Copart Inc (CPRT) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Copart, Inc. fiscal 2004 second-quarter 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. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host, Mr. Jay Adair, President of Copart, Inc. Thank you. Mr. Adair, you may begin.

Thank you. Good morning, everyone. It's my pleasure to welcome you to our second-quarter conference call. Before we start, I'll turn it over to Simon Rote. He will give you a legal intro, and then we will get the show on the road, and give you an update on the Company.

Thank you, Jay, and good morning. During this conference call, we will be making forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities and Exchange Act of 1934. 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 the floor to your questions.

Now, it's my privilege to turn you back over to Jay Adair.

Thanks, Simon. Again, good morning, and let me welcome you to the second-quarter conference call for Copart, Inc. As you can see from the press release, Copart reported net income of 17.3 million on revenues of 92.6 million. This is 26 percent higher than the 13.7 million earned in the same period a year ago on revenues of 82.7 million. EPS for the quarter was 19 cents, compared to 15 cents a year ago, or an increase of 27 percent.

In the earnings for the quarter was a gain of 1.948 million on the sale of basically trucks from our fleet. We announced in the last quarter that the Company would be exiting an owned fleet model, and be starting an owner-operator model going forward. We have sold roughly 40 percent of the fleet, and recognized a gain of 1.9 million. So I'll give you more of an update on that further on in the call.

As I reported in the last quarter, Copart completed the conversion of VB2 as of December 1. So for the quarter -- November, December, January -- we were completely on VB2 for December and January, and partially on VB2 in November. Even with that partial VB2 conversion for the whole quarter, we achieved 40 percent of the vehicles sold being sold to buyers out of state, and an impressive 17 percent of the vehicles being sold to international buyers. We are very pleased with those results, and going forward, 100 percent of the units that we sell, of course, are sold on the Internet. Again, VB2 is a product that starts with preliminary bidding and finishes with a virtual auction on the Internet in real time.

To take a look at the balance sheet, we finished the quarter with 105 million in cash and receivables at 94.9 million. This is an increase of 20 percent, and it is due to an increase in inventory. Of course, inventories go up as we go into the winter, due to weather, and we have seen significant volume increases, and additional business, as well.

Looking at capital expenditures in Q2, we spent approximately 4.4 million in land, 3.6 million in leasehold improvements and, again, $21 million was spent in the purchasing of our fleet, of which 9 million was sold off in the quarter. And that, again, is about 40 percent of the total fleet. We have about $12 million left to spend, and we believe that that will not be an issue going forward, and we don't think there will be any material adverse effect on reported earnings going forward, due to the sale of the fleet.

Lastly, I just wanted to give you a story on a vehicle that we sold over the Internet last week. It was the 2003 Ferrari Enzo, and actually had a magazine from Motor Trend -- an article from Motor Trend that talked about the vehicle being -- the Ferrari Enzo being 399 made, and that it was sold directly to Ferrari customers at a price tag of about $650,000. The article goes on to describe the vehicle and the horsepower, and all the other intricacies of the vehicle. But basically, we didn't know a lot about 2003 Ferrari Enzo's. And so, when we read the article, we looked at it, and we all tried to come up with an evaluation of what the car would bring at auction. We talk to the adjustor from the insurance company that assigned this to us, and they had reported that they believe the vehicle is worth in excess of $1 million today, in a non-damaged condition, due to the rarity of the vehicle and the demand for the vehicle that's out there.

So we put the vehicle up on the Internet, and this is the vehicle that as of last Friday finished preliminary bidding at $502,100. So we were very impressed with the initial results through the preliminary bidding but, as you all know, VB2 finishes with a virtual auction. And we wanted to see what was going to happen in the virtual auction stages of the vehicle. So I would say this is probably a vehicle that had more eyes looking at it than the typical unit sold by Copart.

Now, the typical unit sold by Copart takes about 36 seconds to sell in the virtual auction, or roughly about 100 cars an hour on a single-lane facility. If you have a three-lane facility like our Dallas location, Dallas today is selling roughly 900 cars with three lanes. So they will be selling at a rate of 300 cars an hour, and the auction should be completed in about three hours. And that is a testament to VB2, because the faster we can sell those vehicles, the better off we are at keeping buyers attending the auction.

So again, it goes back to preliminary bidding allows us to generate a certain amount of interest, and know roughly what the vehicle is going to bring in advance. We can start the vehicle off at a higher number. In the case of the Ferrari, we started off at 502,100 and opened up the bidding. Well, it didn't take 36 seconds to sell the Ferrari; it took 8 minutes and 11 seconds. And the final price on the vehicle was $576,900. It's very impressive, considering it had a repair estimate of $400,000, and it would carry a salvage title going forward; this would not be a clean-title vehicle, but a salvage-title vehicle to any future buyers.

So we were excited about that, and I thought it was worthy of mentioning, just to give you a feel for what really VB2 can do. We generate an additional 74,800 in the virtual auction -- in 8 minutes and 11 seconds, that's about $9,000 a minute was raised during the virtual auction. Again, it's pretty impressive. If you were to have watched the auction, you would have seen bids from all over the world on that particular vehicle. Interestingly enough, it did end up selling to a buyer in the States.

So with that, I will turn it over to Simon Rote, and then we will open it up for questions.

Thank you, Jay. Revenues for the quarter were approximately 92.6 million, an increase of approximately 9.9 million, or 12 percent, over the prior year's quarter. The increase in revenues was due primarily to existing facilities, which contributed approximately 8.8 million or 11 percent for the quarter. New stores contributed approximately 1.1 million of new revenue. New stores which contributed revenue include Richmond, Virginia; Albany, New York; and Eugene, Oregon. Yard and fleet expenses were approximately 50.1 million for the quarter, an increase of approximately 1.9 million or 4 percent over the prior year's quarter. The increase is due in part to the cost of new facilities, which contributed approximately 1.2 million for the yard and fleet expenses for the quarter. New stores include Toronto, Canada; Richmond, Virginia; Albany, New York; Eugene, Oregon; and Helena, Montana. Yard and fleet expenses from existing facilities increased by approximately 700,000, or 1.5 percent for the quarter. Yard and fleet expenses decreased to 54 percent of revenues during the second quarter of fiscal 2004, compared to 58 percent of revenues for the second quarter of fiscal 2003.

General and administrative expenses were approximately 8.6 million for the quarter, an increase of approximately 2.1 million or 33 percent over the comparable period in fiscal 2003. This increase was due primarily to increased payroll and other operating expenses. General and administrative expenses increased to 9 percent of revenues during the second quarter of fiscal 2004, compared to 8 percent of revenues for the second quarter of fiscal 2003.

Depreciation and amortization expense was approximately 8.1 million for the quarter, an increase of approximately 1.7 million, or 27 percent, over the comparable period in fiscal 2003. This increase was due primarily to depreciation and amortization of capital expenditures, covenants not to compete in acquired assets resulting from the acquisition and its expansion of auction facilities.

Operating income was approximately 25.8 million for the quarter, an increase of approximately 4.1 million, or 19 percent, from the comparable period in fiscal 2003. Total other income was approximately 2.9 million for the quarter, an increase of approximately 2.1 million. As Jay noted in his opening remarks, the increase is due primarily to the gain on the sale of fleeted vehicles of approximately 1.9 million. Our effective combined tax rate was approximately 39.5 percent for the second quarter of fiscal 2004 and 2003.

Due to the foregoing factors, we realized net income of approximately 17.4 million for the quarter, compared to net income of approximately 13.8 million for the three months ended January 31, 2003. I will now recap new store information for the quarter. New facilities added approximately 1.1 million of new revenue. As I noted earlier, the direct costs were approximately 1.2 million. Depreciation and amortization is an additional 100,000. The effect of new acquisitions and openings on the current quarter is an operating loss of approximately 200,000. 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 the Company's cash flows. We started the fiscal year in August with cash and cash equivalents of approximately 117 million. As of January 31, 2004, the balance was approximately 106 million, a decrease of approximately 11 million from the start of the year. Operating cash flow year to date is 30.4 million from net income of 32.6 million. A significant portion of the year's operating cash flow, over 29 million, has gone into accounts receivable, prepaid expenses and other working capital items, with a normal seasonal growth of inventory during the quarter.

During the winter months, our inventories generally grow due to accident frequency. The growth of these inventories is reflected in accounts receivable and vehicle pulling (ph) numbers on our balance sheet. A year ago, accounts receivables were 83.3 million, and vehicle pulling costs were 24 million. At January 31, 2004, the accounts receivable balance is 94.9 million, 14 percent higher than one year ago; and the vehicle pulling cost balance is 28.7 million, which is 20 percent higher than one year ago.

Year-to-date capital spending was approximately 41.5 million. Please note this includes approximately 21 million for the purchase of our fleet vehicles. Year to date, the Company has sold a portion of the fleet for approximately 9.2 million. Total net cash used in financing activities was 9.5 million. Please recall in the prior quarter, the Company repurchased approximately 977,000 shares of common stock for 10.7 million.

We will now open the call for your questions. Dan, please join us and explain how the questions will work.

(OPERATOR INSTRUCTIONS). Scott Stember, Sidoti & Co.

Could you maybe talk about VB2? It seems pretty obvious that that might have been some of the reason for the increase in same-store comps of 11 percent in the quarter. Have you had any feedback from the insurance companies, or actually seen any increase in assignments for future business which is directly related to VB2, from a volume standpoint?

I would have to say that it's been all positive from the insurance industry, at this time, because the results are positive. Obviously, if we converted to VB2 and returns had gone down on a per-car basis, I think VB2 would have taken the blame for that. And since we have converted to VB2 and we are up on a per-car basis, again, if you look at the quarter -- November, December, January -- compared to the same quarter a year ago, it's up. And that factors in seasonality and taking the same timeframe. But if you look at February, the month we are in right now, our returns are up on a per-car basis, as compared to any of the months -- November, December, January -- that we just finished the quarter. So the results have continued to increase and continued to improve. And I can't see where an insurance company would look at that and not see that as a favorable item, and that has been the case. We have signed some additional business recently. As is normal for Copart, as a Company of our size, we continue to sign new accounts on a quarterly basis or monthly basis. And I have asked that question point-blank to the team at Copart, whether or not they feel that VB2 was the reason. And the typical answer I get is that definitely it's a number of services that Copart offers, from the national network all the way through to the fact that we have got VB2.

So VB2 is one of the drivers. I think VB2 is responsible for the increases that we have seen, and I think VB2 has been responsible for some new business. But I can't say that I have had one customer come out and say, "Had you not had VB2, I would not have made the switch." I don't think you'll get a customer to do that. Typically, they are wanting a very rounded product; they are wanting not only the VB2 method, but they are wanting the network of facilities, the customer service, everything that goes along with doing business with Copart.

And if you look at the income statement, obviously, it looks like between yard and fleet costs and SG&A, there was a little bit of a shift. Is it safe to assume that that had to do with the new model, which I guess has more technology-laden costs in the SG&A line, given VB2?

Correct. Going forward, G&A will be running at a higher rate, as we've layered some significant costs to running VB2 over the G&A level, or over the G&A line. And then, we have eliminated some costs in the yard and fleet, due to VB2.

Scott Haugan, Columbia Management.

A couple of questions. Can you give us a feel for the average incremental dollar added using VB2? You know, like you explained the Ferrari example, how you added 74,000. But are you tracking an incremental dollar add, on average, since you have implemented that system?

I don't have those numbers in front of me. I have looked at them, but I don't have been in front of me at this time. Obviously, not every single vehicle receives a bid in the virtual auction. The majority do receive a bid in the virtual auction stages. And I want to say it's over 200 a car in the actual virtual auction stages, but I don't have the actual number in front of me.

How do you expect the cash flows to trend for the next three or four quarters? I mean, (indiscernible) with, you know --

Sure. We said in the last call that CapEx would be approximately 35 to 45 million. If you back out the purchase of the trucks, CapEx came in at roughly 10 million for the quarter, and it looks like we are in line with that rate for this year. So I think that still stands true. And of course, that's the next two quarters out. Going into fiscal '05, we will come back and give everyone an update of what we think CapEx spending will be going into the future year. At this time, we are optimistic about filling up some yards with new business. So that's something we will have to look at six months out.

And by that, do you mean you need to build incremental inventory?

By that I mean, if we are to -- VB2 has been very well-received right now. And if we were to receive additional volume in our yards, there is going to be some markets where we will have to open up new stores again.

And competition-wise, how can we be looking at your competition? I'm not extremely familiar with the story. But who are the competitors for this business?

There is a couple other -- I was going to say you can look at them anyway you want to, but I won't do that. That's a joke. The competition out there is a couple of public companies that are in the marketplace, and there there's quite a few independents that are in the marketplace, typical single-owner facilities that we compete with.

Do you expect to see anything like an eBay Motors? With this VB2 program, could they come down this type of channel and compete on scrap and salvage?

If you have seen eBay's product and you've seen Copart's VB2 product, they have nothing in common to me. They are two different products, A. B, you need to store the vehicles; and we are sitting on a lot of cars right now, at 100-plus locations. And there still is a need to store vehicles and be in that business of picking cars up, storing vehicles, working with insurers on owner-retained items, working with insurance companies on inspections, reinspections, doing title work, selling the cars.

So I don't think that that is going to be replaced in the future, in the near future.

Have you ever explored some partnerships with some of the broader online auction platforms to participate in any of your bidding?

Yes, we have looked at it in the past. But again, we have got a product that A, I believe is different, B, we are in primarily the wholesale business. So you have to be licensed in most markets. And you may be licensed to purchase cars in Chicago, and that doesn't mean you can buy cars in Ohio. And you may be licensed in Ohio and Chicago, but you're not licensed in Oklahoma. So our system looks at your license capabilities, and allows you only to bid in markets where you're licensed, based on state law. And of course, we work with buyers to get them licensed in as many states as they want to bid in. But it is a state licensing requirement, as we sit today.

And then just one last question. You indicated 40 percent of buyers were out of state, 17 percent international. How does that compare to other quarters?

I have disclosed those in the past. We have in the past looked at international buyers as being in the 10 percent range. So the fact that it's where it's at today is a new record. Being at 40 and 17 percent is definitely a new record for -- and just so everyone on the call understands, that 17 percent is part of the 40 percent. So we are saying everything, 60 percent was sold in the state where the vehicle resided to a buyer in that state. 40 percent was sold out of state, meaning it was sold to another state or another country. And out of the 40 percent, 17 percent of the total units went to other countries. Does that make sense?

Yes. And you believe that is directly related to the VB2 going online with some of these auctions?

I've been asked that question a lot from customers of ours, and again, I go back to, if the out-of-state numbers had decreased and the international buyer numbers had decreased, and if the returns had decreased, I think VB2 would have taken the bullet for that. And, since the returns are up sequentially, since the returns are up year over year, and since they are up on a per-car basis, I have got to believe that VB2 gets the credit for that, with international buyers at an all-time high, out-of-state numbers at an all-time high. We are just -- I think we have got a product that works real well.

Gary Prestopino, Barrington Research.

I had a couple of questions. Getting back to this Ferrari, it looks like you got a 15 percent left on the virtual bid versus the proxy. Jay, could you give us some idea -- are you seeing a range -- give us an idea of a range of the lift you're seeing from proxy to virtual bid. Is that possible, on the price?

Yes, it is. Hold on one second. Off that last question we got earlier, I was handed some information. Of course, I have not had a chance to really dissect it yet. I'll tell you what, Gary. We'll go through any other questions you have, and the rest the calls, and I will look at this as we're doing the calls. And if I can find it in here, I'll get it out.

Okay. A couple of other quick questions. What percentage were PIP, this quarter versus last year?

65 percent were PIP, versus 68 percent last year, for the same quarter.

And then, if you look -- you're showing some strong growth in receivables for the last two quarters. If you could look at that and say what percentage of that is attributable to the industry rebounding, what percentage is it to new stores, and what percentage of it is really to VB2, can you give us some idea of that metric?

I don't think we can at this time. It's difficult to break out how much is -- first of all, I don't know that the industry is rebounding. I've not heard that -- first of all, I have heard that used car sales are down, from the last report I read, based on a Manheim economist. And I have not heard in the industry that salvage returns are up. Now, Copart's are up. And we have shown that to our clients. And they are up materially; they are not up a few basis points or a few percentage points. They are up significantly, and that is something that we have quantified for our customer base. I think everybody, at this point, in our Company and in the clients that we deal with, are looking at it excited and saying, "Okay, is this trend going to continue? Is the something that -- you know, going forward?" And the nice thing is, looking back, when we first converted the whole Company in December, January was better than December. February today is better than January was. So I don't know where it is going to level off at, but it has continued to improve.

Two more quick questions. If you look at what happened in Q1, as you rolled out VB2, and then what happened in Q2, can you give us some idea of the percentage shift of cars that actually received a virtual bid and were purchased virtually from Q1 to Q2?

No, I don't have that at this time.

And then, lastly, what is kind of the cost differential between using an owned transport fleet versus outsourcing?

Well, it's hard to say right now, because I am bearing the cost; I am basically almost all sub-haul at this point. I've bearing the cost of selling off those trucks, and I have got 300-plus vehicle trucks still in inventory that I have to liquidate. And so I'm in a transition mode. It's never -- in fact, it's common for a lot of companies to do one-time, non-recurring expenses to transitioning out of something. And we have said that we are not going to do that. But I am bearing the cost right now of eliminating the fleet and signing up all these new sub-haulers and having all the costs associated with that conversion. Six months, nine months from now, Gary, I should have all the trucks gone, and I should be in a pure model, in a sense. And then I'll really have a feel for what effect that has on my costs on a per-car basis.

But you're still booking transport costs in yard and fleet; right?

Of course, yes. And that will continue; that won't change.

(OPERATOR INSTRUCTIONS). Mike Braig, A.G. Edwards.

Good morning. A question on the extraterritorial metrics. Do you define those as extraterritorial to the location of the yard, or are you simply saying that 17 percent are sold internationally, relative to the U.S.?

I'm not sure if I understand your question, with that brain of mine. But are you asking, Mike, whether or not the 17 percent of vehicles that we sell -- what that represents?

Yes.

Okay. That 17 percent means that it was purchased by an international buyer. If you look on our Website today, you'll see bids from Lithuania, the UAE, Estonia, and then closer places like Guatemala, El Salvador and in Mexico, Canada. And what we are saying is that these buyers -- they will purchase the product, and then they will ship it back to their markets. So what we are saying is 17 percent of the product that we have sold in units was purchased by international buyers.

And do you have a percentage -- can you give us an idea of how much of that 17 percent was Canadian?

No; I don't have that right now. I don't even break it out like that, as to how much is Canadian or Mexican or (multiple speakers).

The 17 percent would include buyers in Canada?

Absolutely, yes.

And of the remaining 23 percent that is essentially state to state, is there any way of determining how much of that would be natural bi-state or tri-state territory?

Well, I can tell you 10 years ago, we didn't even track it. It was a single-digit number; it was less than 10 percent went state to state. I don't even have to go back 10 years ago; I can go back to '95 and '96. We didn't track it. We started tracking it with Internet options in '98, and that was a number in those days that was less than 20 percent, even in -- I think the last quarter, we announced 25 percent was the number that was out of state. So we are putting product up on the Web, and we are putting it in an online environment. We are allowing people to find that product. We are marketing that product, I think, extremely well, by going out and finding additional buyers and showing those buyers the information on the vehicle. We allow buyers today to click on links that will connect them to an appraiser, someone that can go out to the facility. They don't work for Copart, but they can go out to the facility, and they can look the vehicle over and explain the vehicle and describe the vehicle to the buyer. They can also click on a transportation link, and that will list a number of haulers that are willing to haul that vehicle coast to coast or state to state. They put down whether they are willing to go out 500, 1,000, 1,500, 3,000 miles -- how far they are willing to haul. And so we are really making it easy for a buyer today to be in Chicago, find product online, bid that product in Miami, have someone go look at the product so they are not just buying it off five pictures; they get a physical presence that has inspected the vehicle. And then they can go in and click on the transport link and find up to 5 or 10 different companies that would be willing to haul that vehicle back to Chicago.

And I think all those improvements that we have made -- those are two improvements we made in the last quarter, that we are really moving the model to an online business, and we are making it easier for buyers to find product, get comfortable with what the product is worth so that they will bid the maximum return.

And then I guess just a modeling question. Considering what has happened with the tow (ph) fleet, should we anticipate a decline in depreciation from the second-quarter level, as you continue to sell those remaining 300 vehicles?

We did recognize some depreciation from operating the fleet of trucks; I think it was about 600,000 to 700,000 in this particular quarter. Once again, we still have a lot of constructions in progress that will be going into PP&E, and obviously start depreciating. So will it offset it entirely? I can't answer that right now.

There was a question from Gary Prestopino, and I think from Scott, earlier, on the differential from the preliminary bidding to the virtual bidding. And I'll say safely that it is over $300 per car increase.

Ross Berner (ph), Weintraub Capital.

A quick question, with regards to the overall market on the insurance company side. It has always been that there is a split of the insurance companies, that some just wanted to parcel out business and split it in a local market; others just wanted whoever could move the car the fastest. And a smaller subsegment maybe were focused most on salvage returns and getting the most dollars back. Do you get a sense that there is a shift, that people are getting more focused on salvage returns, and that will lead to even better opportunities further on down the line?

Well, to answer your question, I think insurance companies have always been focused on returns. And obviously, they have been focused on streamlining the process and they have been focused on cost. And we are seeing results currently that we have shown to the industry that are -- they are significantly higher than they have been in the past, the increases that we have seen. And I don't think that any company out there that is doing business with Copart is not, to some extent, impressed with the results they have seen on a national basis. And I don't think companies out there that are not doing business with Copart are not going to be intrigued or excited in some way by those results. So that is something we're going to be out and showing it, and we will continue to do that.

You've got one month of results, almost two months of results internally, I guess.

I've got almost three months. December, January and we'll have February here in a bit.

But you're just sort of beginning the process of going to the client -- customer base?

Yes. It's kind of hard to go to them during the holiday season, in December. So we started to really show some of the results in January, and we have really pushed it out in February. And customers typically finish the year, and then they want to start looking at results at the start of the new year. And they will do that, and I would anticipate a lot of spring decisions. That's something we will be looking for.

Congratulations, Jay.

Mr. Adair, we show no further questions at this time.

Again, I want to thank everyone for attending the call. We were pleased with the results for the quarter, and we look forward to talking to you in three months. Thanks. Bye-bye.

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