points. And I'm just wondering, is the experience that happened in '08 and '09 with pricing rising and perhaps with the credit markets being what they were, you guys being one of the few places that go for liquidity, that there's a risk here that ARR, if we exclude the buyer's fee, that we could mean revert back to that period that maybe the uptick in the guidance isn't really that sustainable based on what happened in 2009 and 2010?

It's Rob McLeod again. Yes, that's our revenue rate in '09 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 2 years, let alone 10 years. That was again particular circumstance where our -- the competition was -- I don't want to say nonexistent, it wasn't nearly as aggressive or present in 2009 and 2010 as it had been prior to that and our commentary at that time was that competition will come back. I think all the competitors got the same memo on January 1, 2011, and they came back as expected. And 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, that competition would come back. And so that's -- the uptick in the guidance wasn't based on that.

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

Well, couple of things, I guess, over time. One would be the performance of our straight commission business that makes -- will generally makes up 70%, 80% of our business. And so the strength of that and the -- just like 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. Okay, last question. What was the buyer's fee revenue in the quarter?

We don't -- well, actually, we don't have a buyer's fee. We have an administrative fee.

Right. But that's -- yes, yes, but you're 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 the effectively, the administrative fee in there.

Bert, it's Jeremy. I'll add that in the first 6 months of the year this year, which is the only period that's not comparable, it was $25.9 million.

That's the incremental effect.

That's the incremental effect. In Q3, where it was -- 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.

And in the financial statement. In the chart.

Your next question comes from the line of Scott Schneeberger.

Guys, could you speak to -- you anticipate or I sense the supply of equipment coming back in the fourth quarter a lot more healthy than it had been this summer and fall. How much of that is attributable to the U.S. elections? And obviously, they have not occurred yet but it sounds like you're tracking well in October. So I guess 2-part question. Can you speak to the magnitude of the election? Are you anecdotally speaking with sellers who are holding off until after that? And then if you can kind of put that in a rank order with other reasons that you think that you might see better supply flows?

It's Rob here, Scott. Well, people have been talking about the U.S. election now it seems for 20 years, but I guess it's about 10 months or maybe more. And the uncertainty around the election, of course, is what dictates whether people buy or sell or transact. And you 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 and we've got sort of ourselves to the end of Q3, what we've 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 in their crystal ball and figure out whether it's 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 start buying more equipment because they have confidence that work's going to happen. If I had that crystal ball, I'd probably be retired. But I think you can say that no matter what happens, you're going to see people finally settle down and accept what it is, and then determine a path for themselves, whether they're going to stay in business and await work that might be coming or whether they're going to be displeased with the outcome and get out of business. So I think we're going to see activity as a result of the election ending. The flip side of what's sort of creating activity for us in the marketplace is now we've seen as we do it 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's not a precision art. And typically what happens is you underproduce and you can't keep up the demand and you lose market share as a manufacturer, or you overproduce and when the economy sort of catches up supply and demand, there starts to be a surplus. And that's particularly what we're seeing right now. So these numbers -- a fair number of manufacturers sitting around with surplus new inventory now, and there's various offerings in the marketplace where we're seeing some discounted price and new equipment, which is causing various entities to start replacing. And if they can get a better price on new and they have the comfort to buy it, than they start to flesh out some used. So we're starting to see more activity from the point of view of quantum in the marketplace to trade.

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.

Scott, it's Rob McLeod. Quarter 4 is generally, you're going to have a lot of volume in the first 2 weeks of December. So it's a very concentrated period in December. Last couple of weeks, actually I think this year, we have an auction on December 20 or something. And so it's going to look -- the calendar is extended this year more than it has in the past. But probably December, those 2.5 weeks in December are your -- will be the busiest period through the quarter, and then October, November, probably relatively consistent. You could -- actually if you go to our website, and you'll see a chart in there that gives a monthly GAAP for the last 10 years. And so you can do a whizbang analysis on that super quick.

And then want one final one if I could. You're commenting before on straight commissions and their impact. Could you give us a little bit of granularity how's that versus 3 years ago when you were discussing the environment where that was fairly absent in the competition and maybe going back to 5 years ago. And then just of the past 12 months, how -- could you give us comments on how straight commissions have trended?

Yes, it's Rob McLeod again. Straight commission is a very steady, consistent chart, if you will. As I said, small incremental changes. There's not a lot of variability in that commission rate, and it's very steady progress and just slight incremental increases year-over-year. But it's -- but I mean, when I say slight, I really do mean slight. You 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 that's 70% to 80% of our business. So it's that slight increase year-over-year, particularly over 5 years, has an impact for sure. And there's 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 our -- when we're talking to our sales team and we suggest them, "Hey, when you're talking to our customers and you're setting up a deal and proposals and we'll propose a guaranteed 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%." And that -- those slight changes, when you multiply by nearly $4 billion, it has an impact.

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

Scott, it's all at risk. The variability in our auction rate is all at risk.

Rob, can I just jump in? Bert, if you're 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 and Note #4, it's broken out. It's broken out right there for the 3 months and the 9 months.

Your next question comes from the line of Nate Brochmann.

Why don't you talk a little bit -- we talked a little about maybe the general environment in the U.S. kind of becoming a little bit more stable and predictable. How are you guys feeling about the rest of the globe right now and how much of equipment is kind of moving offshore from the U.S. and kind of where is it going in terms of the trends today versus the normal percentages that you see?

Nate, Rob here. I don't have exact numbers and percentages, but the amount of equipment that's been flowing out of the U.S. vis-à-vis the past peak periods for sure has diminished. And around the world today, Europe, of course, is into its own current challenges. And as a result of that, there's 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's 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's hunkered down a little bit. The local economies are -- do a lot of trade, of course, in Dubai. A lot of trade occurs there with the surrounding countries, and there's a lot of uncertainty in the minds of the people we deal with over there with regards to the Iran and the -- sort of the interaction between them and the other countries and then what's going on in Syria. And that in itself has caused a lot of pause for some of our buyers in that part of the world. So we're not seeing them in the same velocity seeking out equipment in North America and other markets right now. So it sort of pulled itself back a little bit. Australia we've talked about. It's dramatically shifted in its -- in the price in the market, albeit there's 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're not after Tier 3 or Tier 4 type commodities, so you still see activity from those people at 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 talked about it kind of 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 kind of the supply of, or the balance between supply and demand and kind of 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's a better guess than I might have. So go ahead, Rob Mackay.

Yes. Okay. 3.28%. I think -- if there's a positive sentiment in the U.S. after the election is over, obviously, that's going to return confidence to people. And that's been what's missing out of our customer base for quite some time. So with confidence returns and there is -- I think it would be unlikely that there's any immediate stimulus or spend that's 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're going to see any real significant change other than the fact that it's over and you will have more confidence or something else. And today, the manufacturers have caught up with the past demand for equipment. So we got a bit of supply sitting around. It's just a question of how quickly is confidence and demand for equipment going to overcome the current supply that's sitting out there. And that's a million dollar question.

Okay. 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 '08, '09, that was a bit hindrance to your business and created all those 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 1.5 or 2 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?

Yes I -- it's my feeling that it's somewhat temporary. And it's -- over the course of the last couple of years, there's been quite a number of announcements from the manufacturer on new plant development. And in most instances, except in a few that I can recall, most of the manufacturers are still plowing ahead with their CapEx spend on new production facilities around the world in anticipation of one or 2 years out into the future. To affect what's going on today in the supply demand chains, all they're doing is pulling back on how many shifts are running or how many units they're outputting each day to sort of level off on what the demand is today. So I -- it's my view that it's sort of a temporary pause here to see where the economy's going, and they've caught up to the demand so they're just setting adjustment.

Ryan, operator, if maybe we could maybe just have the last question here and wrap up?

Your last question comes from Craig Kennison.

So first question on real estate. I think you booked a loss on the sale of property that cost you about $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?

Hey, Craig, it's Rob McLeod. And, yes, we exclude property transactions from our adjusted net earnings. That's the reconciling out[ph], if you will, between adjusted and GAAP earnings. And when we look at our portfolio of assets, yes, we look at the -- what it's worth because in -- often, the property is worth a fair bit of money and it potentially makes sense for us to relocate. But really what we're looking at is, what's the value of that property to us in its use as an auction site and is it generating a return on that? And in all cases, yes, they are generating a return to justify that asset.

Sorry, Craig, I want to throw it on that because this a bit of an unusual thing. This is a site that we had acquired through 4Q acquisition that we did way back in 1999 and that was acquired at net book value and was just part of a deal. So there was never really any relation to fair value, particularly. Although we look at all the assets and cash flows and we do our maps up to make sure that we're incorporating them adequately. So this is by no means reflective of the value of the portfolio of assets. And I think if you did your math and looked at where are our locations are around the world, there's a very significant list in fair value versus book value over in that instance.

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

Rob here. Obviously, there's a fair amount of damage from the storm, and it's uncertain. I guess -- I'm 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 disruptions. 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 or usage or renewal. There, for sure, is going to be some construction activity that will occur out of this, but I don't -- 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.

Are there any auctions at risk?

Well, you mean like changing the dates on the auctions? No, not currently.

Okay, Ryan. Many thanks to everyone. Appreciate you guys dialing in. 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.

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