Copart Inc (CPRT) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Copart Incorporated second quarter fiscal 2003 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation if anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jay Adair, President of Copart, Incorporated. Thank you, Mr. Adair. You may begin.

Thank you. Good morning, all. I'll go over the income statement and balance sheet and I'll also review some of our spending, et cetera. Before I do that, I'll turn it over to Wayne Hilty for review and then I'll get started. Thanks.

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

Thanks, Wayne. Again, good morning. We had revenue growth for the quarter of 16 percent. That generated 15 percent operating income. The net income for the quarter was 10 percent and then finally EPS ended up with 7 percent increase. Copart earned net income for the quarter of 13.7 million. This is compared to 12.5 million for the same quarter a year ago. For the six months, we earned 28.5 million or 30 cents per share. Getting into the Internet portion of the business, we had significant penetration in that product, finished the quarter with 44 percent units or gross proceeds, rather, that have been either sold or pushed by our two products. We have a virtual bidding product and we have a proxy bidding product. 24 percent of the gross proceeds came from the virtual bidding products and 20 percent came from the proxy bidding product. So in one quarter we saw virtual bidding go from 16 percent to 24 percent. I remember this time five years ago when we were contemplating the rollout of our proxy bidding product and we were basically hoping that this would be a product that would be successful.

And when we rolled it out, we anticipated after the first quarter and seeing some success that we might achieve 10 percent penetration in the Internet bidding product. For us to be sitting here today with 44 percent of gross proceeds being affected by Internet is really an amazing time for us. Truly, we have taken selling salvage vehicles from a local market to really a global business, allowing buyers from around the world -- we sell to 44 -- in excess of 44 different countries, and we sell over 10 percent of our product outside of the US today. So it really has become a very powerful product. We finished with 68 of our 101 locations being on virtual bidding and that comes out to about $133 million worth of product, that 44 percent. Give you an update now on new locations for Q2. In the quarter we rolled out three facilities, Corpus Christi, Texas, which obviously services the southern Texas area; Fort Pierce, Florida, which is north of West Palm, we have a facility in Miami and West Palm and they're both at capacity so this facility in Fort Pierce should give us some additional help in that marketplace and then finally Rancho Cucamonga which is out by Riverside San Bernardino area and that facility that was out there was Colpin and it was beyond capacity in its current situation so that should help us there, as well.

I'd like to go over the income statement now. We did have a good quarter with revenue growth of 16 percent as I stated. Yard and fleet growth of 11 percent so we were able to bring a considerable amount of that to the bottom line or at least to the yard margin line. We had 20 percent growth in G&A but we had significant growth in depreciation and amortization, 73 percent for the quarter. And quite frankly, that growth in depreciation and amortization ended up causing us to have a total operating expense growth of 16 percent and, therefore, operating income ended up at only 15 percent growth with basic net income per share coming in at 15 cents per share. Gross proceeds for the quarter finished at about 302 million versus 269 million, 269.5 million a year ago. That's roughly 12 percent growth in gross proceeds. So it's not the growth we have been accustomed to in the past, but in this marketplace I think it's pretty good growth still, pretty significant growth. Go over some of the capital spending. I know that's going to be some of the questions today, especially with respect to depreciation and amort. Q1 Cap Ex was 21 million.

Q2 capital spending was 40 million so we had a total for the six months of $61 million in capital spending. I anticipate looking at our current facilities that we will still have another 20 to 25 million in Q3 and Q4. Literally, as you've seen in the past when we announced facilities, some of our facilities take as many as two to five years from the day we decide we need it until we find the land until we get the zoning and then we get the facility built. So this is something where we have been working years now on building this network and building capacity, and we realize now that we're not growing at the rate that is we were in the past and that we are taking some pretty significant measures to reduce spending going forward. However, there are facilities that are in the pipeline that have to be finished and there's also some facilities that quite frankly need to be put in because we've got capacity issues in some markets still. We have 101 locations, and when you have that many locations, there's always going to be five to ten locations that are out of capacity and that we have to look at either expanding them or adding locations in that marketplace, even though we have significant capacity company wide.

I figure that 2003 will finish at 80 to 85 million in total capital spending. For 2004, we do not really have a budget on capital spending. In that year, again, I would anticipate that there will be some facilities that will have to open up. I don't know what the amount of capital spending will be in the coming year since it's 6 months away and then that's 12 months out from there so we are looking at 6 to 18 months from now what capital spending will be, really still an unknown. My guess is there will be some facilities that will have to open up because of capacity and because of opportunity with customers. Currently, property, plant and equipment on the balance sheet, not counting for depreciation, is 299 million of which 85 million is land. So we've got approximately 214 million and that, of course, is not a net number because we have depreciated some of that. But that 214 million will have to be maintained going forward. And we do not have a maintenance number that I can give you at this time for the coming year because we are looking at significant steps to reduce spending company wide on capital, capital spending. But obviously, you can put some rate over the 214 million and that's going to be our maintenance going forward.

We are going to have to have some maintenance in facilities. Looking at the balance sheet, the only comment I'll make there and then I'll let Wayne get into the details is that you saw AR increase to 83.3 million for the quarter, and there's usually some concern on that. That's perfectly normal. It just shows that we have been bringing vehicles in during the winter volume -- that number was 76.9 million for the same quarter a year ago. So we have seen 80 percent growth in AR. Which is nothing really unusual. Lastly, before I turn it over to Wayne Hilty, the CFO, we have lowered our outlook for earnings in the coming quarters. Q3, we estimate will be in the 15 to 16-cent range. Q4 in the 14- to 15-cent range.

And again, the reasons for the slowing growth are really twofold. One is revenue, a decrease or a lessening of the growth rate in the revenue side of the business, and the second is that we have had considerable spending in the past with respect to capital spending on new facilities. We have considerable capacity now and so it just makes sense for us to slow down the spending at this point and to start filling up some of that capacity before we get back into a spend mode or a growth mode on capital spending. So we're going to see increased depreciation again in Q3 and Q4 and we think that has a lessening effect on earnings, as well. So with that, I will turn it over to Wayne Hilty and then we'll open it up for questions. Thank you.

Thanks, Jay. As Jay discussed, our financial performance was slightly below expectations. For the second quarter that ended January 31, net income grew by 10 percent to 13.8 million. Compared to the second quarter last year, total revenues increased by 16 percent to 82.8 million. The 11.4 million growth in revenue came from both new and same stores. I'll give you a little more detail about that in a moment. Our mix of units shows a steady level of the percentage incentive program volume. For the quarter, 68 percent of volume was processed under the PIP agreements compared to 67 percent one year ago. Now let's take a closer look at expenses and other income. Our yard and fleet expenses increased by 4.8 million, or about 11 percent this quarter, compared to a year ago.

New stores accounted for 3.9 million of that increase. The remainder of the increase, about 900,000, is due to the cost of handling increased volume and existing stores. Our same store revenues increased by 10 percent and same store expenses increased by 2 percent this quarter. General and administrative expenses increased by approximately $1.1 million over last year due to the cost of handling increased volume and the cost of exploring new business opportunities. For the quarter, G&A was 7.8 percent of revenues compared to 7.6 percent one year ago. The operating profit was 22 million compared to 19.2 million a year ago. The operating profit percentage is steady at just over 26 percent. 26.6 percent in the current quarter and 26.8 percent one year ago. Our net other income decreased by approximately 400,000 compared to last year due principally to less gain on retired fixed assets and less interest income.

The tax rate for the second quarter of 2003 was 39 percent and it was 38 percent for the same period a year ago. So compared to the same period in the prior year, net income for the second quarter increased to 13.8 million and diluted earnings per share increased to 15 cents based on 94,088,00 weighted average shares. Now we'll take a closer look at our new stores. The 13 new facilities added approximately $4 million of new revenue as I noted earlier their direct costs were approximately 3.9 million. Depreciation and amortization for those facilities is an additional 476,000. So the effect of new acquisitions and openings on the current quarter is an operating loss of approximately $309,000. Please keep in mind that these new facilities are an investment in the future. The first 12 to 18 months in some locations will show losses. Finally we'll take a closer look at the balance sheet and cash flow. We started our fiscal year in August with cash and cash equivalents of approximately 133 million. As of January 31, 2003, that balance is 94 million, a decrease of 39 million from the start of the year.

Operating cash flow for the year-to-date is 20 million from a net income of 28.5. A significant portion of this year's operating cash flow over 25 million has gone into accounts receivable, prepaid expenses and other working capital items for the normal seasonal growth of our inventory during the quarter. Recall that during our winter months our inventories grow due to more accidents. The growth of these inventories is reflected in the accounts receivable and vehicle pooling balances on the balance sheet. A year ago, January 31, 2002, accounts receivable was 76.9 million and vehicle pooling costs were 23.7 million. At Jan 31, 2003, the accounts receivable balance is 83.3 million, 8 percent higher than a year ago and the vehicle pooling costs balance is 23.9 million which is one percent higher than a year ago.

The relatively higher AR balance is due to relatively more sales during the last few days of the quarter compared to a year ago. Jay mentioned capital spending for the year-to-date is 61 million. That 61 million includes the cost of the acquisition and startup facilities recently announced and also includes approximately $18 million for a new corporate headquarters. That concludes the prepared portion of the call. We now welcome your questions. Diego, if you could rejoin us and explain how that would work.

Excuse me, ladies and gentlemen. At this time we'll be conducting a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. To remove your question from the queue, please press Star 2. For participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Scott Stember from Sidoti & Co. Please state your question.

That's Sidoti. Good morning, guys.

Good morning.

Just in regard to the guidance for the remainder of the year you guys talked about softer revenue expectations. Can you maybe just go into that a little bit and maybe quantify if any of it has to do with the weather or, you know, competitive issues and so forth.

Well, you know, we discussed that earlier in the year that we thought this year might be slower due to weather and competitive factors and that really hasn't changed. Revenue growth has slowed, and it's just a fact of the business. And we're dealing with that slowing growth by saying, look, you know, can't continue to invest capital in new facilities and in growth if we are not going to grow at the same rate so there is slowing on the revenue side, Scott. And it is still competitive, you know, still competitive factors that are causing that.

Now, will this slowing mentality, does this affect your public side of the business and your plans to grow that segment?

We're still focused on that business and we're still looking at acquisition opportunities and we're still doing the same thing for Copart. I think we'll be looking at acquisition opportunities for both MAG and Copart in the coming year. But the reality is that the opportunities for acquisitions are less than they were in the past. We're obviously not going to be issuing stock at these rates to make acquisitions. And when we do a cash analysis on what we're going to pay for a business, we have to offset that analysis by looking at our own company and the reality is that the lower the stock gets, the less attractive acquisitions become.

Okay. And as far as, you know, buying back stock, you guys considering at this point?

Yeah, we look at buying back stock on a monthly basis. And I usually get this question asked every conference call.

Right.

We are not opposed to buying back our shares. It's just an analysis that we make that really focuses on the opportunity of buying those shares back and getting some type of accretion versus the lost opportunity of parting with cash that could be used for future acquisitions. So as the stock gets lower, as the opportunity for acquisitions becomes less, the likelihood of us buying our own shares back becomes higher. But at this time, the Board has not approved a buy back of shares.

That's all I have for now. Thanks.

Okay.

Our next question comes from Ryan Randall with Kanell Capital. Please state your question. Good morning.

Good morning.

Couple questions here. One, I wanted to clarify what you were talking about for '03 Cap Ex. I thought I heard you say 80 to 85 million.

Yeah.

You're already 61 in the bag.

Correct.

So that means you've got, you know, 10 million for each of the next subsequent quarters. And I thought you had said 20 to 25 million?

Yeah. 20 to 25 million for the next two quarters, not per quarter but for both quarters combined.

Okay that helps. That helps. That makes sense.

Yeah.

What was cash from operations for the last quarter of this Q2?

I have the year-to-date numbers is what I talked about was 20.2 million.

So for the three months?

I don't have the previous cash flow in front of me. You'd have to compare it --

He doesn't have it in front of him?

Yeah, I don't have it in front of me.

Okay. So the balance sheet, you said you had 215 million of PP&E net.

No. I want to make sure we're clear on that I said that property, plant and equipment was 290 million -- 299 million. Wayne can give you the accumulated depreciation number. I don't have that. And quite frankly, I don't look at it that way. I look at it from the standpoint of how much is land. And 85 million of that number is land that gives you a net when you take PP&E minus land of 214 million but that's not accounting for accumulated depreciation.

Okay. That helps to clarify things, it was a little fuzzy.

Yeah, right. Because I look at that 214 million now as assets that I've got to maintain.

Ryan, Wayne here. Operating cash flow for the quarter was basically zero because all accounts receivable -- the growth of the accounts receivable it uses up all the cash flow for the quarter.

Okay. So then we can probably expect D&A for the next subsequent quarters to trend around 7 million-plus?

This existing quarter, D&A was up 6.4 and it's quite possible for D&A to go up to 7 million-plus in Q3 and Q4, correct.

Okay. And then lastly, I think you guys should really strongly consider a stock buy-back. Especially in light of the fact that it sounds like you're running below capacity with your existing units. Is that a fair statement?

It is company wide. It isn't at every location. So there are still roughly just off the top of my head a half dozen locations where we have serious capacity issues and we've got to look at investigation of in those market. Its a unique business where it's like having 101 different factories, and you can't neglect one location. You have to take care of them even though you might have 50 percent capacity in other marketplace. So we have to address that. I think there is no argument on this side, the company's side, that we're going to have excess cash in '04 and that we're going to generate more cash than we're going to spend so that is definitely something we're looking at.

Okay. And then just lastly and I'll hop back in, so maintenance Cap Ex, roughly what, 50 percent of D&A going forward?

I don't have a number budgeted. The reason that I don't -- I'm not quick to give you a number is that we have run at numbers in the past that are considerably higher than I'm looking to go forward. We're trying to really make some -- cut costs -- cost cuts, rather, on the maintenance side of the business. So it's hard for me to give you a number going forward. We've run basically 10 to 15 million in the past, and you could argue higher than that at times depending on whether or not you considered that maintenance of a facility or if that was, you know, truly trying to improve the facility. And I'm not talking expansion but I'm saying, you know, truly improving the facility which could give us additional business, we believe, but it is more of a maintenance mode so could you argue that it's been even higher than that. But I think it would be safe to say in the past it was somewhere in the 10 to 15 range. And so it's hard for me to guess what it's going to be in the future. I mean it could end up being that much going forward, as well.

Okay. Thanks a lot.

Our next question comes from Bob Lutell from MB Sass Investor Services. Please state your question. Thank you. The sales growth deceleration you mentioned was due to weather and to competition, so I wondered if I could get a little bit more information on that. Can you perhaps indicate the weather picture, whether -- I would think the east would be more business and maybe the Midwest less due to weather but I wonder if you could just describe a little bit better what the weather impact is on the company?

Well, we've had much better inventory builds this year on the East Coast than we had in the previous year. The previous year we actually saw some declining numbers in some of the stores as far as inventory builds because, I mean, it was such a ridiculously soft winter and so we have seen some actual increases there. And we've seen some softening in the Midwest. We've also seen some softening in the West Coast. The West Coast doesn't have an enormous amount of rain yet.

Okay. Until very recently, I guess.

Yeah. Exactly. It's raining today. But you know, the whole winter has not been heavy, heavy. But, you know, it's not over. We get our weather all the way out until about April.

And then in terms of the competitive environment, I wonder if you could give a little bit more information on what's going on there and maybe a few quantifiable indications as to the impact on your pricing or your volumes or however you want to describe the impact on your business?

Sure. Well, we have I think clearly it's known in our industry, it's known in the insurance industry that we have superior products and in this business. We offer a myriad of services on the Internet from virtual bidding, proxy bidding all the way down to the Copart access products so we have considerably better products and services. We've clearly spent more on Cap Ex than anyone else. So we have very up to date locations that are very, very nice, clean, state-of-the-art facilities. And the issue that we have today is there is a cost associated with running your business at those types of levels and though we continue to grow and we had 12 percent gross proceeds growth in the quarter, so though we continue to grow, we are not seeing the growth that we saw in previous years that was, you know, in some quarters double that. We had some very, very aggressive growth in previous quarters, and we're not seeing that. And we've -- as I said earlier, we've got some excess capacity in quite a few markets so we're saying, okay, look, we've, you know, invested, I don't know, in 99 or 2000 we invested about 35 million, in 2001, about 51 million, in 2002 about 114 million. This year, it looks like 80 to 85 million and we're saying, look, we've invested significantly in the business so let's just go ahead and let's cut back on that a little and see what happens with respect to business. But I mean, one of the competitive factors that we face since I have been in this business has been price. And I don't think that's going to change but as we develop better facilities and better products, you know, your competitor typically to differentiate themselves will go for the price to try to make themselves look different. And of course, we get just the corollary to that which is that we have an increased cost of doing business because we've raised the bar. And that's something we're facing right now.

Would it be possible to say that because of the better services you've been able to have a premium price of X, whereas under the current competitive situation you've had to shrink that to Y?

We've not done a lot of shrinking. We have just seen slow. We have a fixed cost of running our business. As you know, at the end of the day, the insurance industry wants the products and services, believes in the products and services, and will gain and benefit because of the return side and they believe in that and they will pay for it, or they won't. But I'm not willing to discount my services. I can't. I've got fixed costs of running this business and I can't -- I can't go out there and start cutting price because I've got a competitor that's willing to do that.

So we're talking slowdown in unit volume, not a slowdown in price. The other question I had, had to do with the new locations coming on. You mentioned there are three Texas, Florida, and California. Were those startups or acquisitions?

Fort Pierce was a startup. Corpus Christi was a startup. And Rancho Cucamonga was a startup.

Okay. So all three of those were -- now, fiscal year --

All -- all but -- not to interrupt you, but all but Corpus Christi. Corpus Christi was really a market that we were having to travel into to service. The other two markets were really just way beyond capacity. Over 100 percent of capacity in those locations. And we just -- you had to invest in that market and you know, you take a hit today but it all comes back over time.

Now, these three are during the quarter, is that right? How about fiscal year-to-dates for the first six months?

Yeah. Fiscal was --

Seven.

Yeah. There they are. We opened up in September or I should say purchased a MAG in Pittsburgh, a Motors Auction Group, in Pittsburgh. We've purchased a Copart in September in Reno. Nevada. We purchased in October a MAG in Richmond. And a startup Copart in Springfield, Missouri.

Okay. So fiscal year-to-date we have three acquisitions and four startups. Do I have that right?

That's correct.

Good. Thanks very much. That's all I have.

Sure.

Our next question comes from Michael Braig with AG Edwards. Please state your question. I hate to keep pushing on one particular topic, but could you be more specific as to the form of price competition that our competitor -- that your competitors are using? And how that might at least indirectly affect you? Are you in some instances utilizing any fixed price or fixed commission scheme that would tend to dilute the benefits of PIP?

Are we? Is Copart? Is that the question? Are you saying is a competitor?

The form of price competition used by your competitor and whether or not your response amounts to, in effect, a lower price offered to the insurance company.

Our response does not materially respond to a lower price because again as I said we've got fixed costs what it responds to is lower growth. If I cut my costs tomorrow -- I'm sorry, if I cut my fees tomorrow, significantly, I would erode the margins terribly. But I would gain business. And then I end up in a situation where I have capacity problems. I got go out and spend more money on Cap Ex to grow the business and I'm not getting the returns. So, you know, this is Jay Adair speaking. I'm just not down with that. I'm of the belief that we are considerably different than our competitor as a company and there are benefits that way outweigh the costs of doing business with Copart. I mean, the fact that we sell over half our product on the Internet to out of state buyers, the fact that five years ago out of state selling was less than 8 percent, today it's in excess of 30 percent. The fact that over 10 percent of our product goes out of the country. We have globalized this marketplace which generates significantly higher returns and that's got to be where an insurance company's focus is in doing business with Copart. There is going to be an up-front increase in doing business with us, costs, but you are going to get it back considerably on the return side. You are going to get it back on the service side. You are going to send your insureds out to our facilities and they look modern and to update. So I'm not going to get into a situation where you know, we go in and we're slicing and dicing our pricing to bring on business and so now you see slowing growth because of that.

Okay, if I could follow up on that a little bit, that leaves the cost issues as being a much more significant reason for the lowered earnings expectations and at that level, you specifically cite depreciation and amortization increase.

Correct.

Yet the two million perhaps a bit more increase over what some of us may have been modeling earlier is only a small portion of what must be the total operating profit decline. It probably is no more than 10 percent of the total. Can you characterize what the other costs are and at least -- Well -- -- indicate what might be controllable among them?

Well, yeah, I will comment on two things there. One is that it's not true that the depreciation is up 2.7 million. It's almost 3. For the quarter. And obviously that has a big effect. The second issue is that as we open up all these new locations, to Corpus Christi , the Rancho Cucamonga , etc, we have all this additional cost of running that facility yet no up-front volume until we go out and market and get additional volume in those locations. We actually increase our cost of doing business for a time period. So as we are sitting here with 101 stores and our fixed costs and we go out and add additional units to the business, those are all incremental units but as we don't grow units at the rate that we're opening up locations and spending Cap Ex, we actually erode the operating -- you know, we increase the operating costs, the yard and fleet costs of running the business because you have additional facilities which means additional staff and additional costs associated without as significant an increase in units and revenues.

So in the short run, those tend to be fixed and the game plan is to add volume at those sites?

Right. I mean, it's a pretty fixed cost bills. I have the land and the billions and the forklift and the trucks and now I'm waiting for cars. And every car I add has some incremental cost of towing and has some incremental cost of, you know, staff, et cetera, to handle it. But basically until I reach capacity I don't expand the land and I don't, you know, do any major improvements in the facility and again that goes back to I could go out and fill up another 100,000 units in the business by cutting costs and then I'm in a situation where I've eroded the margins and I'm going back out spending capital to grow the business and I just don't think that's wise. I think we're better off to slow our spending as a company, slow our capital spending, and to focus on increasing volumes at our existing facilities which are incremental, you know, become incremental profits.

Okay. And --.

Does that help?

Just one final point on current rate of expansion. Normally in the third quarter, which is the high volume quarter for you, you do not do much by way of acquisition or expansion, is that likely to be the case in the current quarter?

Normally in the third quarter we don't do a lot of acquisition or expansion? That's new to me. I have never looked at it on a quarter-by-quarter basis. Again, it's just things that we're working on for the last two to five years. And they come out when they come out. We've got additional locations that we've got to announce. We're too far into them with acquiring the land, having the facilities half developed, et cetera, and we need the capacity. So there will be additional announcements in Q3 and Q4. That was the point of the 20 to 25 million in capital that will still be spent to do the year end. Now, going into the fourth, you know, '04 fiscal year, we don't have a budget right now for capital spending and I would imagine that there is going to be some capital needs with respect to acquisitions or with respect to new locations and startups, et cetera. But it's going to be significantly less than it has been in previous years because quite frankly the, you know, things are slowing down.

Okay. Thank you.

Sure.

Our next question comes from DD Shacu with Juran Please state your question.

Hi, guys. Just a quick couple of conceptual questions. The first is on ownership of land. And I'm wondering whether you could say what percentage of the facilities we own land in now and with new facilities whether we're purchasing land more and more or leasing?

I can't give you the percentage of facilities that are owned because it's not something I track off the top of my head and we never come to a conference call with that data.

I think -- sorry, I hadn't finished. What I wanted to ask was, conceptually, as you think about future capital needs, do you think about needing to purchase more of the land in the existing facilities?

Well, yeah. As we look at Greenfield locations, we did acquisitions, it was very common for the owner to want to maintain ownership of the property and then, you know, have rent income. As we look at Greenfield locations, they are most often opportunities where we have to purchase the land. And so we go out and we do that. I don't know that we're going to have that many capital needs going forward for new locations in land, et cetera. I mean, we're just, you know, we're looking at slowing down a little bit here for the next year until we see how things go and see how the capacity gets filled and then we would be back into spending on land and growing the business again.

How much would you budget, you know, for purchasing of existing land that you're using at leased facilities?

I don't have a budget for '04 so I couldn't give that you number.

Okay. The second question is, in terms of --

I can tell you that, you know, out of the 299 million, 85 million is land.

Yeah, you didn't used to break that out in the past and so I wasn't sure what that number would be in '98.

Well, we never got into a lot of these -- there wasn't a lot of focus on appreciation, amortization, capital spending in the past because we were growing at such significant rates it offset any of that. And since we're seeing some slowed growth and some ramping up of depreciation and amort, we figured there would be more questions on that, we figured there would be more questions associated to the maintenance side of the business because we are going in more of a maintenance mode where there will be less spending on capital going forward from a growth perspective and more spending on capital from a maintenance perspective. Just maintaining the facility that we have.

Over the last few years have you bought in a lot of land on your leased facilities?

Yeah, we have.

You have.

Yeah.

Okay. And the second question is in terms of competition and you know you've raised prices in the not so distant past and what I was -- what I wonder is whether -- with the buyer fee increases and the PIP pricing increases whether we didn't leave enough money on the table for the insurance company, I guess. Is there anyway in which you can show net return increases to the insurance companies. And what are your discussions like when you go to see -

Yeah, I think I fully disagree with you on that comment. The increases that we make are done typically on an annual basis and it was a year ago that we made increases. And we've made no increases this year and we don't intend to make any additional increases. And the insurance companies are seeing tremendous returns from Copart's perspective. The industry just overall is very soft right now. And in many of the large carriers that I've spoken with, they're seeing downed returns. They're seeing returns that are actually net down and in dealing with Copart, we've got many markets that are actually up in returns and, of course, we attribute that to the fact that we have had such tremendous growth in virtual bidding and that we're generating such significantly higher returns than our competition. But I don't think that the insurance companies would be doing business with Copart because they just like paying more for the service.

Would you consider reducing pricing to increase your growth?

I think I answered that. Absolutely not.

Okay. Thanks.

Our next question comes from Alan with Copper Beach Capital. Please state your question. Hi. You didn't really give -- you talked about D&A. It pretty clear we can maybe come to something close to 7 million for the next couple quarters. But you didn't really give us a sense as to what revenue growth you're expecting over the next couple quarters and even into the next 12 months. Can you give us your sense as to what maybe your steady state revenue growth is in this business for you?

You know, right now it's single digits. That's what we're going forward-looking at. We're looking at single-digit growth. -- in this business. And so that's why we've revised our forecast.

How much of that is a function that you're already the biggest and it's -- and just harder to take market share when your competitors are fixing themselves up versus where it was and pricing has come up a lot in the last couple of years?

I don't know how much of it is that I think that's part of it. I think it's a number of factors that we talked about but I don't know per se what percentage is caused by that. We all know the law of large numbers, right? We all understand that as a business grows, that, you know, it's compounding. So I'm sure that has some effect on us.

Are there specific markets where pricing is weaker than --

Of course. Of course.

Can you share with us maybe regions of the country where pricing is a little more week than other areas?

Oh, sure. The Midwest is never going to be the same pricing as California and New York.

I didn't mean relative to each other. I meant relative to last year or relative to what you had seen in the past.

No. I mean, we're running the business the same as we have in the past. We have fixed costs and those fixed costs have increased, not decreased over the year.

You talk about the fixed costs and just sort of while this call doing the back of the envelope it looks like you spent hundreds of millions of dollars in Cap Ex in the last few years. Your main competitor I'm assuming you're talking without referring to their name insurance auto auction I guess they've only spent something like 30 plus million in Cap Ex the last couple of years and they have been in more of a fix-up mode. How much of this has to do with the fact that your margins sort of victim of your own growth? You have had great success the last couple of years getting margins up to 27 percent of EBIT of revenues, and your competitor I know has been in different straits in trying to fix their business model but they're so far below you in terms of what they're generating off a dollar of revenue such that they're able to price cheaper than you can.

They are able to price cheaper than we can. And again, like I said, we believe that the insurance industry when insureds come out to facilities, when adjusters come out to facilities, they want to have nice work conditions. We believe that, you know, they want to have higher returns. Our Internet products clearly generate higher returns. If they didn't, we wouldn't be in business. You can't sit out there in the marketplace as the number one player and say, well, I'm just going to be more expensive to do business with and the cars will come. That's just not going to happen. The reason that we've growth at such significant rates, the reason that we're continuing to grow is because we generate higher returns. We've got better products. And the insurance industry recognizes that. So they are a different company than Copart. Copart has taken great strides to differentiate itself from any other salvage vendor in the industry. We don't want to be like the independents, we don't want to be like any of the public companies. -- that are out there we pushed very hard to be different and that different being better and I think that's been very successful for us in the past. I think it will be successful in the future. We've just, you know, we've hit a point here where we've got some ramping costs and we have to slow down for a little bit.

With that said, your stock is down about 70-plus percent in the last year and sort of 14 month after having a good run. It sounds like you recognize now that your business is not a 15, 20 percent grower or steady state grower and that just in general partly the law of large numbers is impacting it. Doesn't that speak to a different capital structure? I know you have had an aversion to debt but I'm not exactly clear why you're sitting with so much cash on the balance sheet given the -- you're turning more into a cash flow story than a growth story.

Yeah. We are turning into more of a cash flow story. Looking forward, I don't anticipate that cars are going to stop being wrecked in the next 20 to 30 years. I think they are going to continue to wreck 'em. There is going to continue to be insurance companies. There is going to be a need for Copart. I'm a young guy. I've got folks in this business that plan to be here a long time. And we interact with the insurance industry and I plan on maintaining a relationship with them long term. And if I ever get called to the carpet to open up 10 locations or to bring on an extra 100,000 cars, I want to make sure I do have the capital to do that. So I'm not saying that I wouldn't maybe decrease some of my cash position as we sit today but debt I'm very debt-averse. It's just very hard for us from the CEO down to embrace the concept of debt because, you know, we increase the return on equity or the return on assets, and it's very hard for us to jump on that bandwagon when we've seen our business get a phone call and six months later we are doing an extra 50, 60, 70,000 cars and you better have the working capital to handle that business. You better have the cash flow to be able to build facilities and expand facilities and handle it. And we're not big debt fans.

Okay. One more if I can one or two more quick questions. Maybe I'm missing something but I can't imagine the weather this year is any worse -- excuse me, is any better than it's been a year ago. I seem to remember at least I live in the Northeast in New York. It's been awful in terms of the number of snowstorms. I know the west they have gotten a lot of rain. Are you going to tell me that the weather this year meaning winter through this let's say July to July, is better than it was a year ago?

No. I'm not going to tell you that.

So your prediction in the beginning of the year where you pin some of it on weather in terms of reducing your growth is that wrong now that you're looking at it and there are other factors playing into it?

I don't think that it's wrong. We had significant weather the prior years. I mean, significant --

I'm talking year over year. I'm not talking does that mean --.

This is Wayne speaking. You know, we've talked in the past about our winter inventory growth and during the healthier years we saw 20 percent inventory growth from November 1 through the end of January. 20 percent from November 1 to the end of January. A year ago, it was 12 percent growth, very dry winter. And this year it's 15 percent growth. So we were still below normal winter growth.

How much of that is that you're so much bigger and can't grow the numbers as much?

No, that's seasonal.

Oh, okay.

Our expectation would have been, you know, a 20 percent, a great winter is 20 percent or better. A dry winter is 12 percent. 15 percent is, you know, a little wetter than the last year's dry winter.

Got it. Thank you. That is helpful. And lastly, I've never found that when there's only 2 public companies in an industry and most investors are using you as the benchmark to get educated on it, it's never good when both companies sort of speak about each other in a negative fashion. I understand it's possible but it just never helps valuations for either companies. That's just a statement. Thank you.

Sure.

Our next question comes from Brad Evans with High Rock Capital. Please state your question.

Good morning.

Good morning.

Just curious, you know, with the revision of the guidance this morning, I guess you've taken your earnings guidance down about 11 percent plus or minus I guess. Based on the prior guidance, what kind of reduction in EBITDA have we seen? Can you just help us understand kind of the magnitude of the reduction of EBITDA as opposed -- because part of the reason we're seeing your stock getting crushed this morning is the higher than expected depreciation and amortization which obviously is a non cash item so I'm just curious as to, you know, kind of compare that to EBITDA as an apples to apples comparison.

Okay. I'm not sure if I understand the question. We did put in the press release a -- you know, an EBITDA but it's not a what I call a investors would say a true EBITDA. It's operating income plus depreciation and amort. It's not factoring the fact that we have interest income. And that was 57.7 million for the first six months versus 46.8 for the same six months a year ago. I don't know if that's what you're driving at?

No. The prior guidance that you had which was I guess roughly 70 cents, you have taken the number down to roughly I guess 60, 61 cents and I'm just curious based on that 70 cents what your EBITDA expectation was and based on the 60 to 61 cents that you are currently forecasting what the current EBITDA forecast is.

I don't know. I didn't have an EBITDA forecast. And I'm not sure that I do today. There's still some unknowns in that. That's, you know, it's hard enough to predict your earnings and here we are trying to give forecasts on earnings and I have tried to give some expectation of what depreciation will be and if you can you know do the math you can basically try and figure out what that will be.

Fair enough. I'm just curious, what remains on the current buy back authorization if there is one.

What was the question?

The buy back authorization what remains on the current authorization if there is one.

We don't have a current authorization. The board has not authorized the buy back of shares. We review it on a monthly basis. And, you know, if we felt that it made sense for us based on all the factors I have named in the past, we would have to get Board authorization before we went forward.

Okay. Fair enough. And I guess the last question I had was just with respect to on the M&A side, under a hypothetical situation, you know, let's assume you find a -- an attractive target that has a mature asset base. What kind of valuations do you historically look at from a multiple of EBITDA or whatever multiple you look at? What kind of private market or you know I guess private market equity values have we seen --

Well, in the past, it's typically been about six times EBITDA. And you know, obviously, as our valuation trades down, that gets harder and harder for us to pay and the reason it's had to be at those rates is typically if you walk into a private owner and you offer him less than six times EBITDA it's not enough to get him to take the step to sell. You get much lower valuations, and they figure I might as well just continue to run the business. So I don't see us paying six times EBITDA on too many acquisitions next year. And the fact that we're looking at lowering our actual price to pay for businesses will probably reduce, you know, there's a probability that it will reduce the amount of acquisitions that will be made by the company.

I guess I mean based on the numbers we're talk about this afternoon, you're trading at right now around five times debt adjusted cash flow enterprise value to EBITDA so I mean from just a financial arbitrage perspective a six multiple would be somewhat dilutive. I lied actually. I have one additional question and that I guess for Wayne as we look to the back half of fiscal '03 at this point can you just help us understand working capital changes for the back half of the year?

Generally, the cash that's gone into accounts receivable is going to reverse.

Right.

So recall Ryan's question during the quarter we actually used up all the net income that we would expect that usually year end inventories are more or less where we began. So we would expect to, you know, return all that back to cash.

So just back of the envelope we could be looking at you know, something in excess of, you know, maybe $30 million in free cash flow in the back half of the year based on the Cap Ex guidance you've given us?

I don't know if that's correct. I don't want to answer that. I don't know that that's correct. I don't know if the math you just did made sense to me.

Fair enough.

Our next question comes from Dan Rudder with (indiscernible). Please state your question.

Hi. I guess I have a question for Wayne possibly: Regarding the new facilities that you're starting up, are you experiencing a deceleration possibly in the time it takes to break even, and in terms of the overall national market I'm just kind of curious, you mentioned in your SEC filings that you've got a return on capital requirements and I'm curious how many facilities do you think, you know, you can put into the country before you start to get down towards not being able to clear that hurdle?

Your first question is how long it takes a green field to get to profitability and our answer since we have been doing this has been 12 to 18 months and I think that's consistent with our current trend. As I pointed out, in this quarter we actually had a net loss about 300,000 from the new stores. And with respect to return on capital, would you repeat the question for me?

Well, you mentioned in the filings that you've got a return on investment criteria for building new facilities and I assume for acquiring, as well. I'm curious, how many more facilities on the insurance side do you think you can add before, you know, perhaps the market starts getting saturated and the returns naturally have to decline?

I think that's --

Or are we already there possibly?

No, we're not already there. That's more of a question for me, that's more of an operational question.

Okay.

You are looking at somewhere in excess of 120 locations across the country to be able to fill in, and that number goes up as populations increase. I mean, we're covering the US today but we're trucking some markets 200 miles. And so obviously, you know, you open up in Reno because Sacramento doesn't want to have to keep driving to Reno every day. So then we go into Reno and that covers that market. And we do that across the country until it fills in. So it's in excess of 120 locations and we're currently at 101 including MAG so it's actually less than that for Copart as.

Thank you.

Our next question comes from Todd Lewis with Way Bosset Research Management.

Hi, I think most of my questions have been answered but, the insurance companies are getting better returns using your facilities rather than the competitors'. And yet the competitors are able to lure more business with their lower prices. Can you explain to me how that works?

I don't think they've lured. I think that's incorrect.

Then can you explain -- I don't understand the competitive dynamic there. Where pricing comes in.

They haven't brought more business in. We have grown in business. We had 12 percent gross proceeds growth in the quarter. We have grown the business. We have just not grown it at the rate that we have in the past. And the reason for that is quite simple. You are getting ready to take an account on that comes from your competition and at the last minute that account might get offered some extremely low pricing. In addition to what pricing they were already at. It might be significantly lower than they were currently paying for the last five years. And that makes a strong argument for that account not to switch at that time and so, you know, we're going to look the things and we'll talk to you in six months again.

I see.

And the reason that we're able to continue to grow -- we're not sitting here at flat growth. We've got growth. -- in the business. You know, like I said 12 percent gross proceeds growth in the quarter. But the reason that we have been able to grow is that we're offering a considerably different product. We're focused on service returns as our driver and you know, there's basically it pretty simple business. I can either reduce my costs, that helps the insurance company. I can reduce their costs. That helps the insurance company. Or I can increase the price of the salvage. And so what we focus on is reducing their costs and we focus on increasing the return for the salvage. And our typical competitor of Copart would walk in and say look there is a fixed cost of doing business with a company like Copart and we'll do it down here. And some companies will choose that and others won't.

Is it apparent to the insurance companies what the deferential in returns are?

Yeah. We spend an enormous amount of time showing them those numbers and those returns and we ask them to get those same numbers from their current vendor and see if they compare. I mean, that's just normal -- the normal selling of the business. I have been doing that since the '80s. You go out and you show what your current returns are you show what your current sales rates are, what percents are going out of state, what percent of your cars are going out of country, what your average return per car is. You give them all those numbers, all that data, and then tell them to check on their current, you know, what their current results are and see if it makes sense for them to stay where they're at.

Okay. And then just switching back to the capital structure question, there is no share repurchase program presumably there is one being contemplated but there is not one in place now. Would you consider paying a dividend?

No. I don't believe that we would consider paying a dividend at this time. That's not been something that we've done in the past nor do we ever talk about it. We do discuss stock purchase, stock buy-backs. And you know, it's not approved right now and it may, it may not happen. I don't know. It depends on what the Board decides they want to do with respect to growth and acquisitions and stock buy-backs and all those decisions -- I'm not going to say that we would never do a stock dividend but I don't think that it is something that is going to happen in the near future.

I was thinking of a cash dividend.

I'm sorry, cash dividend.

What's the rationale against the cash dividend?

That we would rather use our cash for acquisition of facilities, for startup of growth and if that's going to slow, then we have two other options, stockpile the cash that we have and wait for an opportunity in the future, and I really personally think there is nothing wrong with that decision, or go out into the marketplace and buy our own stock back. But those are much -- those decisions make a lot more sense to us than a dividend. I don't know how else to put it.

Thank you.

Sure.

Our next question comes from Matt Berg with (indiscernible). Please state your question.

My questions have been answered. Thank you.

Sure.

Our next question comes from Greg Shults with SAB Capital Management. Please state your question.

Good morning. Couple questions. You guys have done a pretty good job generating leverage kind of at the yard level with the kind of gross profit being up 250 basis points in the quarter. Can we expect that ongoing or as you anniversary some of those price increases, will that moderate?

I think it's going to moderate.

Okay. And on the G&A side, you know, that's -- you obviously made a lot of investments there I assume most of that is for building up people that are looking at MAG. That was up 20 percent this quarter.

Correct.

Is that -- will that moderate or are you going to continue to invest --

I think that's going to continue to go up.

Gotcha. And then on the Cap Ex, I hate to keep jumping on that the -- you spent $40 million this quarter on Cap Ex. That excludes acquisitions, right? You didn't have any acquisitions?

This quarter?

That was --

That's just clean.

There were no acquisition this quarter. They're all startups.

And of the 40, 18 is on the new headquarters.

Correct.

And of the 22 left, how much of that was spent on the three at Greenfield?

I don't have that number. It would have been those three plus other things that are under construction.

Can you give me a ballpark.

No, don't have it.

Okay. The 12 -- the 20 to 25 million in Cap Ex you're using for the second half, that's based on a budget, right?

Yes.

In that budget, how much is in there for greenfields?

How much is in there for green fields?

Yes. How many new facilities do you have budgeted and louch that cost, roughly?

I don't know the answer to that the reason for that is significant portion of that amount is finishing off some relocations of existing facilities that are out of room. and we made a decision to sell that property and move to a new location and rebuild and some of it is for green field startups so I don't know the answer.

Well, I mean, are we talking -- okay. How many green fields do you have in there budget wise just the number?

I don't know.

Okay. Can we get that later?

I think so.

Or you just don't want to give how many you are going to open?

I think we might be able to give it out. It probably in the neighborhood of 3, but I'm not positive.

Three a quarter or three for the back half.

Three for the rest of the year but I'm not positive on that.

And can you -- you know, it's hard for me to project working capital. Are you going to be free cash flow-positive this year? -- based on your Cap Ex budget and your earnings projections? -- excluding acquisitions?

I think it's nominal.

Let me just give you, a year ago we generated operating cash -- cash from operations of 80 million on net income of 57.

Right.

So I think cash from operations is going to be in the same order of magnitude.

Yup.

Capital spending we've told you is in the $80, $85 million range.

Right. Which includes the 18 for the headquarters.

Right. Seems pretty nominal this year, flat.

Gotcha. But you would expect significant -- you are not really committing to a Cap Ex budget but obviously you would expect significant improvements in free cash flow in '04.

Yeah, I think that's fair.

Okay. And maybe give me some color on your decision as -- you know, you are spending $18 million on headquarters, the return on capital on that's obviously not high. Probably 2 or 3 percent after tax, obviously you have better opportunities than that, you know, maybe you could just give me some color on the decision-making there.

Sure. I mean, we have been in the old headquarters for eight years.

Mm-hm.

And we had expanded that into that building twice already. We expanded out of the building, moved people into other buildings. And we were just, you know, we were beyond capacity. We had to make a decision to move.

No, I meant buying versus leasing it.

It made more sense to us on an after -- on a cost basis, I shouldn't say after tax, but on a cost basis, to own it at this time than it do to pay a rent payment. And we figure we could always flip the building back out if we wanted to, if we wanted to leverage it. And you know, a building is pretty easy to go down to the bank and say I want to flip it out and get the cash if we want to invest it so at this time we decided to own it.

Gotcha. And it sounded like you are moderating your expectations for acquisitions going forward, is that right, or did I hear you wrong?

No, you're right. We're -- we're thinking that acquisitions are going to slow. Considerably.

Gotcha. Okay. Thanks.

Our next question comes from Bill Gibson with Banc of America Securities. Please state your question.

Yeah. Most of my questions -- in fact they got answered but I do have one and defining gross profits as, you know, net revenue less yard and fleet, do we expect that margin decline in the second half?

Decline? To decline or incline?

To decline -- in other words, the percent of gross profits would be lower in the second half than the first half? You've been leveraging that line up to this point.

I would say-- I want to make sure I understand your question

Well, given your guidance, it's hard for me to come out with numbers as low as you are without taking that margin down.

Yeah. Well, the depreciation's going to go up, as well.

No, understood. This is a pre-depreciation. In other words, I'm -- it's net revenue less yard and fleet expenses.

I would think yard and fleet will go up in the next two quarters because we'll be announcing new facilities and there will be new costs associated with running them.

Got it. Thank you.

Our next question comes from Ryan Randall with Kanell Capital.

Just a couple of quick clarifications here. Jayson, you said that G&A is going to increase. Is that going to probably come out on an ongoing basis around the 7 million that we'll see for D&A --

I don't know that it's going to stay there. Simply saying that I think it will be in excess of 7 million. In Q3 and Q4, 7 or more in Q3 or Q4 and I'm not saying that it won't increase from there. But I don't see it being less than that.

Okay.

Does that help?

Yeah, that does. Uhm... I guess at some point are you going to be more focused on stabilizing that number?

We're focused on it now.

And we should begin to see that in '04?

It takes a while to slow down, it takes a while to finish up what you've got. So you will see improvement in '04, yes.

Okay. And then just one last clarification on the new sites for the next two quarters of Q3 and Q4. Any acquisitions that you have planned? You said you have some things in the works. I'm trying to discern as to whether they're green field or acquisition?

I wouldn't say expect no acquisitions. I'm saying the majority of growth will be Greenfield. There might be some acquisitions but there might not be, as well.

Okay Thanks very much.

Our next question comes from Alan with Copper Beach Capital. Please state your question.

Hi, first of all, I appreciate you guys spending so much time on the phone here today. I realize a lot of people just want some answers. I appreciate that. Can you just remind us how many MAG sites do you currently have right now?

Six.

And your intention by the end of this fiscal year is to have how many.

Six.

And where do you see that growing to over the next year to two years?

That's unknown. We've again, we've got to focus on running the business, not just MAG but Copart, as well. And you know, we're going to look at returns. And we're going to look at the return on our own businesses, the return on startups of our own business, acquisitions of businesses that are like ours and acquisition of our stock. And those will all be in the analysis, those are all things we'll be looking at and weighing.

Also, what levers do you have, outside obviously of slowing down capital spending and making sure, you know, you are not buying sights just for growth as -- and maybe adding capacity if growth is going to slow, what other levers do you have to cut your costs? You seem to have pretty high margins now. Maybe can you lend us -- give us some of your views as to where you think costs can come out of the businesses

I don't think there are a lot of costs I can take out of the business.

So it's got to be revolve around finding ways to grow the top line.

I've got to grow the top line. This is that kind of business. We run very, very efficiently

Right.

And I don't know that -- efficiently.

Right.

And I don't know that I'm in a position to go out whacking expenses off the business.

That's fair.

So I have to focus on just controlling capital spending and then I have to focus on increasing revenue through additional cars.

One last question. I sort of got mixed messages from listening to you. Do you believe the number of cars that will be totaled this coming year will be down year-over-year or are you still seeing the typical one to two or three percent growth that the industry will face given all the cars on the road the last few years and the new car sales?

I don't know any differently that I did a year or two or three ago so I would think that it's going to be the same as it's been in the past.

Okay so it's just a question of market share gains or losses or just how much growth you can get versus the industry itself?

Correct.

Okay. Are you seeing independents being hurt more in this environment?

In some markets, yes. In some markets no. It's, you know, I wouldn't say that that is any different than it's been over the last five years. Some markets we have been extremely successful. Other markets you battle it out day by day and wait for the day that you can get a nice increase of business.

Which markets are the most competitive for you right now?

Oh, geez they're all competitive. I can't give you -- I can't tell you which ones are more competitive than others.

And then lastly, how do you manage to forecast growth outside of accounts receivable growth? How do you know what your growth is going to be a quarter or so call it -- outside of a quarter because I know you build inventory --

Indicators are where our revenues are currently at for this quarter, where our inventory level's currently at and we don't know what business we're going to sign on in the future. We really don't. You either -- you don't really know. You've got the new account until you've got it. And so we really look at those two factors and try to determine where we'll be. When we had aggressive growth in the past, we were signing accounts today that I knew were coming out in the next quarter so as that slows, you know, your growth slows.

And then lastly, have you made any progress or have you seen any progress in the industry in terms of being able to transfer title quicker for some of the DMVs over the last few months? Has that helped any more? Is that a way to get growth because you could have increased the terms?

It's -- it's nominal. I'm not going to tell you it's a large enough -- I mean, we have seen some improvements in some of the states but across the board, it's fairly nominal. We're moving cars quicker today but I think that's because we're working a lot more of the older salvage than it is a factor of moving titles so much quicker at the state level. Do you plan to change your compensation schemes given that I guess the corporate -- I mean, given the reduced growth outlook and maybe the forefocus on cash flow? Not at this time.

Thank you very much.

Sure.

Gentlemen, there are no further questions at this time.

All right. Well, I'd like to thank everyone who did attend the call. It was a fairly long call. And we look forward to reporting Q3 and continuing to grow our business. Thank you very much.

This concludes today's teleconference. Thank you for your participation.