Copart Inc (CPRT) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Copart Inc. fiscal 2004 first quarter earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jay Adair, President of Copart Inc. Thank you, you may begin.

Thank you. Good morning everyone. We are very excited about the results of the first quarter for fiscal 2004. As you can see, a lot of changes are occurring at Copart. I'm going to give you an update on that today. With me on the phone is Simon Rote. He is on the West Coast. I'm on the East Coast, so there will be a little delay when we get to the question-and-answer period in me getting back to you. So at this time I will turn it over to Simon -- he'll give us a legal introduction and then I will get the show on the road.

Thank you, Jay. Good morning. During his 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 Exchange Act of 1934. These forward-looking statements may include, among other statements, projections about our future revenue and earnings growth, which are subject to numerous risks, including weather conditions that are unfavorable to our business and our ability to increase market share in an increasingly competitive market. For more discussion of these and other risks that could affect our business, I would direct you to 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 factors that could affect future performance. Our agenda has three items this morning. First off, Jay Adair, our President, will go over highlights of the quarter and recap some important accomplishments. Second, I will be discussing financial details of the quarter. Finally, we will open for your questions. It is my privilege to turn it over to Jay Adair.

Thanks, Simon. Again, good morning everyone. You are very excited about some of the things we are doing here at the Company. As you saw in the press release, Copart had a net income of 15.2 million for the first quarter of 2004, on revenues of 91.5 million. That is 4 percent higher than the 14.7 million earned in the same quarter a year ago on revenues of 83.5 million.

Fully diluted earnings per share for the quarter were 17 cents compared to 16 cents a year ago and an increase of 6 percent. The Company also announced that we have converted all of our 98 locations to virtual bidding second generation or what we commonly referred to as VB2. I will give you a full update on VB2 -- how it works and where we're going with that product later on in my call. But again, it is a very, very exciting time for Copart with VB2.

The Company also announced the repurchase of 977,000 shares, in the quarter, at $10.97 a share.

Looking at revenues -- revenues were up 10 percent for the quarter. Same-store was up 8 percent for the quarter. Yard and Fleet was up 8 percent. But, if you look at 2003, Yard and Fleet was 57 percent of revenues, whereas, in 2004, 56 percent of revenues. We believe that Yard and Fleet will continue to decrease as a percentage of revenues, going forward, because VB2 does eliminate some costs in the field. However, the Company has had significant growth in G&A in the previous quarters. That obviously is due to the development and the investment, primarily in VB2, and we think the continued development and support of VB2, going forward, will continue to add costs there. So, I think that, for whatever we may save in the Yard and Fleet line, we may end up spending that money -- that savings, rather, in the G&A line, going forward. G&A growth for the quarter was 23 percent.

Again, that is because when you hear about VB2, you'll understand there is a process, or there's a process that we go through in selling the vehicles online. It takes significant servers and technical staff to make that happen.

Looking at the balance sheet, cash and cash equivalents for the quarter was 119.5 million -- this is up about 2.7 million from year-end number. CapEx for the quarter was roughly 10.8 million. Of that -- Simon will elaborate -- but of that, 4.1 million was land purchase.

Accounts receivable for the quarter was up 10 percent. This is good news because we typically build inventories in the November/December/January quarter. That's the second quarter. And then we sell those vehicles off in the third quarter. We are seeing an inventory build earlier than normal. So we are excited about the fact that that is happening and that is due to a number of factors from growth to increased volumes.

Also in the press release we announced that we issued $20 million worth of cash for the purchase of leases. The Company made a decision to shift from a company-owned fleet and to an owner/operator model. We will be selling those trucks off, so we had to purchase the leases out to acquire titles on the trucks. The decision behind this is purely based on costs. We believe that this point that we can reduce costs within our company, guarantee our customers the same level of service going forward, and basically focus on what we are best at which is auctioning vehicles. And let the owner operators do the pickups.

I'm going to highlight VB2 now -- go over the VB2 process. The first I want to tell you on the highlights is that returns are up. We are very excited by the results of VB2, both year-to-date comparisons and same-store -- same period rather -- a year ago. Looking at prior to converting VB2, returns where they are at today and looking at the same period a year ago. And now converted to VB2 -- both of those are -- both of those periods are up in returns. Both in a percentage of ATV and both as a whole dollar amount. So the actual per-car dollar amounts of the vehicles are selling are up significantly. In some cases, as much as 10 to 20 percent. I'm not going to quantify the actual increase on a per-car base. But I will say it is significant and the Company is excited about that.

This calendar year, we will sell over 300,000 units online. We have not disclosed nor are we going to disclose, unit sales, going forward. But, I did want to give you a feeling for the size of this endeavor and what we have done with VB2. We will sell in excess of 300,000 units this year. Next calendar year we expect to sell over one million units online. So, when I say 300,000, that's 300,000 units online. Over the Internet -- next year one million units online over the Internet. VB2 is an all-Internet method of selling vehicles and I will go over that.

Prior to VB2, we had a virtual bidding product that was at 70-plus locations, but not at all 98 locations, company-wide. Now, with VB2, all of our facilities are online with access to our 40,000-plus registered buyers. If you go back prior to having any Internet position, we really did not even track out-of-state or out of country -- we did not look at out of country at all -- out-of-state was less than 10 percent -- it was a single digit number. Today, we are selling 10 percent of our product out of the country. 35 percent of our product that we sell goes to a buyer in another state. So, we believe that the push now to putting all of the locations online will allow more of those buyers to find the product and again, increase those number and continue to generate higher returns.

If you go back to 1998 and you look at proxy bidding, Copart was the leader and, as they are today, in technology and rolling out the initial technology within our industry. We went out and instituted a five digital image of the vehicle and instituted a product that allowed buyers to bid on vehicles anywhere in the country. This immediately made a change in the percentages being sold out-of-state -- immediately made a change in returns. By 2001, we had developed virtual bidding. This allowed buyers to bid on products real-time. So, now buyers could access a live auction, and could bid against that live auction without attending the auction. And, we saw a pretty dramatic shift in the Company where we had been -- basically all buyers were at the auction. We now allowed buyers to attend the auction without being there through the proxy. But, we went to a real-time virtual bidding format, we saw a pretty dramatic shift where buyers started to attend the auction on-line, and not near as many buyers started to attend the auction locally.

One of the things that virtual bidding -- one of the issues with it or one of the methods behind it was that it was a closed bidding system. You could not see the current high bid on the car. And we sat down in 2002, and I alluded to that in some of the conference calls -- that the G&A was up it was that we're developing -- we're working on that. But we've sat down in 2002 and started looking at our options -- what could we do? How could we open up the bidding and make it an open bidding format, where it was not a close bidding format? Allowing buyers to see where the current bid is and if they get out-bid, the buyer can then re-did the vehicle. Notifying the buyer that he's been out-bid, so he can go in and see the current bid and rebid the vehicle. How can we build a product that allows people that don't want to use the Internet to still submit their bids? And, at the same time how can we develop a product that would not lose that feeling and that frenzy and that action of the live auction? We put our heads together and we basically developed what is VB2 today. A two-stage product that allows preliminary bidding, three days prior to the actual auction, and then a virtual auction that allows the vehicle to go for a final run through on the Internet, were it will be sold. This product allows buyers to attend our auctions up to two days prior. So, today is Wednesday. A buyer could attend an auction on Monday or Tuesday, looking at product, submitting bids at the facility or submitting bids online. When that buyer gets out-bid, the buyer is e-mailed, letting them know they have been out-bid. They can do this around their schedule. The vehicle then those up for sale today, on Wednesday, and the preliminary -- current preliminary bid -- after all these buyers have bid against each other, the current preliminary bid is transferred. That initial preliminary bidding portion allows buyers to see what the vehicle is going to be near. It may not sell for that amount; it may bring more at the virtual auction. A significant amount actually do sell at the preliminary bidding stage. In other words, the amount they have brought on preliminary bidding when they get to the virtual auction is it -- it does not receive any additional income at that time.

So, buyers can see the car's and they can say, well, I'm not going to focus my attention on that vehicle because it has already exceeded my limit. I'm going to focus on this one. It keeps the buyer from potentially losing a vehicle. In a live auction environment, you don't have any idea what the vehicle is going to bring until the live auction occurs. So, in this environment, they can better understand what the vehicles are going to bring.

We transfer those bids, as I said, to the virtual auction, and if the buyer has submitted a higher bid and their current bid, we represent them at the virtual auction through bid for you. So, this auction is now taking place online where all other buyers can attend in a real-time fashion to bid on the product.

Again, it opens up the product to more buyers, allowing them to find the product and again, it's done at their ease -- the buyer is not standing at the auction from 9:00 until 2:00, for five hours, trying to bid vehicles. This becomes extremely beneficial, as we have already seen, going through the Thanksgiving holidays. When buyers start to go on vacation, and when we start to get cold weather, every year we have always seen a dip in returns during that period. What we have seen already is a significant improvement due to the fact that buyers can attended the auction a couple of days prior -- a day prior -- may not attended all -- do it completely online. May attend and look at the vehicles but then attend the virtual auction online. It works around their schedule instead of them having to work around the schedule of the auction. It is more convenient. For the buyer it saves time. At the end of the day, if a buyer can become more productive and can find more products and save time and not have to be at the auction, it allows the buyer to focus on their business. And, we think at the end of the day, it allows them to find more product and potentially pay more for that product.

Because it is a more efficient method, in addition, we don't start the auctions at 9:00; all the auctions start at 12 noon. We've already compiled a significant amount of what the vehicle is going to bring in the preliminary bidding stage, if not all of what it is going to bring. So, the vehicles sell quicker. We're not starting the vehicle off at $100; we may be starting it off at $8,000. So the vehicle sells quicker. We can start the auctions at 12 noon. We do have to start them at 9:00. So, you do not have that scenario where buyers are showing up late for the auction. You have to get everyone to the auction again around their schedule.

Another exciting part of this product is, if you look at the current situation we are in right now, we are heading into winter. And, with adverse weather, snowstorms, freezing cold temperatures, buyers will either not attend a sale, or buyers may make a decision to attend, but leave early. With VB2, that basically becomes a moot point. Buyers can now attend prior to the actual day of the sale, as I said, and they can do all their bidding online; there is no need to actually be their on the day of sale.

We converted our first facility on June 27th. The results of that conversion were very, very exciting. Within a couple of weeks we converted a second facility in the same region -- the California markets. And we saw, again, a very positive result so we wanted to get a feel -- is this something that is localized? Or are we going to get these kind of results, company-wide? So, we rolled out 12 locations. And, we did that early on in the quarter. And the results of those 12 locations that we tested were terrific. We were very excited by the results, and so we made a decision to quickly convert all locations across the Company. And, we have done that. As of December 1, 100 percent of the facilities for Copart, 98 salvage locations -- are converted to VB2. As is something we have done in the past, when we need to push to get things done, we are able to do that. And, we saw a need to get this rolled out quickly. It has made a dramatic increase in returns, as I said, compared to a year ago, and compared to the prior period -- prior to the VB2 conversion.

We expect these positive trends to continue, going forward. And, we are seeing positive results in November, already.

So, with that, we are very, very excited with what is going on. I'm going to turn it over to Simon Rote. He will give you an update on the numbers and then I'm sure there will be some questions with regard to what we're doing and how VB2 works and that kind of stuff. Simon?

Thank you, Jay. Revenues for the quarter were approximately 91.5 million, an increase of approximately 8 million or 10 percent over the prior year's quarter. The increase in revenues was due to both new and existing facilities. New stores contributed approximately 1.6 million of new revenue, and same stores contributed approximately 6.4 million or 8 percent for the quarter. Yard and Fleet expenses were approximately 51.7 million for the quarter -- an increase of approximately 3.8 million, or 8 percent over the prior year's quarter. The increases is due, in part, to the cost of new facilities which contributed approximately 1.8 million of Yard and Fleet expenses for the quarter. Yard and Fleet expenses from existing facilities increased by approximately 2 million, or 4.2 percent for the quarter. Yard and Fleet expenses decreased to 56 percent of revenues during the first quarter of fiscal 2004, compared to 57 percent of revenues for the first quarter of fiscal 2003.

General and administrative expenses were approximately 8.1 for the quarter, an increase of approximately 1.5 million, or 23 percent, over the comparable period in fiscal 2003. This increase is due primarily to increased payroll and other operating expenses.

General and administrative expenses increased to 9 percent of revenues during the first quarter of fiscal 2004 compared to 8 percent of revenues for the first quarter of fiscal 2003. Depreciation and amortization expense was approximately 7.4 million for the quarter, an increase of approximately 1.8 million, or 31 percent over the comparable period in fiscal 2003. This increase was due primarily to depreciation and amortization of capital expenditures, covenants not to compete, and acquired assets resulting from the acquisition and expansion of auction facilities.

Operating income was approximately 24.3 million for the quarter, an increase of approximately 900,000, or 4 percent, from the comparable period in fiscal 2003. Total other income was approximately 900,000 for the first quarter of fiscal 2004 and 2003. Our effective combined tax rate was approximately 39.5 percent for the first quarter of fiscal 2004 and 2003.

Due to the foregoing factors, we realized net income of approximately 15.2 million for the quarter compared to net income of approximately 14.7 million for the three months ended October 31st, 2002.

I'll now expand on new store information for the quarter. New facilities added approximately 1.6 million in new revenue, and as I noted earlier, their direct costs were approximately 1.8 million. Depreciation and amortization is an additional 300,000. The effect of new acquisitions and openings on the current quarter is an operating loss of approximately 500,000. Please keep in mind that these new facilities are an investment in the future. Some new facilities will show losses for the first 12 to 18 months.

Finally, let's look at our company's cash flow's. We started the fiscal year in August with cash and cash equivalents of approximately 117 million. As of October 31st 2003, that balance was approximately 119 million, an increase of approximately 2 million from the start of the year. Operating cash flow for the quarter was approximately 24.1 million, from net income of approximately 15.2 million. Capital spending for the quarter was approximately 10.8 million.

During the quarter the Company spent approximately 10.7 million for the repurchase of approximately 977,000 shares of common stock. Total net cash used in financing activities was 10.6 million.

This concludes the prepared portion of this call. We now welcome your questions. Donna, please join us and explain how the questions will work.

(OPERATOR INSTRUCTIONS). Michael Braig with A.G. Edwards.

Good morning. Wonderful-looking results. You suspected questions on VB2 -- I have a lot of them. The first one is, whether or not it is totally live auction, to the extent that all participants must have Internet connection?

Yeah, well, as I explained, the buyers can attend the facility. I will not say auction; they can attend the facility, two days prior to the day of the auction -- of the virtual auction. They can look at the vehicles and they can submit bids at the time on our kiosks. The vehicle might have a current bid of $600. They could go in and submit a bid of $2000 on that vehicle. And that current bid of 600 might have had a max bid of $1000. Meaning that the initial buyer was willing to pay up to $1,000. And the system would say, you are now the current bidder at 1050, knowing that the system would go up to $2000 on their behalf. Now, that will immediately e-mail that first buyer and let him know that he has been out bid, so that he can go back in. That will continue through kiosk bidding, and through online bidding on the Internet, up until the day of the sale, the auction date, where we have the virtual auction. Now, the virtual auction is pure online, so yes, you have to have an Internet connection to attend the auction. But, if somebody else came along in that scenario I gave you and bid 1500 and that's where it finished, that vehicle very well could start off at 1550. And it would start off at 1550 because someone else bid 1500 so the next bid would be 1550. It could start off there. And it would ask for someone to bid and if someone did not bid within seconds, the vehicle would be sold. That is the exciting part of the virtual auction.

A buyer comes in, submits a bid for 1600. The system would automatically say 1650, because we have that bid for you -- 2000 bid that the buyer submitted at the yard. So, it goes on 1700, 1800, you know, at that point, the system comes back 1850, nobody else bids, the buyer might purchase it in that scenario, for 1850. Even though, he was not online. So, they don't have to be online, but the virtual auction takes place online. (multiple speakers) our experience, so far, is that buyers are moving very, very quickly to that. We built the system in such a way that we would not disintermediate (ph) any buyers from attending the auction, i.e., allowing them to bid through kiosks. But, the reality is, once you do that, you see how it works, you want to get online, and you want to check it out, and you want to watch the auctions. Then, now you're not just bidding your local market when you're online, you start to look at other auctions across the country.

Okay. Are the kiosks live during the virtual bidding procedure?

No. That is a pure Internet-only experience.

There are obviously costs eliminated on the part of the auctioneer and his staff and those who physically move the cars under your prior live-bidding practice. What you are suggesting when you say costs are neutral -- is that the costs of those personnel are offset by other costs of the virtual bidding process?

Yeah, there are significant costs associated with holding all the auctions online. And, between the IT staff and the support and the systems, the hardware -- significant costs that we do not believe there's going to be any real savings at the end of the day from doing it. So, we wanted to make that clear because I think there was some thought, maybe in the community that the Company might recognize cost savings due to VB2. We don't leave that that is going to be the case. We believe that any savings we achieve out of the Yard and Fleet will be offset by increased costs in the G&A.

Okay. And that leads to a question on the towing aspect of Yard and Fleet. Will there be a change in the quarterly profile of those costs -- those they used to reflect a higher embedded cost during the winter accident months?

Well, you know, as you all know, we have always sub-hauled (ph) to some extent, anyway. We have always sub-hauled about a quarter of our product. You know, because, as you go into winter, you get significant increases in volume. Going from a company-owned to an owner/operator model, does not change the way we allocate the expenses. I mean, at the end of the day, all of the trucking expenses at the Yard and Fleet -- all the sub-haul expense is going to be at the Yard and Fleet level. And, you know, we believe -- sure there's going to be some transition here. But, we believe at the end of the day, it is going to end up significantly, you know, we're going to end up better off, financially, subbing it out that doing it ourselves.

Okay. Thank you.

Scott Stember with Sidoti & Co..

Good morning, guys. Could do guys maybe talk about some of the specific costs that will be saved from converting over to an owner/operator fleet model and also talk about how long and just the magnitude of costs that will be when you guys eventually do finally exit the towing business?

Yeah, I can tell you that the moving from the company-owned position to the owner/operator is due to the fact we have been looking at Fleet for, you know, we look at it on a monthly basis -- but if you look at it over the last two years, it has continued, as an expense, to creep up. In the most recent year, the cost of insurance, the cost of workers comp -- the cost of even new carriers have all gone up significantly. And we basically compare what our sub-hauling expense is to what our own fleet is. And, at the point where you start to see your hauling cars cheaper through sub-haulers than you are to your own fleet, you've got to ask yourself, could I switch and yet maintain the service level? And since we were moving -- in the wintertime we move more than a quarter of the cars through subs and we did that in the last year. And yet we maintained service levels. So, our feeling is we can move to that model, still get cars picked up in 24 hours where we need to and not reduce service levels to our customers.

And, the costs that you estimate that it will cost you guys to eventually complete the plan?

Well, I'm not going to give that out this time. We believe that there is a savings or we would not be doing it, but I'm not going to quantify the savings.

Okay. If you look at this new VB2 format you are putting out there. Obviously, it looks like you're going to be doing a lot more cars online. Do you have any expectations or percentages that you would expect a year from now, that the Company percentage of sales over the Internet versus live?

Yeah, it is 100 percent. Everything goes to the Internet now. Everything goes out to the Internet on the virtual auction. So, going forward, we will be a 100 percent Internet auction company; everything will be listed there. Everything will be bid on there. And, if the bidding stops or the bidding ceases to occur, then the countdown initiates and the vehicle is sold. So, everything will sell online.

Okay. And, any news on the public auction side?

Nothing, really to report at this time.

That is all I have. Thanks.

Thank you, Scott.

Bob Latelle (ph) with MD Sacks (ph) Investor Services.

Thank you. In discussing the fact that the returns using VB2 will be better, you used the adjective dramatically better. I wonder if you could define dramatic?

I think what we have decided to do is let you know that it is a sizable effect of our business by basically saying they we're going to do over one million cars -- we expect to do over one million cars through VB2 in the next twelve months, and that we are seeing improvements today and then we are going to let that just come out in the quarters that come, rather than try to quantify the changes and try to quantify, you know, what kind of improvements we're seeing. (multiple speakers) at the end of the day, it affects two things. I mean, if I'm going to generate a higher return, which we are definitely doing right now -- and I have no problem being bold on that statement. We are seeing higher returns through VB2. So, if I'm going to be able to continue to do that, which we believe we can, I would think that insurance companies are, again, going to be more out to want to do business with Copart. And two, we generate our revenue based on a percentage of what the car sells for a lot of times. So, if the vehicle is earning more money, we end up doing better.

This one million sales -- I wondered if you can give us an idea -- if that is what you expect to be selling on a twelve-month basis -- that one million units in a twelve-month period -- what does that compare with prior to using virtual bidding -- VB?

Yeah, using VB2 doesn't change how units go through our process. The way in which we sell the vehicles (multiple speakers) we don't disclose units. The reason for giving that number out in the press release was simply to let people know just how dramatic this change is -- (Multiple Speakers)

I was thinking -- (Multiple Speakers)

(Multiple Speakers) the switch to VB2 and the fact that we were able to achieve a goal of rolling out the product in one quarter.

I was thinking that this new methodology, though, by pulling in foreign and out-of-state buyers and all, in addition to getting a better return per unit sold, you would also get more units, wouldn't you?

Well, that is the goal. If we can (multiple speakers) the results we are seeing thus far (multiple speakers) through our existing and potential client base, then there is the chance that they will give us additional volume on a test.

Okay, but you don't have an estimate for us -- what percentage increase in unit volume you expect to come from this new methodology?

No.

Okay, okay. And the final -- I have two questions on the truck leasing buyout. Has that been completed for 20 million, or is that a partial completion?

No, that is a total.

Okay. Then, finally, where on the financial statements will we see the impact of the expenses for buying back and then the proceeds for reselling the units, getting rid of them?

We will still have depreciation as we continue to use those trucks. And we'll just have a gain or loss on the disposal of those fixed assets. But, we do not expect it to be a material number at this time.

Will that be broken out though, on a separate line or would that be merged with one of your line items?

At this time, I would expect to have it merged.

In which line item?

The gain or loss would actually just be in the Yard and Fleet expense.

Yard and fleet. Okay, good. Thank you. That is all I have.

David McAshian (ph) with Value Line.

I was wondering what your capital spending plan for the year is? Is 11 million per quarter a pretty good run rate?

Yeah, we gave out --

35 to 45 was what we said in the last conference call. It still holds true.

Okay. Awesome. Also, I was wondering how many facilities you plan to add this year?

We're not giving out any kind of estimates on new locations.

And then lastly what are your priorities for your free cash flow uses? Would it be stock buybacks?

Right now, we are just looking at, you know, the options that are available to us. We still have over 5 million shares authorized under the stock repurchase. And we will just be looking on a quarter-to-quarter basis -- on a month-to-month basis.

Okay. Great. Thanks a lot, guys.

Tom Lam (ph) with Live Asset Research and Management (ph).

Good morning. A couple of questions. First of all, in terms of the returns -- the better returns -- that you have mentioned, are you seeing improvement on both sides? In other words, are you seeing increased insurance company participation because of the VB2? And also an increase in selling prices?

When you talk about increased participation from the insurance companies, it literally -- you know, we are giving you the hottest news off the press. It literally got converted in its final stages last month. So, this, as we see it today, every location is a VB2 location. But, today, we've got a store that is having its very first VB2 sale ever. So, it is such a fresh product and such a new product, that, you know, we've got to now communicate and show results to the insurance industry.

In looking at the results of October, in looking at the results of November, we are up, as I said, significantly, compared to prior returns -- prior, meaning before the conversion and then, going back a year ago, looking at what the product was bringing a year ago, compared to what the product is bringing today in those locations we are up.

Okay. Are you also seeing more buyers, more participation, in the auctions? In terms of numbers of people bidding?

You know, I can tell you this, viscerally, I think that is the case. Have I sat down and really scanned through all the data? Not really. I have not gone through and looked at how many bids am I getting per car -- or how many -- and there's really no way to tell because at the live auction we did not track any of that so it would be a waste of my time to really look at it from the standpoint that -- at a live auction I never knew how many people were attending or how many times they were bidding. I have all that data today because it is all online. But, it would be -- I would be literally setting a benchmark for today and then looking at it six months from now. And that is something, you know, as the product grows we will be looking at those kinds of data points on a regular basis.

Okay. Another equation is, you mentioned something -- this is a proprietary system and is patent-pending. You know, even eBay has had some trouble with auction software or auction techniques. How sure are you -- I suppose that you can't be 100 percent sure that you are not going to run into litigation regarding the methodology by which you auction these cars?

No, you will not, you know, know that until that time comes. That is the point of the pending on the patents. (multiple speakers) we have invented a product -- the virtual auction in VB2 -- that is, to our knowledge, the only one of its kind. We have not seen anything out there that offers this real-time bidding experience that, you know, allows you to submit bids real-time. It says -- going once, going twice. It does a countdown. If you bid, is does just like on auctioneer -- going once, going twice -- are you going to bid again? 5,4,3,2,1. If you do not bid, then it sells the vehicle. So, that's what we applied for a patent and we are patent-pending.

Okay. Can you give us a sense of when you might expect patent approval?

Not at this time. It is hard to tell. I'm not going to give you a date, because I don't really know myself, at this time.

Okay. Great. Thanks a lot.

Michael Derrick (ph) with Bassler (ph) Partners.

Good morning, guys. I have a question for you, just on the general industry landscape. I read an article in the Wall Street Journal at the end of November that was talking about the rise of used car auctions -- the success of some the dealers, Auto Trade Center, talking about how many vehicles General Motors was selling -- talking about the off-lease vehicles through Smart Auction. I just wanted to ask you guys if this is -- how you view this as a potential impact -- one, on your existing core salvage business which I think is probably indirect, at this point. But then also on any plans you may have to expand the scope of your business in the future.

Yeah, I think it is very positive. The fact that companies like GM are announcing such phenomenal results on their side is just a testament to how successful Internet bidding is. And the fact that people being buyers do want to get online and do want to attend those auctions. I read that same article, Michael, and if you recall some of those numbers -- one of the reasons I threw out in the press release the fact we do over one million cars is just to tell you -- to let you see that we are actually going to process more cars than they are currently on their run rate. If you look at their run rate, with their product and you look at ours, we are doing a hell of a lot of cars through an Internet site. And, I think that the statement that -- it is basically successful for everybody. Everybody is seeing a lot of success with auctions -- Internet auctions. It is a real positive for us. I think it is a testament to what we are doing. We have always made an effort to be industry leaders, and to try to predict where the industry is going and to try to do what is best for our clients. And generate the best return we can.

As far as what will VB2 do in the, you know, non-salvage arena? I will say that we are looking at those auctions right now. I will leave it at that. I will not give any other details on that, because I don't know what's going to happen in that arena. But, we are very, very excited about our product and so, yeah, we are looking at what else could it do?

And to your knowledge, are you guys at this point, the only participants in the salvage online auction business?

To the extent that it is like VB2. VB2 is, you know, in my opinion, it's a one of a kind. What we are offering today -- the preliminary bidding experience, tied to the virtual bidding experience -- the two-step process that VB2 is. We are the only ones that got it.

Thanks, Jay. I appreciate it.

Terry O'Connor (ph) with Cedar Creek Management (ph).

I apologize. I'm on a cell phone -- it is going to sound a little funny. I want to take a step background and make sure I understand how this works -- under the old virtual bidding system, when we went to the yard, the guy in the bus was putting the Internet bids up sort of inserting then in-between live bids and you had live people at the auction, and you mentioned earlier that 100 percent of your vehicles will ultimately be sold on the Internet using this system. I am not sure I understand exactly how this works at the yard and are you discouraging live bidders by doing this?

No, let me explain it to you. The system you saw -- if it was in a bus -- was not virtual bidding; that was proxy bidding. The virtual bidding product that we had is where we made the auction stationery and you would bid indoors on the product -- again, that was trying to deal with adverse weather and conditions like that. But, in that product, buyers would still attend the auction or have that option. We had seen the physical attendance continue to decline. We have seen the online presence of buyers continue to increase as that product continued to mature.

The development, or the thinking, behind VB2, when we developed, was to make sure that we did not cut out the live auction experience. And, we did not cut out the people that want to show up -- the buyers that want to show up physically to the auction and submit their bids. So, you do not have to go online to bid on VB2, you can submit your bids at the facility. You can use the kiosks and you can use bid for you and put in your max-bid. In theory, you can put in a $2000 bid on a car that you think is worth $1500. If someone else thinks it's worth 1700, you are going to pay 1750. But you will not -- you will not pay the 2,000 you put in, unless they -- unless some other buyer is actually bidding you up to that mark.

So, we do not lose the local buyer who wants to come in, look at the products, submit the bids. And we don't lose the feel of the auction because we transfer those preliminary bids, or I should say the preliminary -- current bid -- over to the virtual auction. We offer it out to all buyers that are on that virtual auction, so you have a virtual auction with 300 buyers online, and the vehicle is offered up and they will start to click on that and start to bid against the vehicle. And the bid for you bid may respond; it may not. It might not have had a bid for you price in. And the sale might go to virtual buyers at that point. It might go to the local proxy buyer -- I'm sorry -- kiosk buyer, on the preliminary stage. It is an unknown.

But, the point is, we built a product that we wanted to make sure that we did not take anyone out. We didn't want to disintermediate any of our customer base, whether it be a local buyer, whether it be the feeling of the auction, the frenzy, the excitement. When you watch the auctions, you will see them 5,4,3,2,1 and they slide a bid in for 2100 and then the next buyer immediately responds with 2150 and then 5,4,3,2,1 and at the very last-minute 2200. It reminds me of sitting in the auction truck 10 years ago and watching a buyer sit there and just boom, boom, boom -- bid real quick and the other guy would look up at the auctioneer and wait some time and kind of think about it and the auctioneer would say, do you want to bid it? And boom, he would submit his bid. It is just the way people bid. There is an art to attending a live auction. I think there is an art to attending a virtual auction on VB2. People get excited about it. They get into it. It is fun. It is an event.

So, the guy who is there live though, who shows up -- does he sit at a kiosk? Is there noise in the room? In other words, does all this happen on the screen?

No, we'll have buyers showing up at noon on sale day. The buyers are showing up prior to that, from 7:00 until 11:00 -- they are showing up the day before that and the day before that. They are showing up two days prior, a day prior. And the day of the auction from 7 to 11. They're looking at product -- they are submitting bids. They may be getting out-bid, they may be going back in and submitting more bids. But, all that, if that buyer does not what to get online, all that, you know, bidding is happening locally on the kiosks, rather than going online.

Can I ask you, during the preliminary period -- the three days leading up to the auction -- if you have submitted a bid, can you go on any time without submitting an additional bid and see what the current price is? Or do you just find out if you do have been out-bid?

No, all the buyers can go in and look at any car and see where the bid currently is. They can see if they are currently the high bidder on the vehicle. They can see what their max bid versus where their bid is at. If they get out-bid, they get an e-mail update letting them know they have been out-bid, so they can resubmit their bids on the car.

And again, we are working on all sorts of new products for VB2 -- things that will enhance what we have already built to make it an even stronger and better product.

Thank you.

Ross Verner (ph) with Weitop (ph) Capital.

A quick question for you. You guys have been using sub-haulers, I think in your largest facility in Dallas for a number of years. Can you kind of walk us through and maybe quantify, if possible, the cost savings that you have seen there, relative to some of the other facilities? And I assume the success in Dallas was helpful in letting you come to that kind of decision.

Well, it wasn't, you know -- Dallas is, you know, one example -- you know -- so many, if not all the auctions were using sub-haulers. And, you know, our believe was really twofold. One, when you start to see sub-haul costs go below the your own trucking costs, and you're trying to do everything you can to minimize some of those expenses -- but at the end of the day, workers' comp has been a significant increase on trying to run your fleet and trying to, you know, offer the right benefits and to offer the right pay and do everything it takes to run the fleet. When you try to do that, and yet, you're not competitive in some of your sub-haul markets, then you've got to look at it and say, well, if I committed to that sub-hauler? Because, we were always committed to running our fleet. The sub-hauler was someone who would fill in for us during heavy periods.

Yeah, overflow -- right?

Yeah, so, if we would commit to that sub-haul and actually say, look, we're going to use you on a regular basis -- you used Dallas as an example. A lot of those sub-haulers are owner/operators -- they own the truck. They operate the truck. They are not operating seven trucks. They are not a company in that sense. They are an owner/operator company. When you start to look and say, look, I'm going to commit to you and give you a certain amount of business on a regular basis. We think it gives us even more leverage to work with those sub-haulers. So I am not quantifying today -- we are all going to see the results of the decision in the coming quarters, so I'm not going to quantify it. But, obviously, if we didn't think it made sense, we would not have done it.

Okay. Great. One other thing, Jay. On the national contract side, are you seeing the willingness of any of the insurers to maybe follow in the footsteps of some of the Safecos (ph) and some of the other other guys that have done -- gone the national contract route? We have not seen anything, but is it something people are satisfied with? And that they are still willing to look in that direction?

Well, we continue to sign national deals, Ross. But, they are not material to the Company, the way that Safeco was, we don't announce them. So, we will do some, you know, every year, and we just move on.

If it was a material enough transaction or large enough company, then, yes, we would do a press release. And, I think there is still a willingness for that. I think there will be even more of a willingness, going forward. I think what we have is a very compelling product. And, when we get that communicated to our existing customer base, I think it has the potential for us to drive more volume and more units.

Okay. Then on the VB2, would it be a process patent? Or, is it a technology patent? Because, I'm not familiar with how you would go about doing that. But, I mean, do you have any sense, just maybe tell us what, you know, what kind of patent you are trying to get?

I am not 100 percent positive that it is not both. So, I really cannot comment. I believe that we went after the process piece, but I don't know that we didn't go after --

I believe you are right, Jay. It is process.

Okay. Great. Hey Jay, great quarter. I will give you a call, later in the week.

Okay. Thanks, Ross.

John Bloomberg with Burgundy Asset Management.

I'm sorry, gentlemen. His line dropped out of queue. Michael Braig with A.G. Edwards.

I hate to follow-up with what may be a minor item, but on the --

But, you can't help yourself (laughter)

I can't help myself -- (laughter) on the fleet side, will there be any significant change in depreciation and amortization -- first off, to reflect the ownership of an additional $20 million of equipment? And then a decline, as the fleet is eventually sold?

At this time, Mike, we are replacing the lease expense with a little bit of depreciation expense and we do anticipate exiting the trucking business within the next 12 months. So, we hope to get out of it quickly here.

So, is likely to bump in the current quarter and then trail?

The depreciation will bump, yes, but the lease expense will go away.

Okay, and lease expense is currently included in Yard and Fleet?

Correct.

And depreciation will continue to be a separate line item?

Exactly.

Okay. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS). Gentlemen, we are showing no further questions in queue at this time. Do you have any additional closing comments?

Yeah, we will go ahead and finish it up then if there is no further questions. Again, I think everyone understands that we are very excited about some of the things we are doing in the Company. And, we are pleased with the results of the quarter. And, we look forward to talking with all of you for the earnings release on Q2. Thank you very much.

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.