Copart Inc (CPRT) 2002 Q3 法說會逐字稿

Good morning and thank you for standing by. I'd like to remind all parties that this call is being recorded at the request of Copart. If anyone has any objections, you may disikt at this time. I'd like to turn the call over to the president, Jay Adair. Mr. Adair, you may begin.

Thank you. Good morning, everyone. Thank you for attending our Q3 conference call. Before I start, I'll turn it over to Wayne Hilty for some general comments.

Thanks, Jay. During this conference call, we will make forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933, and Section 21(e) of the Securities and Exchange act of 1934. I would direct you to review the management's discussion and analysis and factors affecting future results that are contained in the company's 10-K and other SEC filings for a full discussion of factors that could affect future performance. Our agenda this morning has three items. First off, Jay Adair, our president, will go over highlights of the quarter and recap some important accomplishments. Second, I'll discuss financial details of the quarter. And finally, we'll open it up to your questions. It's now my privilege to turn you over to Jay Adair

Thanks, Wayne. Well, good morning, and as you can see from the earnings release last night, we had a very good quarter. Copart reported net income of 16.6 million for the quarter, or 18 cents a share. The same quarter a year ago, that was 11-and-a-half million or 13 cents a share, and we had EPS growth of 38%. Revenues grew 26%. Of that 21% was organic growth and 5% was acquisition growth. In April, we announced the opening of our Portland, Maine facility, and in May we announced the opening of our Tucson, Arizona facility. Most recently, we just announced the New Jersey facility in Summerville and we've been working on that one for well over three years, trying to get that open. So that will really help us up in the north - north side of Jersey. Those cars have been going to south Jersey, and to two facilities we've got in Newberg, New York and in Long Island, New York, so that will help us you out a lot there. With respect to salvage facilities and Motors Auction Group locations, we've got a few of them in the pipeline right now. We should be announcing additional locations in this quarter, in the fourth quarter, that will be acquisition and start-up. So I won't go into any of the details of it. You'll see that in the quarter. I'd rather talk about at this time about things that we really did in Q3, and I think some of the most exciting stuff to talk about for the conference would be some of the results that came out of our internet products. Had a pretty exciting quarter with respect to internet. Proxy bidding went from 65.2 million in Q2 to 74.2 million in Q3. Of that, 36.1 million were vehicles that were pushed and 38.1 million were vehicles that were actually sold over the internet. The - the piece I think that excited me the most with respect to internet was our virtual bidding. I expected, just by virtue of the fact that you only had one proxy - or one product prior to bid on, being proxy bidding, that as we moved more yards over to virtual bidding, that we would be cannibalizing the proxy bidding product and I didn't expect to see some of the heavy growth that we had in the quarter. So that was exciting. Virtual bidding went from 351,000 in Q2, when we launched the product in Q2 - 351,000 sold, 741,000 pushed. So a total of a 1,000,092 or about 1.1 million in total product affected through virtual bidding. In Q3, we went from a handful of locations to 27 locations converted to virtual bidding. 27 out of our 91 locations. And that 351,000 sold became 6.4 million sold. The 741 push became 8.7 million push. So we had a total virtual bidding effect of $15.2 million, which is phenomenon growth. If you recall, back in '98 when we launched internet bidding, and in the year of '99 as we watched the product grow, we saw a million to 3 million to 6 million. We saw pretty consistent growth like that. Eventually we got to double-digit, you know, 11 million, 13 million. To go from 1 million to $15 million on a product in one quarter pretty much blew me away. I just had no expectations of the product doing that well. I did, yesterday - or I should say I ran the auction yesterday in Indianapolis, at our Indianapolis location. I clerked the whole sale myself to, again, see some of the interaction and how the product works with the sale. We've got a number of phase II enhancements that we're doing to the product that's going to make it that much stronger, and we'll be rolling out additional facilities this quarter. I would anticipate another 15 locations roll out to virtual bidding in Q4. But I literally watched vehicles sell against the live auction there. I watched buyers come in and bid against the live auction. I saw those vehicles sell to buyers in Mexico, Omaha, Idaho, Washington state. So literally, as we're sitting there at the auction with the live auction that's bidding against the vehicles, I've got this internet, you know, product, virtual bidding, that's allowing all these buyers from across the country to come in and virtually participate in the sale without actually being there. And I think the reason it's been so successful is, we've got proxy bidding that's fully integrated into it, so you can still proxy bid a car, but I saw some scenarios where even when the proxy bid ends, the virtual bidding, the live auction, continues and then the virtual bidding comes back in at the end to buy the car. So I think you've got scenarios where buyers are virtually bidding vehicles after their proxy bid maybe has been beaten, so they see their proxy bid beaten, then they come in and they virtually bid the vehicle. The exciting part of the $15 million number is the fact that 64% of all those vehicles that were sold on virtual bidding went to out-of-state buyers, and that's, again, what we're bringing to the table for the insurance industry. We're allowing product that was in the past sold in local markets - and I'll use Indiana as an example. You're selling cars in Indianapolis to an Indianapolis contingent of buyers and now you open up, you know, products like proxy bidding and virtual bidding and the next thing you know, you've got vehicles that are going to Mexico and Washington state. And I literally sat there and ran the sale and watched it occur and watched the vehicles sell and beat the live auction. We even had some cars where the live auction had quit and virtual - virtual bidding bid against another virtual bidding buyer for a thousand dollars, so we'd see a vehicle that had finished up at 2100 live, and a virtual buyer came in 22, and then another virtual buyer comes in and starts to bid against that virtual buyer, and the vehicle ends up selling for $3,100. So that's pretty exciting stuff. Looked at some other examples last week in virtual bidding as well, where we had some buyers as far away as Canada bidding against buyers that were in Guatemala. You've got two buyers literally bidding against each other that are not even in America on product without attending the sale. So we're very, very excited about virtual bidding. I anticipate the product to do - to do very well in Q4 as well. It's just - I think it just makes sense for buyers. They can see where the auction's at, they can click a button on their PC, and they're bidding the product without having to attend the sale. So we think it's going to give us quite an edge with respect to the insurance industry in showing them greater returns. We've seen nothing but increases in returns at all virtual auctions. The virtual auctions that Vinnie ran for me for the quarter, the ones that were not on virtual bidding that went to virtual bidding, we saw an increase of over 1.4% in returns by becoming a virtual auction. So, again, if we can generate higher returns for the product, then that's the impetus for an insurance company to use us versus someone else in disposition of their salvage. Lastly, I'll talk about off-site sales. Another terrific product that we launched, what, three weeks ago, I guess. So we just did it in I think the week before May. It would have been the very last week of April that we launched the product. Literally, it's a completely separate product from Copart access or the other products that we offer at Copart.com, in that you can assign a car to Copart on the internet but that's going to go to a salvage for one of the Copart yards. Off site allows you to go into a separate product, assign the vehicle to Copart but the Copart will not be transported to one of our locations. The vehicle could be sitting at a body shop, a select shop, one of the certified shops in the insurance companies use to do their repairs. It could be in a far-away location, where we're not at. It could be Montana or the Dakotas. The vehicle could be a heavy piece of equipment like a heavy-duty truck, 18-wheeler that's been damaged, it's at the owner's location, and it can be listed on-line, it could be a boat at a marina. The product is listed on-line and it's fully integrated with all of the vehicles that we've got for sale. So instead of going to a site where you only have a select number of buyers and a limited amount of product, you're going to a site that has over 40,000 vehicles for sale, and you're getting over 37,000 buyers looking at that product. So we've taken a product and made it completely separate from Copart, yet fully integrated on the buying side. So literally, a car could be anywhere. It could even be - could be anywhere. It doesn't really matter where it's at. It could even be in another - in another country, and you're listing it on our site and you're allowing all of the buyers to find the product. They might do a search '99 vets and they'll see a vet we've got in Chicago, a vet that we've got in Dallas, and then there could be one that's sitting out in wherever. Grand Rapids, Michigan. And it would be listed right there and the buyer can bid it. It is a - an open bidding system. It's not closed like our on-line bidding. You will see the bid is currently at $5,000, and you bid $5,100. Once you've bid 51, someone else can come in and bid 52. The auction can be held for three, five, or seven days. At the end, if the reserve price has been met, then the auction closes and we move forward with collecting payment from buyer and going with - going on with the closing of the vehicle. If reserve has not been met on the vehicle, then the insurance company has to go in and approve the bid on the vehicle and if they approve it, then we go to the buyer, collect the funds, deduct fees, and send the proceeds on to the insurance company. We do do all the escrowing on the vehicle. At this time, we don't do title. We're allowing the seller to transfer title and as we see a need for Copart to do title work for the insurance industry, we will obviously do that. We do that everywhere. But we wanted to build a product where they literally could do everything themselves, if they wanted to. If they wanted to use another vendor to do title, they can do that as well. So the idea was to allow them to sample some of the services at Copart or utilize off-site selling 100% in the disposition of their salvage by having the vehicles at other locations. Again, some of the simple thinking behind that, too, is just that you minimize your towing costs, your - there is no towing cost of moving the vehicle in. Per our perspective, we don't have the towing or the storage or any of that on those vehicles. So we've already seen a lot of interest in the product. It's literally been out, I think, three weeks, maybe four weeks tops, brand-new product. It's doing very, very well and we're excited to see what will be happening. I don't have any statistics on it for this quarter. I will definitely be giving statistics out on off-site sales for the fourth quarter and let people know just how the product is doing. With that, I will turn it over to Wayne Hilty for the financial review and then we'll open it up for questions.

Great. Thanks, Jay. As Jay has discussed, financial performance was ahead of expectations for the third quarter ending April 30th. Net income grew by 45% to $16.6 million. Compared to the third quarter last year, total revenues increased by 26% to 90.2 million. That $18.7 million growth in revenue came from both new and same stores. I'll talk a little bit more about that in just a moment. The mix of units shows a steady level of the percentage incentive program volumes. For the quarter, 68% of volume was processed under PIP agreements compared to 61% one year ago. Now I'll move on in our discussion to expenses and other income. Yard and fleet expenses increased by $9.8 million, or about 23% this quarter, compared to a year ago. New stores accounted for $4.5 million of that increase. The remainder of the increase - approximately 5.3 million - is due to the cost of handling increased volume at existing stores. Our same-store revenues increased by 17%, and same-store expenses increased by 12% this quarter. General and administrative expenses increased by approximately $1.3 million over last year, due to the cost of handling increased volume and costs of exploring new business opportunities. For the current quarter and Q3 one year ago, G and A was 8% of revenues. Depreciation and amortization expense reflects the adoption of FASB 142. Effective this fiscal year, we no longer amortize goodwill resulting from business acquisitions. The current effect of this accounting change is to eliminate approximately $2.6 million in annual goodwill amortization The effect on the current quarter was a reduction of amortization expense by approximately $667,000. On a pro forma basis, if we had applied FASB 142 during the corresponding quarter a year ago, amortization expense would have been reduced by approximately $599,000, and earnings per diluted share would have changed from the previously reported 13 cents to 14 cents. The operating profit was 26 million, compared to 19.1 million one year ago. Our operating profit percentage improved by 2 points, from 27% a year ago to 29% in the current quarter. The improvement of profitability is being driven primarily by economies of scale. Our net other income increased by approximately 800,000 compared to last year, due principally to increased interest income compared to a year ago. Recall that we raised $127 million this past November from the sale of 6.9 million split-adjusted shares. Today, that cash is invested in short-term cash equivalents that are yielding approximately 2% interest income. As Jay reported, we're currently looking at prospective uses of the proceeds. The net effect of the new shares on the current quarter was about a half a penny of dilution. The tax rate we used for the quarter was 38.5%, and a year ago was 40.4% for the third quarter. So compared to the same period in the prior year, net income for the third quarter increased to 16.6 million, and diluted EPS increased 18 cents based on 93,516,000 weighted average shares. Now let's take a closer look at new store information. The 8 new facilities added approximately $6.3 million of new revenue, and as I noted earlier, their direct costs were about 4-and-a-half million dollars. Depreciation and amortization is an additional 191,000. So the effect of new acquisitions and openings on the current quarter is an operating profit of about $1.7 million. Please keep in mind the new facilities are investment in the future and the first 12 to 18 months at some locations will show losses. Three of the eight new sites are start-up locations that produced $2.7 million in new revenue. The bulk of this revenue is from sites that are less than 20 miles from existing stores. For example, our Martinez facility that we announced last May was our fourth bay area facility and is located just 12 miles away from our first Vallejo site. These new stores in existing markets are built to respond to market share gains and to provide better service and lower towing costs for our suppliers. Because of this, we report organic sales in addition to standard same-store sales information. So for the quarter, same-store sales grew by 17%, and total organic revenue growth was 21%. Organic growth is same-store growth plus revenues from new stores that we opened not acquired, such as Martinez. Acquired revenues contributed an additional 4% to revenue growth. Finally, let's take a look at the balance sheet and cash flow for the quarter. We started the fiscal year in August with cash and cash equivalents of $15 million. As of April 30th, 2002, that balance was 144 million, an increase of 129 million from the start of the year. Operating cash flow for the fiscal year-to-date nine months is $63.1 million from a net income of 41.9 million. Recall that this is the time of year when we sell off inventories and accounts receivable balances decline for the cars that we picked up during the winter. The A/R balance at April 30th, 2002 is $64 million, which is down slightly from the 65 million we started the fiscal year with. Capital spending for the year-to-date is 64.7 million in cash, and 10.9 million in stock, for a total of $75.6 million. The 75.6 million includes the cost of acquisition and start-up facilities recently announced, plus significant investments in land, facilities, computer systems, and software. We continue to expand our capacity to handle our growth. And that concludes the prepared portion of the call. Katie, if you could rejoin us and explain how the Q and A will work

Thank you. At this time we are ready to begin the formal question and answer session. If you would like to ask a question, please press star 1 on your touch-tone phone. You'll be announced prior to asking your question. To withdraw your question, you may press star 2. Once again, to ask a question, please press star 1. One moment. David Reno of Salomon Smith Barney you may ask David Reno of Salomon Smith Barney you may ask your question.

Yes, good morning. David Reno from Salomon Smith Barney. Congratulations on a good quarter.

Good morning, David.

Good morning. A couple of questions. First of all, I'd like to ask about the - your ability to widen your gross margin and the ability that you were able to get a higher percentage of the gross proceeds as your fee revenue. Can you explain what are some of the main drivers of you guys securing more of the gross proceeds of the car?

Yeah. Well, we're on PIP. 68% of the are on PIP and we get a percentage of what the car brings. We've seen an increase in the quarter in what salvage has brought. That's one major reason. The other one was we had - we always have some price increasing in different areas and we had some of that in this quarter as well.

When you say price increasing, is that buyers' fees?

Yeah.

Okay. And those buyer fee increases are sticking?

Oh, yeah.

Okay. I'd like to move over to the public auction, if I could and I've got a series of questions about that.

Sure.

Can you give us an update on where you stand with the plan to acquire public auctions, what you expect to pay as a multiple of revenue or EBITDA, when you -

Yeah. We never do it on a multiple of revenue. We look at the business as a multiple of what how many cars we handle or we look at it on a multiple of pretax, which is basically EBITDA, because they don't have really a lot of DA, and we typically want to buy companies at five, six times EBITDA.

That's consistent for the public auction as well?

Oh, yeah. We're not changing that.

And then how quickly - once you secure those operations, how quickly do you think they can grow and how many do you expect to acquire over the next six and 12 months?

Well, I think we can - I'll answer it in reverse order. I think we can add probably four to six locations in the next six to 12 months, and as far as growth goes, I think that's - that's kind of an unknown for us right now. I anticipate that we can overlay our systems immediately within - immediate to a month's time, and that will allow us to offer a lot more services than are typically being offered out there in the field. They're going to be profitable day one, and I think we'll be able to increase the margins within six months from where they're at, from where we bought them, and I think growth is definitely something that's going to happen. I just don't know, really. At this point, you know, I've got 91 Copart auctions under my belt. It's pretty easy for me to give you an estimate on where I think growth goes with those facilities. I don't really know, with the public auction business yet, David, where the growth will go going forward. But I anticipate that we add vehicles to the business. That's why we're in it.

Finally, on the public auctions, what would be a typical revenue number and a typical pretax number for a location that you purchased on a public auction site?

Yeah. Typical revenue would be about 3 million. Yeah, about 3 million bucks in revenue. And what did you say? Pretax?

Yeah.

Pretax would be probably $800,000.

Great. Thank you very much.

Sure.

Our next question comes from Scott [Stumberg] of Sedotty. You may ask your question.

Good morning, guys.

Good morning, Scott.

Jay, maybe you could touch again, you talked about the virtual bidding. You did a little comparison of a 1.4% increase. Was that on a return basis versus traditional internet bidding?

No. That was on the auctions that were not on virtual bidding, and we converted them to virtual bidding and we took 60 days' worth of data prior to converting the auction to - to converting the auction to virtual bidding. And then we converted the auction and took the data up until, oh, the fourth week of April. Almost the end of April. Almost the end of the Q. And that's - that's the increase. The increase came out to 1.4% on that. I think the reason for that is that obviously proxy bidding has been successful. We've got, you know, 70 - what was it, 74 million? I just want to check my notes. I don't want to give you a wrong number. 74 million, yeah. 74.2 million in proxy for the quarter. But I think where virtual bidding takes over, that proxy couldn't, is that proxy bidding allows you to put your bids in up until 5 o'clock the night before the auction, and then it's really the last call - the last say in bidding always goes to the live buyer, so, you know, the live auction bids against the proxy auction. We exceed the proxy exceed and the proxy bidder has no way of stepping back in and saying, well, I'd like to go an extra hundred or two hundred or a thousand dollars or whatever. Virtual bidding gives them that ability. Virtual bidding allows them to watch the auction. We had a car yesterday that started off at about a thousand bucks. We ended up selling it for - I think it was $8,200. And it just went on and on and on, live auction against proxy, and the last $1,500, I'm going to say, was live bidder against proxy bid - against - live bidder against virtual bidder and we had a proxy bid on it. We exceeded it. The proxy bid was around 6,000, we exceeded it and then it just went from there live against virtual bidding and I think that's why virtual bidding is so successful is it's allowing those buyers to come back in at the moment of the auction and say, nope, I'm going to bid a little more. I want to purchase that vehicle. And we're seeing an increase in the returns from it. And that's - that's - that's huge. That's the real substance behind the product. If I can go in, again, to an insurance company and say look, it's got a realtime product, we're the only ones that have it, and it's generating high returns, then that puts me in an advantageous position.

Okay. And as far as total proceeds, total - total internet business, what would that percentage be for the quarter?

Total internet?

Yeah. Total if you put the proxy plus the -

Well, it would be on the - on the sold side it would be 38.1 million plus 6.4 million.

Okay. I can do the math from there.

Yeah. And that would be total sold and then on the - on sold and pushed, it would be 74 million plus 15.2 million.

Okay. And maybe tying the virtual bidding into your Motors Auction Group, I think you had mentioned in past calls that you had some intention of eventually -

We're definitely going to do it.

Okay. And how far along are you with that at this point.

We haven't even started. We haven't even started. We're definitely going to do it but it's not even something I've started. I've rolled it out to the 27 Copart auctions, and we put a hold on it about a month ago, stopped rolling it out, started working on some fixes that we wanted to get done first, and the major fix that I had to get done is - is completed. You know, you roll out a new product and it goes well, but you find inevitably, you find something that uh-oh I got to do that or I got an issue, so it was causing a problem probably 2% of the time that we were selling product, so we got that fix done, and we're going to roll out - we're going full bore again. So I would anticipate another 15 auctions get rolled out in this quarter. And then I'll go after Motors Auction Group. Motors Auction Group is so much different than Copart, in that Copart gets the same crowd to the auction every week. You stand out at an MAG auction and the thousand buyers that show up this week, 950 of them are all new next week because it's public. So I didn't see that as having near the benefit, short-term, as I did at Copart, so we wanted to focus on rolling out the product at Copart first and putting our resources into that.

Okay. That's all I have. Great quarter, guys. Thanks.

Thanks.

Our next question comes from [Shaw] Lewis of [inaudible] Research and Management. You may ask your question.

Hi. [Slay] Lewis, actually, but anyway, just wanted to ask with this - with your internet bidding, whether it's by proxy or by virtual, what is there to keep your competitors from having a similar product, I don't know, six months from now or a year from now or something of that sort?

Well, I can just tell you - I can the only tell you what it takes to do it and you'll have to see if that is good enough for you to figure out whether or not that would give them the ability to do it. You've got to have all 91 of your locations fully integrated on one realtime platform. We're all connected through a frame relay network on one server, and by doing that, it allows us to see if a buyer is bidding on product in Oklahoma City, if he's licensed to bid that product, because literally we've got over 37,000 buyers from Washington state to Miami to New York to San Diego, so we've got to be able to look at the buyer and say, okay, he's a San Diego buyer, San Diego buyers can bid in Kansas City but they can't bid in Ohio. And if you don't have that, if you don't have that integration, you'd have to - I don't know how you'd do it, quite frankly.

Is it a matter of -

Then the next, I think, answer to your question would be we spent over a year developing virtual bidding and over a year developing off-site sale. We've been working on this now for over a year and we've just - you know, just now launched them together, but - or pretty close to together. About three months apart. But even if they, you know, see the benefit and they've got the base core systems in place, they've got to build the product, so I think - I mean, I think that's the best I could tell you is it took us that long just to build the product, so I think that's some of the - the time edge that we've got.

Do you - so it's a matter of not just you've got integration as a big part of it. Is it also a function of the database you have?

Well, absolutely. I mean, the database that we use at Copart allows us to take a bid from a proxy buyer, take a bid from a virtual buyer in a different state, or take a virtual bid on the same car that a proxy bid that the same bidder bid proxy. So he could bid it proxy and then bid it virtual, and we can differentiate that and take payment for the vehicle at any location. So I mean we've really got a robust system. I think - I won't spend too much time on that because I think most of the investment community at this point knows we've got pretty strong systems. So I do get asked that question quite a bit, and the only way I can respond to it is, well, we're still the only - we're the only national auction company, salvage auction company, that announces any kind of internet numbers and I think that's because we've got a product that works.

And you have some numbers to announce.

Yeah, we've got numbers to announce and virtual bidding, to be honest with you, I had no intentions of it going to 15 million. I was looking for very single-digit growth. I mean that just blew me away. I wasn't expecting that at all. I was going to be happy if we went from 351,000 sold to a million-and-a-half sold, and to go to 6.4 million sold just - well, it just tells you that the product works.

Yeah.

It allows buyers to, you know, participate in the auction without being there.

Very fine. Thank you very much.

Thank you.

[Ishi Pont] of Fairlawn Capital. I you may ask your question.

Hi, guys. Just a question on the public auctions business. You've been doing it for some time now. Could you sort of give us a sense of the profitability that you see in that business and, you know, what have the challenges been, you know, in terms of what has been tougher than what you thought it would be and what has actually worked better than you thought it would?

Well, the - the margins in that business, as we've said in the past, are very similar to the salvageable business margins. The three auctions that we've got this year I guess at some point we'll disclose what the - what percentage that is of the total company, but they're going to run somewhere in the neighborhood of I would imagine they'll run somewhere in the neighborhood of 40% operating margins, and then you've got depreciation, amortization, and G and A to lay over that. We've got a great management team in place now. We've got - we ran a class of about 15 new GMs, general managers, that we do a training class on, and we've got a nice selection of folks that are working for us now that can help us in acquisitions that we're going to make. I would say those have all been some pretty decent hurdles that we had to get done and we've accomplished those. Going forward, the real, I think, issues we're going to have are going to be integrating the facilities. No different than we do with Copart. It's much easier today to integrate a facility when Willis buys it when you've got 91 locations than it was when we had nine, and so I think that the challenges we've got ahead will be as we acquire these facilities, we've got to get them integrated and we've got to do it quickly, but I think we'll do it. I mean, I think it's something we've done in the past, we know how to do it. We've got that experience. But it's definitely going to be a challenge. It always is.

Another question on the [inaudible] side. Can you talk about the pricing environment? I know you guys are getting benefits of improving the realization on the auction, but also just in terms of the sort of fees, buyer fees, versus seller fees. I mean what kind of pricing are you seeing as the industry consolidates?

What kind of pricing am I seeing? I think you need to be a little more specific for me to really understand the question.

Are you getting pricing power, particularly in areas where you've been able to consolidate the mom and pops in the salvage pool business?

No, I don't think we're getting pricing power. We've got enormous amounts of competition from our major competitors out there, and the minute that we are, you know, not offering enough value, they're not going to - they're not going to give us the cars. So I give the benefit of saying, look, look at the return I'm getting and if I'm going to cost, you know, more than the benefit that's there and there's someone else out there willing to do it considerably less, I'm not going to get the business. So I don't think I have that much pricing power, quite frankly.

Thank you.

Michael Brigg of A. G. Edwards, you may ask your question.

Can you comment at all on the competitive landscape for the public auctions sector, whether or not other entities and other auctions - types of auctions, are looking at moving into that area?

Sure. Primarily, it's fragmented right now, so we compete with - in the public auction arena with small public auctions that are out there. There is no major player, other than ourselves, that is in the public auction arena that I'm aware of. I don't believe the large auction companies that are out there today that do the straight car auctions, the nondamaged vehicle auctions, I don't believe it's their desire right now to be in the public auction business. That's not to say that they won't go in the public auction business, though, so I don't know where they're going to be headed. But right now, we primarily compete with your independent.

Would you anticipate at all offering financing to the buyer at the public auction?

Yeah, we're doing that right now through a partnership with a finance company. At one of our locations for sure. I'm not sure if we've rolled it out to the second location yet or not. But we're doing that now, so we're offering financing on vehicles and the - we don't make any funds off of it, we don't make any money off the financing but it allows us to generate a higher return. Again, if I am competing with an auction to get the salvage - to get the product in, the cars in, I'm competing with returns, and so if I can sell to the public and generate a higher return and if I can finance the public and that finance bidder bids on six cars and he only buys one but he raised the value of all six, while he's there, that generates a higher return and again, there's more reason to use Motors Auction Group than someone else, so that's the reason for our financing or for offering the financing. It's not to make a profit off of of it.

Okay. Thank you.

You bet.

Gary [Presopino] of Barrington Research. You may ask your question.

Hi. Good morning.

Hey, good morning, Gary. How are you doing.

Good. I had a series of questions. First of all, just what were the current liabilities, Wayne? Do you have that?

Yeah. Hold on. Current liabilities are $55.5 million.

Okay. And then as far as greenfields and refacilitations, can you give us some idea of what you're currently working on, and what we can expect to see as far as greenfields over the next 12 months?

Yeah. You'll probably see somewhere around six new greenfields over the next 12 months and I don't - I can't tell you refacilitation. We don't actually - I can't say that we actually refer to that, Gary. We - all of our facilities in the company have been brought up to our standards. We do that the minute we acquire them.

Okay.

And all the facilities that we open up, of course, are brand-new day one, so there's really no refacilitation to do or cleaning up up of the facility. As far as expansions, we'll probably expand another - I would say a dozen locations will get expansions for additional growth. Of course that's all - you know, that's all to be seen. As you get the cars and you don't have space, then you've got to expand.

That's really what I meant, expansion. I shouldn't have used the term refacilitation. And am I correct in hearing that you've opened up eight sites, you've got eight new site start-ups and acquisitions this year, year-to-date?

In the quarter compared to a year ago.

Okay. All right. That's fine. And then just some other questions. With this virtual bidding and the off-site sales that you're doing, I mean you're driving more and more business to the internet. I mean, is there a risk that you actually alienate the buyers that come physically to your auction sites?

I don't think so. I don't think there's a risk there at all. The buyers need to buy the product as much as we need to sell the product, and, you know, they're going to go to the auction to buy it or they're going to go on-line. I think it's quite the contrary. It's like saying, look, I'm offering you a service that's going to save you time and money. You no longer have to send buyers in and have them spend the day at the sale or have them fly into markets to do that. You can go on-line and it's like the buyer is saying oh, jeez, don't do that for me. That just cost me - you know, that makes me save time and money. Why would I want to do that. I mean I think it's just illogical. The buyer gets a tremendous benefit out of being able to go on-line and bid the auction. Those that choose to go to the local auction and not bid live - I'm sorry, not bid on the internet, have that option. I mean, we - it's not uncommon, we looked at St. Louis sale last Friday. We had 265 internet buyers on-line, we had about 70 buyers at the live auction. So it's not uncommon for us, in our business, to be well outweighed in attendance on the internet or on-line versus at the live auction. I think the live auction component is a necessary component. I think it will exist because you've got buyers that want to physically go out and see the cars, touch the cars, and stay there for the auction. Also, there's a certain amount of product that's just the lower-end salvage that I don't think the - the very - rarely does the internet have much effect on it anyway. You usually have one or two low-end buyers that are bidding the three, four, five hundred dollar product, and they bid against each other at the auction and we sell it to them, so I don't think it alienates them at all, in my opinion, Gary. I think it's - I think it's a benefit to them, to be able to find product and bid the product and not have the expense of going to the auction

Okay. That's fine. Just curious. And then just a couple other things. I mean your yard and fleet as a percentage of sales was - expenses, 58.8 versus 60.45, I mean is that all leverage or can you pinpoint some things that you're doing to drive efficiencies there?

Well, we're - again, part of it is leverage. We're running more, you know, product through the base. As far as efficiencies go, we've seen some efficiency in trucking. I don't know if that's true for the 12-month period. Wayne might be able to comment on it. Fuel is definitely down.

Yes, fuel is -

For the whole year. I don't know if it's down from the quarter four quarters ago.

About the same price it was a year ago, I believe.

Is it now?

Yeah. The total efficiencies, Gary, I think are more just more volume through existing locations.

Okay. That's fair. All right. I'll let somebody else go.

Thank you.

Sandy Braun of guilder gag no one and Howell. You may ask your question.

Hi. How are you?

Good. How are you doing?

Okay. Good. What was the impetus for the off-site bidding? I mean d it come from the insurance companies? Is it something that they were talking about for a while? And are there -

Well, there's - I'll just comment on it. There are a couple companies that are out there that have been out there since the great internet boom of, what, '99, and they came out with the product of selling salvage on-line, only on-line, and not having facilities, and we saw the product at that time and we've observed the product and finally decided, okay, let's go ahead and build this product because we think there is a demand in those areas I talked about. The product that would be especially your heavy industrial, your recreation vehicles that get towed into an RV facility for repair, your - all your marina type stuff, your high-end vehicles, your recovered theft, you know, Mercedes, Corvettes, Porsches. We saw an opportunity here for insurance companies to list that stuff, and also to sample Copart. So we might not do business with them today, yet they might sign some product on-line and see what kind every return we can get on an on-line environment versus what kind of a return they can get at their current vendor. So we looked at it from an ease - a point of ease, and also from a competitive advantage point.

You - you're only a match maker, I guess, in this. You don't fix up the vehicle. You don't even hardly see it, right.

Right. We don't tow it in, we don't store it, we don't see it. They take the pictures, they attach the pictures to our website, they can attach up to 10 images, they give a very detailed description. Our descriptions are HTML enabled, so they can go in there and fancy it up a bit. It's very similar - if you want to say it's very similar to the Ebay model where, you know, buyer and seller meet and Ebay never gets involved. We're taking the same approach. We want the buyer who has got to be licensed in most cases to go through our database to make sure we've got the right buyer and that he is licensed, and then we will hook him up with a vehicle, being the seller, and different from the Ebay model, we then collect the proceeds. We collect the funds from the buyer, make sure the buyer's happy with the product, that it was - that it was sold correctly, that it was listed properly, that it wasn't misrepresented, and then once we've cleared that escrow period, we forward the funds on to the seller.

Do you expect [inaudible] cars that you normally get into your lots, not stolen or not boats, just, you know, wrecked cars -

Do I think run-of-the-mill cars will go through the product.

Yeah.

Oh, absolutely. Right now I'm seeing the higher-end product going through it, but sure. I think - I think, absolutely, there will be, you know, your run-of-the-mill product as it goes through. Because it's brand-new, really it's brand-new to our industry in the sense that there were companies out there doing it but they never did any real volume and so, you know, we're listing it through our buyers and through our current volume. You can go in and bid off-site only product at our website but if you just do a search, you come to Copart's site, you type in "2000 Porsche 911" you're going to get every Porsche 911 we've got for sale whether it's at our facility or it's an off-site car.

Okay. So this - I mean it's a little off track but your percentage of PIP may go down a bit. Instead of dwelling, you know, cars in and you can get them - share in the up side -

I don't think it's going to cannibalize too much from what we certainly sell, if it cannibalizes much of anything. I think it's more that we're going to get vehicles from far away places that we've - we currently don't maybe handle the business. I think it might also be vehicles that are - we're currently not getting, the account, we currently don't have the account with that company and they're saying hey, let's go ahead and try this out. Copart's saying it's great. Let's see if it is.

And two other quick questions. One was there's been a lot of talk, especially this quarter, about [inaudible] getting together or another competitor becoming a lot more active in the United States. Have you seen that in some of your markets, where there's increased competition.

For acquisitions of business or you mean just in the running of the company.

Well, just there's rumors about some of your competitors - one larger company coming in and acquiring [inaudible] one of your competitors trying to get a foot hold into the United States.

Uh-huh.

Have you been seeing increased competition this quarter at all?

Again, I don't know if there - if - you know, I can't tell you the rumors are true or not. As far as competition, there's always competition out there, and it's been pretty fierce for the 13 years I've been in the business, so I don't know that it's changed. It's competitive and it's been competitive and I think it will stay that way.

And last quarter you talked about because of the, you know, mild weather, that there were more body shops doing the work.

Yeah.

Has that trend continued?

Well, winter's over, so it - not only did it happen, it's gone.

Okay.

Winter came and went and I'm - you know, I'm sitting in, you know, the Midwest right now with a polo shirt on and no jacket, so -

But the question is, then, did the body shops, now that they, you know, got a little more into it because of the mild winter, have they stayed involved?

No. That's just normal. That's the way our business is every year.

Okay.

If we have a really heavy winter next year, shops are going to write heavier estimates because they've got more product than they can handle. It's a supply and demand game and that's going to force more stuff to be totaled, not to mention there are more totals. So you get kind of a doubling effect and if we have a really light winter next year, shops become more aggressive in writing their estimates to try to get more product in because they're starving for product and there's less product out there to boot because we don't have a heavy winter and so we just see a light volume. We had a really light winter. I mean that's just a reality of it. You heard some of the stories in the news about record droughts and all that kind of good stuff, so we just had a really light winter and, you know, in our business, we are affected by the winter. That's just the reality of it. So if next year we have a really heavy winter, that will be to our benefit.

And can you just repeat what number was pushed through virtual bidding this quarter?

Sure. Virtual bid push was 8.7, or 8.8 million. 8.786, so 8.8 million.

Okay.

And sold was 6.4 million.

Very good. Thank you very much.

Sure.

Tracy Whitman Brace of Solomon Smith Barney, you may ask your question.

Hi. This is Tracy Brace from Solomon Smith Barney. I just have a couple of follow-up questions.

Sure.

With respect to capturing a bigger percentage of gross proceeds in the revenue, do you think that's something that will continue to go up driven by either of the two reasons you cited, the increasing PIP or the higher buyer fees, or do you think that's going to kind of plateau where it is?

I don't know. I'm not - and I won't speculate on it, because I've definitely seen an increase in virtual bidding, and what product we sell in this quarter could have effect on, you know, the - again, virtual bidding is 27 out of 91 locations. If virtual bidding were, you know, 50% of the company, I think it would - instead of 25%, I think it would make a bigger - I'd have a bigger ability to predict it. So I really don't know. I would anticipate that there will be some increase, but again, the - eventually, you have to level off. There's only so much of a return you can get, right? You're selling an ACV of $6,000, you can't bring $6,000 on a wrecked car. So there's just a limitation to how high you can go. But we saw about a hundred - a little over a hundred dollars per car on the virtual sales increase, and that's where we got excited, because that's - that - all that - I shouldn't say "all," but the majority of that money goes into the insurance company's pocket.

Okay. Thanks. And then as far as your guidance for fiscal '03, the 20 to 22% EPS guidance, can you just talk about what the major assumptions driving that are, as far as [inaudible] sales and new facilities opening and if there's any impact from public built in there.

Yeah, there is. We figured pretty conservative growth in units, in unit growth, and again, our goal is to be conservative with respect to the street. We would rather be a company that's known for exceeding and beating, rather than missing, so we wanted to take a conservative stance on what we anticipate the growth to be in units. We don't know what the growth will be till it happens. We believe we've got great products, and that if we market them properly, we'll get additional business from the competition. With respect to new facility growth, I would anticipate somewhere around 6 to 10 or - including MAG and Copart, including 10 to 12 auctions for both businesses in the next fiscal year.

Okay.

6 to 10 per business, so 12 auctions for the - for the two businesses put together.

Oh, okay. All right. Thank you.

Okay.

Dan Rutter of Laird Norton Trust Company, you may ask your question.

Yes, good morning.

Good morning.

Hi. Would you just spend a few minutes, when you think about MAG, would you kind of detail for us possibly the capabilities and systems that you think are leverageable from the existing salvage business versus what kind of new capabilities might you need to develop as you go?

Well, leveraged - the areas that you can leverage are pretty obvious. One is the G and A. You know, leveraging your payroll, your accounting, those different areas. Again, as we buy companies out, they've got to do all that internally and we take that away from them and do it at a G and A home office, and the second, I think, big area that we leverage is the ability to see something done well in one location but it's not done at the other companies. Every time we buy a company, we find out a new way of doing business. We did that with Copart, and we still do it to this day. It's not as often because we've experienced more opportunities, but in the early days, every time we bought a company out, somebody did something better than we were currently doing. And Copart has always had the McDonald's effect in the way we run our business. We want everything consistent, and if it's good for one auction, it's good for all. And so we take great ideas and we leverage those across the - across the board and do them at all auctions. And then I think the third major benefit is that companies are competing or I should say public auctions are competing with each other for advertising. So you're advertising in three markets that all overlap. You might advertise in a market that another guy's at to try to get his cars or his buyers up into your area, and you're advertising, you know, brand A and he's advertising brand B and the other guy is advertising brand C. And so if you're able to bring all those up underneath one brand, being MAG, I think that it gives you tremendous leverage with respect to the advertising, your ability to go out there and just say, you know, come out to Motors Auction Group, boom boom boom, when you do your advertising, we've got locations in these areas, boom boom boom. And because of that, you don't need to do as much advertising either, and that's - you know, you get a financial benefit from that.

Okay. That's very helpful. Regarding barriers, what do you see as the difference between barriers in the two businesses?

Well, Motors Auction Group doesn't have near the zoning restrictions so that barrier is not as great, but in getting the business, it's as difficult, if not more, because Copart has such a name behind it in our industry that it gets us in the door in many cases to at least show our products. Now, we might not convince someone to give us their cars, but we can - nine times out of 10 - get in the door was there's an interest. There's an interest to see what Copart has to offer. Motors Auction Group is definitely the small kid on the block with respect to that business, because there is no real major player and the - and the banks are typically using the large nondamaged car auctions today. So if you're going out and trying to tell a bank that they ought to meet with you and give you additional business or give you business to start with, you've got to go in and try to get in the door, which is a little more difficult, but then you've got to go through the process of selling them on, you know, how selling cars to the public, rather than selling them to a dealer only sale generates a higher return. And again, that goes back to the financing and everything else we do, but that, at the end of the day, puts more money in your pocket.

And do you view the internet product offerings as something that will be a big differentiator in MAG?

Yeah. I think it's going to be - I think it's going to be a great product. I don't know if it will have the effect that it's had in Copart, but I think it's going to be an improvement to the business. We have a website now, and our buyers go on-line now, and look at product, and we've actually - we actually do a survey every time you check in to buy at Motors Auction Group. You've got to tell us whether you heard about us from the paper or the TV or billboards or wherever we advertise. And one of them is the web. And we get a surprising number every sale. Surprising to me is like five. It's not a big number, but that surprises me that out of a sale where we'll have 400 people check in, that five of them heard about us from the internet, and so I think as we build that internet presence and as we build products on there, we can do advertising and say check us out on the web and people can go directly to Motors Auction Group.com and check out product we've got for sale and that might be just enough to get them in the door. They go on there and say see wow, they got a '97, you know, whatever. Ford Explorer, and that's what I've been looking for. Or maybe they got a '95, you know, Ford Taurus or whatever. They'll go on there and say there's the Camry I wanted and come on down to the sale. So I think it - the internet is going to give us maybe that leverage to get them to see the product and that brings them down to the auction and then later on, with the internet, we allow internet bidding today with dealers only but later on - or I'm sorry, we allow the public too, but allowing the public and dealers to go on-line today and submit bids, I think that product could definitely grow. The public is not like wholesalers who can bid and they're buying 50 cars a week and it's just part of their business. They're more touchy-feely. They want to come down, they want to see the cars, they want to touch the cars, kick the cars, all that kind of good stuff. And it's fun for them to get a hamburger and bid on the block and all that kind of good stuff. So I don't think the internet will have the dramatic effect that it's had it at Copart for Motors Auction Group but I definitely think it's going to be an enhancement product

Great. Thank you very much.

Sure.

Gary [Presopino], you may ask your question.

Yeah. Wayne, you know, as I look at your receivables growth year over year at the end of the quarter, it's up about 2.2%. Has that relationship been a growth in receivables versus what revenues can be in the upcoming quarter - has that relationship kind of gone away because of some of these things you're doing like virtual bidding where there's no advance charges, things lake that, or is it still, you know, because of the winter, still somewhat difficult to get cars in.

Yes. The fundamental business model is we're picking up cars today. We pay out advance charges. They sit in receivables until we sell the car. So even with virtual bidding, we still have an advance charge on a car. What's different is we've added a buyer who is live on the web. So as a leading indicator, the accounts receivable balance is still telling you that we're reflecting cars that we're holding in inventory.

Let me add to that, Gary. The - first, this is the first quarter I've ever seen it this low. The average days that we're turning vehicles has come down considerably.

I can see that. It's down -

Collection efforts have also improved.

Yeah. We are seeing insurance companies - and we're working with them heavily on it but we're seeing them move product quicker which is great, because that means we can store more cars at the same - you know, we can do more product through the same size facility. If, you know, storing 3,000 cars allows me to sell 15,000 cars today and in the future stores 3,000 cars allows me to sell 20,000 cars, I become more productive. So we're seeing that number drop considerably. I mean, it's - it's - it was so low for the quarter, it surprised me. I'll put it that way.

No, I can see that in my numbers here, and that throughput gives you, you know, more profitability and increased leverage. Okay. Thanks.

Once again, to ask a question, please press star 1.

Okay. Well, I'll give a closing. If a question comes in, then we'll take it. If not, we'll move on. I want to thank you all for coming onto our Q3 conference call. Had a lot of questions, so that's good. It appears that most people are seeing some of the value in virtual bidding and the off-site sales and we're going to have a great Q4 in those products and we'll talk about that at the - at the year end. So again, thank you, and we'll sign off. Good-bye. we'll sign off. Good-bye. !!!!WAYNE HILTY!!!! Thank you.