Copart Inc (CPRT) 2004 Q3 法說會逐字稿

Good day, everyone and welcome to the Copart Incorporated third quarter earnings conference call. As a reminder, today's conference is being recorded. For opening remarks and introductions, I would like to turn the conference over to Mr. Jay Adair, President of Copart Incorporated. Please go ahead, sir.

Thank you. Good morning. Good morning, everyone, it is my pleasure to welcome you to our Q3 earnings release for Copart, Inc. Today I'll be introducing Will Franklin, CFO to the call. He'll be going through the Safe Harbor, and then we'll be going through an update on financials for the company, and then finally, he'll turn it over to me and we'll finish up with Copart and VB2.

At this time, it is my pleasure to introduce to you Will Franklin, CFO.

Thank you, Jay, and good morning. Before I go into the numbers for the quarter, I would like to make you aware of the following. During this conference call we will be making forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933 and Section 21E 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 unfavorable to our business, our ability to increase market share in an increasingly competitive market and our ability to secure favorable supply agreements with suppliers of salvage vehicles.

We recently converted all of our salvage auctions to an Internet-based model deploying VB2, a proprietary Internet auction system. We cannot predict the long-term impact of this conversion on our business or operating results. Favorable results to date may not be indicative of future performance, in particular, we do not expect our revenues, net income or EPS to grow at rates comparable to those experienced in the most recent quarter.

For more discussions 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.

Now, let's look at the quarter. Revenue for the quarter was approximately $116.6 million. An increase of approximately $22.7 million, or more than 24% over the same quarter last year. The increase in revenue was due to growth in services, the beneficial impact in fees from higher gross proceeds per car, and an increase in car sales volume. Revenue from same-store sales, stores opened before May 2003, contributed approximately $21.3 million of the revenue growth during the quarter.

Yard and fleet expenses were approximately $58.1 million. An increase of approximately $3 million over the same quarter last year. The growth in yard and fleet expenses came primarily from increased vehicle certification costs and the addition of 5 new yards over the same period last year.

General and administrative costs for the quarter were approximately $10.5 million, an increase of approximately $2.6 million or 33% over the same quarter last year. The growth was primarily due to increases in software development costs and technology hardware leasing cost, both directly associated with development and deployment of VB2.

Depreciation was approximately $7.7 for the quarter. This is an increase of $1.3 million over the same quarter last year and resulted from the acquisition expansion of yard facilities and other operating assets including, stores in Richmond, Virginia; Albany, New York; Toronto, Canada; Eugene, Oregon; and Helena, Montana. Operating income was approximately $40.4 million for the quarter or 34.6% of revenue. This is an increase of $15.8 million or more than 64% over the same quarter last year.

The company recorded a loss associated with the writedown of certain fleet equipment to the lower cost to market of approximately $900,000, which, when netted with gains on completed sales during the quarter, resulted in a recorded loss on sale and fleet equipment of $773,000. Since the company announced its decision to outsource hauling in the first quarter of this fiscal year, the company has sold 477 of the 724 pieces of equipment, generating over $15.8 million in net proceeds and producing net gains of over $1.1 million.

Income tax expense for the quarter after certain adjustments, the estimates affecting deferred tax liabilities and tax valuation allowances was approximately $15.6 million or a book effective tax rate of 38.4%.

Copart continues to improve the strength of its balance sheet, having over $165 million in cash and a current ratio, current assets divided by current liabilities, of almost 4 to 1. Net operating assets, total assets less total liabilities and cash, were approximately $411 million. After-tax return on these net operating assets, on a trailing 12-month basis, was over 17%.

Now let's look at cash flow. Cash generated from operations for the quarter was approximately $60.1 million. This is an increase over the same quarter last year of approximately $15.1 million or almost 34%. Net income plus noncash expenses, primarily depreciation, generated approximately $33.2 million.

Further, the company generated approximately $26.9 million from movement in the balance sheet, primarily reductions in accounts receivable and vehicle pulling cost as car inventories declined during the quarter, and increases in accounts payable and taxes payable due to timing of certain payments. Car inventories and salvage car sales peak during the winter months due to accident frequency. This activity consumes cash by increasing receivables in pulling costs. During the current quarter, accounts receivable and vehicle pulling cost declined by combined $14.7 million. This trend is consistent with prior years.

The company received over $7.4 million during the quarter in cash proceeds from the sale of fleet equipment, which, when netted with capital expenditures of approximately $9.5 million, resulted in cash consumption of $2.1 million through investing activities. Finally, the company received over $2 million from the exercise of stock options. The primary financing activity for the quarter.

Total cash generated from all activities during the quarter was over $60 million. For the year, we have spent approximately $51 million on capital expenditures, of which approximately $20.5 million was for the buyout of leased fleet equipment.

Now, I'll turn the call back over to Copart's President, Jay Adair.

Thank you, Will. Clearly, the results for Q3 are impressive. Before we go forward, I would like to take a look back. I want to take you to a year when the 30-year treasury was almost 7.5%. The North American free trade agreement had just gone into effect. Or what we now call NAFTA. For you sports fans, the Dallas Cowboys won their fourth Super Bowl title, 30 to 13 over the Buffalo Bills. And for you tech fans, there was a little company that just got founded called Netscape Communications. And in the same year, they launched the Netscape browser.

Georgia representative Newt Gingrich led the United States Republican party in taking control of both the House of Representatives and the Senate in mid-term Congressional elections. The first time in 40 years, the Republicans secured control of both houses of Congress. Yasser Arafat won the Nobel Peace Prize. And if you're still confused, two of the top grossing films in that year were "Forest Gump" and "Pulp Fiction." Hopefully by now you know what year it was, but if you still don't, it was the same year Copart went public, 1994.

This last quarter, on March represented the 10-year anniversary for Copart as a public company. And I thought it would be interesting to reflect on what happened ten years ago and what happened today. I'm looking at the whole year for 1994. The whole fiscal year. But I'll be comparing it to just the quarter that we're in, Q3 that we finished for 2004.

Revenues for Copart for the year of 1994 were 22.8 million. For this quarter, as you heard from Will, revenues were $116.6 million. Net income for the whole year of 1994, 590,000. Net income for the quarter 2004 Q3, 25 million. Total locations as we finish the year, making our final acquisition in Atlanta, I remember because I was there integrating that facility, 15. Total locations for Q3, 105.

We went public that year with an initial IPO stock price of $2 per share, split adjusted. We closed yesterday at $19.65. Shareholders equity for the year, 1994, just over $49 million. Shareholders equity for Q3, $576 million. But the most important part of all of this to me is that we are redefining the industry with which we're in.

If you look to the press release and to what Will discussed, we have disclosed in this quarter information regarding returns. We measure returns within our industry as a measure of a ratio of gross proceeds to actual cash value. In other words, we take the gross proceeds of the selling price of the car, and we divide it by the ACV provided to us by the insurance industry.

Looking at Q2, compared to Q3, we saw that number grow 9%. In the 15 years that I've been in the industry, I cannot recall when we've seen returns of this magnitude. In Q3, comparing it to Q3 a year ago, we saw an increase in returns of 17%. The best part is, the vast majority of this increase goes to our customers, the suppliers. Also, we disclosed in the press release that 53% of total auction proceeds were generated by buyers outside of the state where the vehicle was sold. 36% of that number went to buyers from another state. 17% from another country.

In 1994, I would have expected a buyer to drive to a sale and spend all day at the facility bidding that sale. And back in 1994, I didn't even track out-of-state buyer activity, let alone out-of-country activity. Today, I would expect that same buyer to bid every sale that I've got going today, all from their PC.

Buyers today can search for product on-line. They can look at 10 vehicle images of that product. They can then click on our appraisal link where they will be given a list of providers that will go out to our facility, look at the product, describe the product, tell them the quality and condition of the vehicle. They can click on another link called the "transportation link." And they can submit bids to transporters. Bidding out how much it will cost to ship a vehicle from say, Miami to Seattle, Washington. All this can be done from the convenience of their office.

The need to show up today at a Copart facility and stand out at an auction from 9:00 until 3:00, it just isn't there. Buyers today can literally do all their research in advance, whether it be appraisal, whether it be transportation, and whether it be demand for the product. And then simply click their mouse to bid the vehicles.

As I said today, we live in a world where we're redefining the industry. We will continue to live up to our mission by streamlining and simplifying the auction process. And we will continue to live up to our vision by continually offering compelling, innovative and unique products and services to propel the marketplace forward. We're very excited about the future of Copart and the future of VB2.

At this time, I would like to turn the call over for questions.

Thank you. The question-and-answer session will be conducted electronically. If anyone in the phone audience does have a question for our presenters, please press star 1 at this time. If you're on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you do have a question, press star 1 now.

We'll take our first questions from Scott Stember with Sidoti.

Good morning, guys.

Good morning, Scott.

Jay, could you talk about the gross profit. Tremendous growth in this quarter. Was that all strictly just from increased leverage from the sales and increased returns per vehicle or were there any one-time items in there or just a clean, clean number?

The majority of it comes from the increased selling price that we're achieving. Obviously, 17% increase in selling prices as a ratio of gross proceeds. As the vehicles sell for more, as I said, the vast majority goes to our suppliers, but we do achieve a higher return on that as well. And additional units through the business. We are up in units. The company has seen growth in Q2 and in Q3.

As we said, in the -- what is it -- press release. We have a number of companies that have now seen the product, understand VB2. When we first discussed this back in December, talking about the fact that we just rolled it out company-wide, we really had no historical data. So we put that 9 and 17% number in the conference calls so that the Street and customers could see some of the results that we're achieving within VB2, within the product.

Okay. And the last couple of conference calls you've indicated that since VB2 went on-line, that every single month you've seen sequential and year-over-year increases. Could the same be said going into the month of May?

At this time, I think we've stabilized to some extent. Of course, it could happen. But my guess would be that December and January were full months with the product. We saw a 9% increase from that quarter to February, March, April. February, March, April running 17% ahead of a year ago. I think we probably stabilized. We may have additional increases.

But at this time, if it stabilizes at that, Scott, I'm very, very happy. I've not seen in my history, in my career where we've had returns in a year increase to that magnitude.

Okay. As far as the balance sheet, the receivables growth, on a year-over-year basis, up about 20%, is that indicative of incoming volumes on a year-over-year basis whether it be advanced towing charges and so forth.

It is. It is associated with growth on a year-over-year basis in vehicles and in inventory.

Okay, and last question. What was the percentage versus fixed in the quarter?

You're talking about PIP?

Yeah PIP, yes.

65%.

65.

Okay. That's all I have for now. Thank you very much.

We'll move next to Max November with Triangle Partners.

Happy anniversary, guys.

Thank you.

Quick question. Can you feel comfortable giving us a little more guidance for the following year or the following quarter?

You mean with respect to earnings?

Yes, sir.

No, we don't give earnings guidance.

Okay. Thank you.

You bet.

We'll take our next question from Harry O'Connor with Cedar Creek Asset Management.

Hi, guys. It seems like you ought to be seeing some significant mix shifts going on in your business, if what you're doing here is getting much higher prices, particularly for high-value cars. We know you kind of tried to lose some of the charity business and some of the low-end stuff. Are you seeing that kind of mix shift yet, or is that something you anticipate in the future?

First of all, I do want to correct you a little bit. We are not trying to lose charity cars at this time. Actually, I was looking at the statistics yesterday. We are up on charity units that we're processing. We're up on dealer consignments that we process as well. And the company is up, not only on high-end units, but there seems to be some belief out there that maybe VB2 is not working on the low-end units. We're actually up on low-end units as well. So it's not just a product that is affecting high-end salvage.

Obviously, when you put out a $15,000 BMW and you allow the world to see that product and you get bids from Guatemala, Estonia, Cambodia and Florida and Connecticut all on the same car that's sitting in Oklahoma, we expect that that vehicle is going to generate a higher return on a per dollar amount than, say, a $100 car, you can make a bigger impact. But we are making an impact across the board, on 15-year-old cars and 1-year-old cars.

These are still early days, you're talking about 6 months since you first described this shift. I'm trying to understand what obstacles would be left in the minds of insurance customers as far as shipping more vehicles to this model. It seems so obvious now.

It does. And I have to say that from my perspective, I'm seeing a significant amount of interest from our customers. They are looking at the product and they are interested in what impacts. I was on the phone yesterday with a potential supplier discussing just these types of issues. So, I think, there still may be some concern that it is a new product. Because it is still new, I mean, we're talking about a product here that has literally only been out about 6 months. But the initial results are pretty exciting.

Do you have any perspective or comment on Manheim's comment that, I think March was the largest increase in used car prices in memory, I guess is the way they described it. Is some of that at work here in your results also, do you think?

It's potential, yeah. There's a possibility that the industry at large is up somewhat, too. But I've seen our industry go up and down.

Yep.

Over the years. I can remember Desert Storm kicking in in '90. And then you had kind of recessionary times. And then you had the boom years, the late '90s. And I've seen our industry go up and down like this. But I've never seen it to this extend.

Thank you.

Sure.

Once again I would like to invite our audience to ask a question by pressing star 1. We'll take our next question from Gary Prestopino with Barrington Research.

Good morning, Jay.

Good morning.

What is going to be your capex for this year, factoring out any acquisitions of land?

I can't factor out acquisitions of land. But the number we gave out is $35 to $45 million.

Okay.

It looks like we'll be in that range. I think we finished the quarter about $31 million if you back out the acquisition of trucks and so I think we'll fall within 35, 45 for the year. And we're not going to give guidance at this time, Gary, on '05 capex.

That's fine. You gave us new-store revenues, can you give us what the expenses were and the operating contribution of the new stores?

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

Okay. Well, could you tell us, was it a negative contribution on the operating line or a positive?

Of new stores?

Yeah.

Positive, I think.

Okay. Can you also discuss, with the VB2, any new contract wins? Have you gotten any new national contracts just based on what VB2 is doing for you.

Obviously, we've signed new business in the quarter. But that is the normal course of doing business. If there was a national contract that we signed that I felt was material, I would obviously disclose it. But there is nothing that I think that I would disclose on a case-by-case basis. We've gained new business in the quarter. We hope to do that in the quarters coming. If there is something that is seriously substantial to the business, we'll disclose it.

Okay. And then do you keep track of -- what countries are your major international customers? Is a lot of this coming from Canada or Mexico? Or is it really spread out all over the world?

It is spread out all over the world. A lot of it does come from Canada and Mexico. A lot of it comes from Central America. Some of our biggest buyers in Guatemala, El Salvador, Honduras. It comes from the eastern block countries. We get an enormous amount of buyers from Estonia, Poland. There's another one, Hungary, I couldn't think of it. And then we get buyers that come from the islands, St. Thomas and Puerto Rico. We get buyers that come from Asia, Cambodia. We've got a lot of Russian buyers, too. That's becoming a big, big -- and I mean Russian buyers from Russia.

So we're getting a lot of just foreign, international, it's become a global business. We really changed it. When I think about, not even back in 1994, but '95 or '96, I might see some guys coming in from some other states.

Right.

But they are fairly local states. By 1999 we saw bids in San Diego coming from buyers in Hartford, Connecticut. Today, if you were to watch sales, you can't watch a sale without seeing bids from all over the world come in within ten minutes.

Are most of these international players, are they rebuilding these cars, or is there a thriving industry for salvage parts overseas as well?

In some cases it is both, because they are buying builders and they're buying parts cars as well for their builders. I know from one perspective, we've had to change the way we do business. I was in the field last week talking to some of the general managers, they said they get bids from -- the customer they were talking about was from Spain. And they said trying to interact with customers when our phones won't let them dial international calls is a problem. And I said, I thought we fixed that already. So it was another yard we had to open up. But we do a lot of back-and-forth communication with these buyers trying to make sure they got titles and make sure that they got that kind of thing taken care of.

There was an article written on us, too, Gary, a couple -- I would say probably a couple of months ago, about a vehicle that sold in our Richmond facility and was purchased by a buyer, I believe, in El Salvador, if I remember correct. But at the end of the day, the importance of the article that was written -- it was by the "Washington Post," wasn't it? Yeah, it was by the "Washington Post."

The importance of the article is that this was a car that the buyer decided to drive back. It was a BMW, they decided to drive the vehicle back to their country. But this is a buyer who stated in the article that he normally ships the product down out of the Port of Miami, I think. And the point was that he could ship product all day long for $500 on container per car.

So it is becoming a thriving enough business that we are building links on our site now for not only -- we've already got transportation and appraisal links, but we're going to be working on shipping and export information so that buyers can list their services on packing containers and shipping cars and that kind of thing.

That would lead me to think, are you contemplating anything in any international markets, I mean with insurance companies where you would actually be, say, on continental Europe with sites where you could take advantage of this on a global basis?

Right now I would say the only international thing Copart is looking at now is Canada. We've had initial success where we're at. And we may be opening up further additional facilities in that market going forward.

And the last question, are you contemplating since this platform seems to be very successful, are you contemplating using it again as a platform for other auction venues, say heavy equipment, things of that nature?

Well, we don't think VB2 is limited to salvage. So, yes, we are talking with folks in other industries.

Okay.

As we continue to do that and if we see that that is going to become something that we need to further talk about, we will do that.

Thank you, Jay.

You bet.

Next we'll move to Bob Lattel with MD Sath.

Thank you. I wondered if there is any valuable information that you would up date us on as far as the program to auction non-salvage used cars?

Program to auction, are you talking about the whole car auctions?

Yeah.

I think that was something Gary was just bringing up. Again, not to give it a canned response, but it is something that we are looking at. We don't think that VB2 is limited to salvage-only sales.

I thought that a year or so ago you had started acquiring sites and so you already were --

That's the public auction business. And yes, our motors auction group, our public auctions --

Yeah, that's what I'm talking about.

We are looking at implementing VB2 in those facilities as well.

By update, I mean, are you adding sites, is that business going along without VB2 okay? Have you decided to shut that down and get out of that business?

No. That business is doing well, it's up year-over-year.

Okay.

We've not added additional locations in the year, but there's some reasons for that. One of which is we've changed our business pretty extensively going from the change with the fleet and the change with VB2.

Sure.

So we've had our hands full. But that business is up year-over-year. It continues to do well. And we're happy with it.

Okay. How many sites do you have at the moment?

6.

6, fine. Thank you very much.

We'll take a question from Tom Lamb with Roy Bosset Research.

Good afternoon or good morning.

Good morning.

Great quarter. I was wondering, when you think -- you're probably thinking big. What do you see out there? I mean, how many more -- I guess, can you gauge your market share at this point in the salvage business? And where do you think it might go? I guess to put a simple kind of number on it.

Well, this is a market that we're probably 35, 40% of the market based on what we can see. How high it will go, I don't know. But my goal as a company is to continue to offer compelling products and services to my customer base. And I think if I do that and I can generate higher returns, especially in the range we're seeing right now, we'll continue to gain market share.

Yeah. And I guess I was speaking domestically, and you were probably answering in sort of a domestic mode as well, right?

Yeah, I'm not thinking --

Globally, right.

U.S., right. We're the smallest player I would say in Canada. And, of course, this business does exist in other countries, and we are not adverse to going over and doing that one day, but I can't say that that's on our plate right now.

Sure, sure. In a previous quarter, you commented on the ability to buy property, even the necessity to buy property to expand some of the lots. Are you facing the same kind of pressures now?

We are. We're having -- volumes are up, as you can see. And we are having some capacity issues in some facilities again. And that will be something we will have to -- I shouldn't say have to, we are currently doing that now. We're currently looking at markets we've got to expand, we're looking at markets we've got to add facilities. And we've got, in some markets, more demand for our product than we have space for cars. So, yes, we'll go out and we'll rectify that problem and make sure we have space.

Terrific. And finally, in terms of the technological capability of your VB2, how far ahead of the industry do you think you are?

How would I quantify that? In years?

Whatever you think is appropriate!

I don't know. I don't know how to quantify how far ahead we are. Using -- our experience was that we were live auction. And in some cases, the industry back in '94 was live auction and seal bid. And the industry went from -- even when I started in '89, a lot of seal bid stores, to by '94 more live auction stores and seal bids, by '98, we had our Internet bidding product that was a day behind. By 2001 we had our virtual bidding product that was realtime. But they all relied on the live auction. And we clearly, without a doubt, in our minds, from the results we've seen, are confident that a virtual auction model is better than a live auction model enhanced with Internet.

Having a virtual bidding product that enhances the live bidding environment, the virtual bidding product is a better product. It doesn't miss buyers. It doesn't skip buyers. It's completely anonymous. And it allows buyers to bid prior to the auction and see what product is going to bring. In some cases, what it will bring completely, at the virtual auction, yet it allows for a virtual auction with a realtime component that is all on-line and offers that excitement and that frenzy and that fun feel of the auction. So there is no doubt in our mind that going with a live auction model and enhancing it with Internet is not as competitive, not as good a product as a pure Internet model.

And you were also looking at perhaps patenting it? Any further word on that or trademarking it?

Yes, nothing to report today, but yes we are patent-pending on VB2, on the technology.

Great. Thanks a lot, Jay.

We'll hear next from from Harry O'Connor with Cedar Creek Asset Management.

Thank you. It is actually Steve Daylog, his partner. I'm interested if you could in trying to quantify the impact, if any, I assume it would be positive, of higher scrap steel prices. So I guess the guesstimate I'm looking for is, how many units do you sell that are just purely for scrap? And either units or revenues is that an impact that we will, just enjoying that because of the steel craze and maybe we won't enjoy in 6 months?

Yeah, I don't have those numbers in front of me, Steve, as far as what percentage of vehicles are scrap. I mean over 50% of the product we're selling is, in terms of dollars, not in units, but dollars, is rebuildable product. I would guess that scrap units are less than 25% of total units that we're selling. That's something I would feel comfortable guessing at without looking at the numbers in front of me. And then to quantify how much scrap is up -- what have they gone to? Are they up to about 50 or 60 a ton now? So you can find out what the scrap prices are per ton as easy as I can. The low, I remember a few years was somewhere in the low 20s. And it may be up from there $40, $50 today. And that's going to help. But the kind of numbers we're seeing, 17% year-over-year growth, the majority of that is from product going up in value. And it is not scrap prices that are affecting that whole number, it's part of it, but it is not the majority of it.

All right. Thank you.

Sure.

We'll hear a follow-up from Max November.

Thank you. Just I'm curious for revenue growth for the quarter, it was extremely impressive. Is that a growth rate that one could extrapolate going forward or should we be looking at prior quarter revenue growth rate year-on-year?

I want to make sure I understand your question. Should we be looking at prior quarter -- what do you mean? When you go into Q4, look at Q3?

No, I mean, it looks like for revenue growth for the quarter you guys had an impressive, I think north of 20% year-on-year revenue growth for Q3.

Yeah.

Prior to that, it seemed like it might have been more, 10 to 13%.

Correct.

Going forward, should I use the 20% number, or is it more kind of a trend line that we've seen of 10 to 12%?

I don't know that I want to give you guidance on that. Our experience is, from looking at VB2, we think it will maintain the existing increase that it has made. Eventually I would think that we're going to have our anniversary on that. But I intend to get additional business as well. I mean, it is very difficult to walk in and show someone the types of results we're having and not make an impact on them.

Okay. I understand. Thank you.

Sure.

And we have another follow-up from Gary Prestopino.

Yeah, Jay, I don't know if you can tell us this, but since VB2 has been implemented, can you kind of give us a breakdown on a percentage basis of how many of these cars are actually going on a virtual bid versus a kiosk bid, when you first implemented to where you are now?

The vast majority of the vehicles are receiving bids prior to the virtual auction. It is very rare that we don't have a bid on a vehicle before the virtual auction starts, which is nice, because it gives you the ability to see what some of the products are going to bring prior to the virtual auction. That's good for asset allocation. In a live auction environment, you might be interested in item 9 and you might be interested in item 150. And had you known that item 150 was going to bring so much, you might have focused more of your working capital on item 9. But in the old live auction environment, you get to item 9 and it bids, and you think, well, it's brought enough, I'll wait for item 150. And you don't spend more and then you get to item 150, and you get outbid on that as well.

At the end of the day, we want our buyers, at the very least, push bids. And at the very most, walk away with some cars, so they are productive. And we have seen a lot of bidding coming in on the preliminary stages, if not almost all the vehicles at that point have some type of preliminary bid on them before they go to the virtual auction. Which, as I said, it works for asset allocation and it speeds up the auction. All of our auctions start at noon and are usually over with in 2 to 3 hours, versus the old days of starting them at 9:00 and finishing the auctions at 2:00 or 3:00.

What I'm trying to get at though is -- I shouldn't say bids, but actual sales. What percentage were, say, kiosk versus Internet 2 or 3 quarters ago and where are you now?

I don't have those numbers in front of me, Gary.

Has it increased more toward the Internet side?

I really don't know. I don't have them in front of me. I don't know where we're at. I know that most vehicles get virtual bids and most vehicles get proxy bids. It's that type of product where, I think of it as a product where you submit your bids and you can see in advance what it is going to bring. Then when the virtual auction comes you've got that exciting environment as well, and you submit bids there often. Or your proxy bid at that point reps you against other virtual buyers.

Okay. Have you pushed in any buyer fee increases, and/or seller fee increases?

I'm not going to talk about buyer fee or seller fees on a conference call. Obviously, in the future if the company is going to make increases to any sellers or to any buyer fees, for me to track that and have that at a conference call, I can't do it.

What about with this new owner transport, fleet transport --

yeah.

Are you susceptible to increases in fuel prices, or do you kind of got these guys locked on an annual basis for the expense of the transport?

We're going to be subject to costs throughout the market simply because the transporters are. So we will work with the owner/operators that are going to give us the best rates. And we're going to basically say, look, you give me a better rate, you'll get more volume out of me. But if the overall market goes up in fuel costs and some buyers, or some transporters, owner/operators may absorb that, some may not. It depends a lot of times the market by market. I was in Atlanta last week, and comparing fuel prices in Atlanta to California is night and day.

Right.

So it is going to be market by market. And it is going to be own/operator by own/operator.

Okay. And then one last question. Obviously, you're increasing returns so that's an easily marketable factor for insurance company business. But on the buyers side, if you're getting from some of these older, old-time buyers that have been doing this for years, how do you counteract that? I mean, are you getting a lot of that from --

I don't think we are. The product makes it so easy. And if you think back before a live auction -- if you go back 20 years in this industry, there were a lot of buyers that were seal bid and they went to the auction. In the days when Willis was buying from salvage pulls and not owning salvage pulls, he was going out to facilities and submitting sealed bids at facilities. And that's the environment we basically made for them at the facility.

If they do, if that, as you say old-time buyer wants to come to the facility and inspect the product physically and wants to submit the bids, that buyer can do that, can walk inside, submit those bids at the kiosk, immediately see if he or she was outbid when they've submitted the bids. They can up their bids. And then if they want to embrace any of the technology, they can put in an e-mail at that time and if they do get outbid at that point, we'll e-mail them and let them know they were outbid and if they would like, they can drive back down to the facility and submit their bid again or they can submit that bid on-line.

So, I think from my talks with buyers, I think they are embracing it. I remember the days when buyers hired contract buyers to stand at an auction for them all day and submit bids. Guys would stand there with cell phones that looked like the size of a briefcase on their hip and submit bids for dismantlers. They don't have to pay those contract buyers. If they went to the store all day, they've got to value their time of standing at an auction for 5 or 6 hours. In some cases they might fly into markets.

All of that has been eliminated. And I think that cost that they had in the past associated with that, they can put that into paying a higher price for the car so they have a better chance of winning the bid on that vehicle. So what I think we've done in many cases is take a lot of the inefficiencies out of the business, and by doing that, making the buyer more efficient and able to find the product that they need. They can pay up for the vehicle and generate a higher return.

Thanks, Jay.

Sure.

And now we'll hear from Michael Kaminski with Neuberger Berman.

Yes, hi, gentlemen. Michael Kaminski, Neuberger Berman, I'm here with team Kaminski. While we own 2 million shares and we don't call and bother you a lot, for ourselves we wanted to congratulate you. Second of all, we wanted to ask you one simple question rather than try to get inappropriate revenue guidance from you. Can you discuss the priorities in terms of use of free cash flow and use of cash? You obviously have a unique business model, growing profitability and a terrific balance sheet. Can you lay out for us as you've done in the past, as you're thinking about the growth of the business, the use of the cash?

Sure. We will be looking at needs going forward, Michael, for property, both in new locations and both in expansions of existing locations. There may be a need for -- we are anniversaring now as a ten-year company, as a public company. We're going to be coming up on the facilities that are hitting their anniversaries on leases. We may have to, if we're not able to resign leases, have to purchase some of those properties as well.

There may be opportunity going forward for acquisition of businesses. Obviously, if this product continues to be successful, that puts maybe a thought in some of the existing facilities out there today. They may want to become part of the Copart team. And we'll be looking at that as well.

We'll be laying out in future quarters, either Q4 or the quarter after that, the capex needs going into the next year. The capex budgets and what we think we'll be spending going forward into that. And, as I said, we are looking at VB2 in industries that are not just a salvage arena. I don't know if that's going to take a lot of capital to do that or not at this time, but we will report on that in the future as well.

Terrific. Just as a follow-up, in terms of the acquisitions, in terms of funding them, would you use cash or stock?

It depends. It depends on what acquisition it is and how bad we want that acquisition and what our current stock price is and what the seller wants. So I wouldn't close the door to either at this time. I'll put it that way.

All right, terrific. Thank you again. Okay, Michael.

Next we'll hear from Scott Haugan with Columbia Management Group.

Hi. Given your price increases, on the gross proceeds side of the return equation, do you have the ability to increase price incrementally as this unit volume kind of annualizes or we get through the annualization of the VB2 platform coming on-line.

Well, it's really not our focus right now. We're focused on getting out, demonstrating what VB2 is doing in the marketplace. Showing the customers the difference we think the product can make. At the end of the day, we don't want them to have a dollar waiting on a dime. And if we can show that there is an opportunity here for them to do business with Copart and use the VB2 technology, and we can grow units through the business, that's the method that we're going to go after.

You just commented that the vast majority of your increase goes to the supplier/seller.

Correct.

I'm just kind of curious as to what your ability is to raise price on them and just how it works, more mechanically.

I don't know that I can answer it the way you want. It is not my focus right now. My focus is to generate more units through the business and not go out and increase prices per se.

Okay. Thanks.

Thomas Lavert with Five Corners Partners has our next question.

Yes, hi. I see that returns are going up nicely, but are you also seeing higher ACV's coming through the lots as well?

ACV's are down just a little bit. The ACV's are probably down $200 to $300 a car, so that's 3 to 5 percentage points, I would say. Around that range.

Is that a sequential number or year-over-year and what do you attribute that to?

Year-over-year is what I'm looking at, not sequentially. It is probably attributed to used car prices. Used car prices have been down over the last year. And so insurance companies are going to look at used car prices to determine what they think they should pay an insured for their vehicle. And if used car prices are down, the actual cash value of the vehicle is going to be down. The payoff is going to be down.

Okay. And another quick question. What was your units up year-over-year, or do you not give that information?

We don't disclose that, right.

Okay. Thank you.

You bet.

And now we'll take a question from Charles Benziger with Perry Capital.

Thanks, my question has been answered.

Okay.

And we have no further questions. Gentlemen, I'll turn the conference back over to you.

Okay, well, this is probably one of the longer conference calls we've had in a while, if not more questions that we've had. And we will be around this week for further questions from any of you that have those.

As I said, Will Franklin came on in the quarter as our new CFO. He's a great guy. And I think you'll all enjoy working with him going forward. And I know we will on the Copart side. We're excited about the changes we're making in the industry. And we look forward to reporting to you on the next quarter. Thank you.

That does conclude today's conference. Thank you for your participation. You may now disconnect.