Copart Inc (CPRT) 2004 Q4 法說會逐字稿

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

Thank you. Good morning everyone. It is my pleasure to welcome you to our conference call for the quarter and for the fiscal year ending July 31, 2004. We've got a lot of change that occurred in the quarter and in the year; I will be giving an update on that. Before I do that I will turn it over to Will Franklin, CFO. He will give you a legal update; after I give you an update on the company he will then give you and update on financial updates and then we will open it up for questions and answer. It is my pleasure to introduce to you Will Franklin, Chief Financial Officer.

Thank you, Jay. Before we get into the call I would like the listeners to be aware of the following. During this conference call we will be making forward-looking statements within the meaning of Section 27A of the Securities Act 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 adverse to our business, our ability to increase market share, and competitive markets, and our ability to secure favorable supply agreements with the 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. 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. I will turn the call back over Jay.

Thank you, Will. Good morning. As I stated, there's been a lot of change in the year. 2004 started with the company being primarily live auction with the hope of a product called VB2. Very early on in the year we realized that the product had a lot of potential as we saw increased returns, and we made a commitment. We went out to the team and said we want to transition from a live auction model to a VB2 auction methodology, and we want to do it in 90 days.

At the same time, we talked about transitioning from an owned fleet to an owner operator model. Clearly if you ask I don't think anyone would see that as something that could be done. Those two things done at the same time. But we went out to our team, we suggested the thought, and they embraced it. It was an extraordinary year, with extraordinary people. The people at Copart from the GMs to the people underneath them in the field, made that change and made the difference for us.

As you then move to corporate, the support team at corporate continued to back those folks in the field in support of our mission and vision. Then, as I have spent the week with my regional managers and my account executor here at home office, I began seeing that dedication. We have extraordinary people, I want to point that out. I know a lot of those folks are listening on the call and I want to tell them that I am proud of them.

As we transition to VB2, we saw a huge change in the market, a market where the business was a local bidding opportunity to a market that became global, allowing buyers from across the country to bid on product. You will see that in the net income for the quarter, as we achieved 21.4 million on revenues of $100 million. This is compared to net income of 13.3 million, on revenues of 87 million, one year ago. Net income increased 61 percent and revenue increased 15 percent, fully diluted earnings per share for the quarter were 23 cents, 21 cents, after a onetime event, as compared to 15 cents a year ago.

Looking at the year, we achieved net income of 79 million, as compared to revenue of 400 million. Looking a year ago, that was net income of 57 million, on revenues of 347 million. This net income increase was 38 percent, and revenue increase of 15 percent.

Fully diluted EPS for the 12 months was 87 cents, 85 cents excluding the onetime event, compared to 62 cents the prior year. Out-of-country bidding and out-of-state purchasing represented 43 percent of total vehicles, 25 percent being out-of-state, and 18 percent being out-of-country. Again, truly transforming our business into a global bidding environment versus a local bidding environment. We think this transition also transformed the industry as we made it easier for buyers to bid at our locations, not being bound to the sale, having to be at the sale for 4, 5, 6 hours, not having to attend at 9 AM in the morning; we think that allowed buyers flexibility in being able to go to other auctions across the country, and in effect has made the overall marketplace more efficient.

Gross proceeds on that number, that 43 percent number, represent 53 percent of all gross proceeds going out-of-state or out-of-country, 43 percent of units. So it's impacting a large number of vehicles already but a higher dollar amount on those vehicles. We finished the year with 178 million in cash, and we will give you more on the balance sheet and cash flows as we go on.

As you are all aware, we had an auction on the day that Charlie landed, Hurricane Charlie landed in the state of Florida. In the past, I have seen where auctions have been canceled due to heavy, heavy snow, ice, and even hurricanes, yet this year as Hurricane Charlie was approaching, and our facility was being shut down, as the staff, management, and buyers were leaving the facility, we saw there was no reason to cancel the sale. We held that sale, and achieved a 30 percent out-of-country bidding ratio, with an eleven percent out-of-state bidding ratio, having one of the best auctions of the year. Copart really sees the value and the boundary-less affect of VB2.

An update on the catastrophe -- we got hit with Charlie, and then came Francis. We really hadn't finished picking up vehicles from Hurricane Charlie so we haven't seen the full effect of Francis and now as you all know, Hurricane Ivan is coming up the coast. We have sent forklifts, people, subhaulers, equipment into those marketplaces, we are currently servicing our existing customers, and we have even stepped up to the plate to handle some business for customers that are currently not selling through Copart. So we have really gone above and beyond to handle that marketplace, and we will do so leveraging our size to service that marketplace the best we can.

On new stores, we opened up Alaska, or purchased rather Alaska and Cleveland, and next year we anticipate opening or purchasing between 6 and 10 facilities. As I mentioned, we have now converted to an owned, owner operator model versus an owned fleet, and we have less than 80 trucks to sell in inventory. I anticipate that we will sell the majority of those trucks if not all of them off this quarter and whatever trucks aren't sold off will be sold off in Q2. Next quarter will be the last time that I will comment on trucks and the effect of selling that equipment off.

With respect to CapEx, we believe maintenance CapEx for the year will be between 10 and 15 million, for next year, 2005. This will be for the purchase of forklifts, rock, improvement of facilities, for repair maintenance on facilities etc. With respect to investment CapEx, again this is something that is difficult to anticipate. Investment CapEx will be based on availability of zoning, land, and business, what we call success-based. We anticipate today that it will be a minimum of 60 million, but that number could change up or down based on availability and success.

Lastly, we had 40 auctions attend the VB2.com forum here at home office. We reviewed the VB2.com product, showed them how the product would work for the auto auction industry and showed them the results and the effect of that product on Copart and the salvage auction industry. We even held a small auction on items so everyone could feel the excitement and the power of VB2. I think it was a very successful conference, a successful meeting; we are currently working on building a buyer base or a database of buyers for VB2. We intend to launch the product by year end for those auctions. Once in place, I believe those auctions will have the flexibility to tie a VB2 auction to their live auction or dovetail with that auction by having a live auction and maybe a day or two later, holding a VB2 auction. So we're very excited about the affects the VB2 will have on the live auction industry and I look forward to reporting to you on that in coming quarters.

At this time, I would like to introduce Will Franklin again, he will give you a financial uptake and then we will open it up for Q&A. Thank you.

Thank you, Jay. Revenue for the quarter was approximately $100.1 million, an increase of approximately $12.9 million or almost 15 percent over Q4 last year. For the year revenues were approximately $400.8 million. This is an increase of $53.4 million, or more than 15 percent over the prior year. The increases in revenue for the quarter and for the year were primarily due to three factors. New service revenues related to VB2, an increase in car sales volume, and the impact on buyer and seller fees from higher gross proceeds on a per-car basis. We believe that the growth in gross sales proceeds per car came primarily from the increased bidder pool created by the virtual bid process which is enabled by VB2.

In terms of per store sales, the vast majority of the revenue growth came from same-store sales, stores opened before 2004. These represent 95 percent of the growth in Q4, and 97 percent of the growth for the entire year. During the quarter 66 percent of the cars were sold under the percentage incentive program, up 1 percentage point from Q4 of last year. Yard and fleet expenses were approximately $49.1 million for the quarter, and included a net positive adjustment to reserves for insurance claims and sales taxes of approximately $3.6 million. Excluding that adjustment, yard and fleet expenses would have been $52.7 million or 52.6 percent of revenue. This is a reduction as a percentage of revenue of 6.2 percentage points, from Q4 last year.

In absolute terms, excluding the adjustments to reserves, yard and fleet costs increased approximately $1.4 million, due to increased vehicle handling costs associated with the higher volume and the additional costs associated with 5 new yards. For the year, yard and fleet expenses were up $9.9 million before the effect of the adjustments to insurance and tax reserves. This is an increase in absolute dollars of almost 5 percent but a decrease as a percentage of revenue of 5.3 percentage points.

General and administrative costs for the quarter were approximately $9.2 million, an increase of approximately $1.5 million over the same quarter last year. For the year, general and administrative costs were $36.5 million, a growth of $7.8 million or almost 27 percent. The increases in both the quarter and the year were primarily due to the increases in software development costs, technology hardware leasing costs, and IT payroll costs, all tied to the deployment and development of VB2.

In addition, the company saw increases in the costs of professional services impacted by the Sarbanes-Oxley compliance, and payroll and benefit costs associated with expanded and support headcount. Depreciation was approximately $7.7 million and $30.8 million for the quarter and the year respectively. The results represent increases of approximately $500,000 and $5.3 million over the same periods last year, and resulted primarily from continuing acquisitions and expansions of the yards and additions to other operating assets.

During the current fiscal year we purchased yards in Northfield, Ohio, Anchorage, Alaska and Eugene, Oregon. We opened yards in Helena, Montana and Toronto, Canada. These stores contributed approximately $600,000 and $1.4 million in revenue for the quarter and the year. They generated net pre-tax losses for the quarter and for the year of approximately $258,000 and $886,000. The losses were primarily due to longer than expected startup periods for certain yards. We expect these facilities to generate net operating income in fiscal 2005.

Operating income was approximately $34.1 million for the quarter. Excluding the favorable impact of the adjustments to reserves, operating income would have been $30.5 million. This is a 45 percent increase over the same quarter last year. For the year, and excluding the impact of the adjustments to the reserves, operating income would have been $121.2 million or over 30 percent of revenue. This is an increase of $30.4 million or almost 34 percent over last year.

The company realized net gain of approximately $170,000, and $1.4 million on the sale of its fleet equipment during the quarter for the year. Since the company announced the decision to outsource hauling in the first quarter of this year, the company has sold 602 pieces of the 724 pieces of equipment, generating almost $20 million in net proceeds.

Other income consists primarily of rental income from the lease or sublease of unutilized yard facilities. Income tax expense for the quarter after certain adjustments to estimates affecting deferred tax liabilities and tax valuation allowances was approximately $14.2 million, or an effective tax rate of 39.8 percent. For the year, the effective tax rate was 39.2 percent.

Copart continues to improve the strength of its balance sheet, having over $178 million in cash and a current ratio, current assets divided by current liabilities of almost 5 to 1. Net operating assets, total assets less total liabilities and cash were approximately $424 million at the end of the year. After-tax return on net operating assets for the year was almost 19 percent. Cash generated from operations for the quarter was approximately $23.5 million; this is an increase over the same quarter last year of $10 million or almost 73 percent. The company had capital expenditures during the quarter of $17.4 million. These expenditures were offset by proceeds from the liquidation of fleet equipment of almost $3.3 million.

Finally the company received almost $2.5 million from the exercise of stock options and approximately $600,000 from the issuance of shares pursuant to the company's employee stock purchase plan. On a year-to-date basis, cash generated from operating activities was more than $115 million. Of this amount, approximately $109 million came from net income adjusted for non-cash expenses and income. The balance came from movement in the balance sheet. During the year, we had capital expenditures of approximately $69.2 million. Including almost $20 million associated with the buyout of our lease commitments relating to fleet equipment which we are in the process of liquidating.

Finally, on a year-to-date basis, we consumed approximately $4.4 million in cash and financing activities, including a stock repurchase of over 977,000 shares at an average cost of under $11 per share. This outflow was offset by the combined proceeds from the exercise of stock options and issuance of shares pursuant to the ESPP plan of over $6.4 million. Total cash generated from all activities during the quarter and for the year was approximately $12.7 million and $61.6 million respectively. Now I will turn the time back to Felicia to handle any questions.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Scott Stember, Sidoti & Co.

Could you talk about the reversal of the accruals once again? Could you just talk about, I just want to make sure I heard right that both items were in the yard and fleet line and that -- could you just comment if these items were originally accrued in this year or were they from prior year accruals as well?

Let me explain what they were first. The primary adjustment was to our insurance reserves. Copart self-insures a large portion of its insurance exposure. Workers comp, automobile and general liability. And associated with that, we have to maintain reserves for incurred but not reported claims on our balance sheet. Every year we have a consultant help us to determine what an appropriate accrual should be. This year, our consultant and actuaries determined that we had more reserve than we should have. We went back and analyzed the periods that are affected, and it’s over the course of the last eight quarters primarily, and the impact in any one quarter was immaterial. We had extensive discussions with our accountants and our audit committee on how to handle this, and we concluded that it was appropriate to handle it during this quarter as a change of estimate.

Okay. As far as how VB2 is going, could you talk about -- we obviously have seen the increased returns per vehicle, but some anecdotal evidence maybe of how this is translating into new allocation? And if it hasn't happened in mass yet, when can we expect to start seeing that going forward?

When you say in mass, we are a pretty large company already, Scott. When we sign a 10,000-car account, that’s less than one percent in units yet we consider that a big win. So, we have gone out and quantified for our customer base, and for prospective customers the gains that we're seeing on VB2.

As we said in this month of September we are seeing a record gain again in returns, and so we are out there and we are showing and quantifying the gains and the benefits of VB2 and we're excited about that. And we are 9 months now, 10 months into the product, and I think it is really starting to get out there. We're going to be anniversarying the product here in December, and as that happens and we continue to see the benefits of VB2, I think we will be signing up even more business. But we’ve continued to sign business throughout the year, and I think we will do that throughout the coming year. That is the reason for the capital budgets that we threw out there. There is some markets where we are clearly going to be getting business and we have got to anticipate that and expand in those markets to make sure we got room for the customer.

Okay. The receivables balance at the end of the year, was up about 15 percent. Once again that is a pretty good indication of the flow of business coming in. Is that correct?

Yes, in the past, the receivables do go up as we pick up business and build inventories. So, yes, in the past, it has been a good indicator that inventories are building. That is not the only thing that affects inventories though. It has some to do with the timing on the sale of the vehicles.

That's all I have. Thank you.

Bob Lattelle of MD Sacks Investor Services.

I just had a question on your plans and the potential contribution from licensing VB2 to other companies?

Right now, we are very excited about the change that the product could make in the industry. We have seen what it has done for us, it's a boundary-less product that eliminates barriers between the buyer and the seller. There is no need to physically attend the auction. I think that is even more so in the straight car auction because in our business every car is like a snowflake. It's unique in its damage. And in the straight car business, a lot of the cars that are sold are very easy to commoditize and look at that vehicle as being just like a number of other vehicles with the same year, make, model, options and color. So, we're excited about the opportunity that is going to make in that industry, and we're putting a lot of time and effort into it. But at this time, I’ve made a decision not to try to make any estimates on what the financial gain would be to Copart. Let's just see how the product works, see what happens and as we have success, I will report to the Street on that success.

Okay, thank you.

Eric Destenfeld (ph) of Institutional Investment.

I heard you comment earlier about the hurricane thing, that there obviously are more wrecked cars that will probably help business, but did any of your facilities get affected and did any of the inventory at any of your facilities get affected?

We got hit in Orlando from Hurricane Charlie, it knocked down a couple hundred feet of fence, and ripped some buildings up and we got hit in some of the other facilities like West Palm, where buildings were damaged and we had some flooding damage and that kind of thing. So, we shipped in -- what do you call them? Containers or modular buildings that we will be working out of. We shipped in generators during the days when the electrical was down. I think all the electrical is back up in those markets. We are working out of modular buildings; we’ve got customers working out of modular buildings and in a catastrophe situation its not unseen to have 20, 30 insurance company reps at your facility until you put up a lot of modular space and our people are really doing a great job there. We are proud of them, and they are going to make it happen.

The point I was trying to make is really I guess two-fold, which is one, we're servicing our customer base there. We are not being negatively impacted by the hurricane. It hasn't damaged inventory, so we are handling that and we're doing fine. The other one was that it's not going to make a real financial impact, positive impact for the company because though we will handle a lot more cars, there is a lot of costs involved in doing this. We obviously are paying everybody a premium during this time period. And so the cost associated with that makes the impact really not material.

Isn't it more business, more profit? I mean, that’s your business, more wrecked cars. I don't understand how?

Because in our business we're geared for the everyday flow that comes in. We are geared for the 100 cars a day that come into that market. When you get 2000 cars in a week that come in, you've got subs that you have got to ship in from other markets and you are putting people up in hotels and your paying overtime and there's just a lot of costs associated with handling those incremental cars.

So in general, increased business being weather-related is bad for you? Because you don't know how to handle the extra flow?

Increased business due to weather is not a hurricane. So, if we were to have heavy, heavy rains up in the Northeast, because of a tropical storm that goes on up there, we can handle that kind of volume. You're talking about thousands of cars coming into marketplaces where we’re shipping people and I will be flying out to that market with the team in a couple of weeks to do a follow-up and see how we are doing. So there's a lot of costs associated and a lot of time that goes into a hurricane. You really are trying to manage a catastrophe situation; you're not trying to handle a little bit of snow or a little bit of rain volume.

So a 5 percent increase across the nation will be good but like a 100 percent increase in a couple of markets is actually bad for you, or neutral for you?

I would say neutral.

Great, thank you very much.

Gary Prestopino of Barrington Research.

Just want to clarify something you said. You said 95 percent of revenue growth in Q4 was same-store, so that means same-store sales were up about 14 percent. Is that correct?

That's correct.

And then about 15 percent for the year?

Correct.

Can you give me the breakdown of the amount of cars that were -- for the year -- that went outside the state where the vehicle was located, and as well as out of the country?

I think its 25 percent and 18 percent. Let me confirm that.

From Q4.

If you have it for Q4, I'm looking for the full year.

I know from Q4 '03 to Q4 '04 we saw over a 20 percent increase in out-of-country growth and over a 20 percent increase in out-of-state growth.

That's fine.

He's got the number here.

It is 24 percent for the year out-of-state and 17 percent out of country.

Okay. Great. This new endeavor that you have with the wholesale auctions, you said you had 40 auctioneers that are working with you on this?

40 auction owners. I shouldn't say auction owners, auction facilities because some owners own three stores.

Are these facilities public or wholesale auctions?

These are both.

Okay. Is it more tilted towards the wholesale side?

I would say it is more tilted to the wholesale side.

Did you talk about how much your salvage returns were up in the quarter and the year?

No, we didn't comment on that. I gave clarity on that in Q3 just so that people would be able to quantify some of the impact that we're seeing, but we're not going to make it a habit of every quarter reporting results.

Okay, thanks Jay.

Michael Kaminski of Neuberger Berman.

Hi, and congratulations. On behalf of our team here at Neuberger we just have two basic questions. One is, given your pristine balance sheet, the fact that it is underleveraged and generates significantly more cash flow annually than you plan in terms of budget and spending, is there any way that you considered returning capital back to shareholders? Have you thought about instituting a dividend perhaps?

No, not at this time. We are right now, focused on growing the business, and we don't know -- as I said, there's going to be a minimum of 60 million in capital needs next year but we don't really know what the capital needs will be until we get into the year and see some of the growth. So, there is no intent right now to really buy back stock or to cut a dividend.

Longer-term, where do you think the proper capital structure for the company is? Do you always envision having no debt? Do you always envision having a lot of cash?

I think that is an opportunity answer. If the opportunity were there for us, there is some opportunity that we felt we had to take then maybe we would put some debt on the balance sheet, but assuming that that isn't the case, I think we're a company that is going to be debt-free and have significant cash on the balance sheet.

Okay. Lastly, in terms of growth opportunities longer-term, do you foresee a world where VB2 could be applied to other industries outside of autos, whether you are talking salvage, used or new autos? But entirely outside of the industry into new industries?

I don't see a reason when we are talking about wholesale businesses. I am not talking about small charity auction types of things. I am talking about wholesale business where anonymity is a benefit, where it eliminates collusion. Obviously if you go to your local school auction, we want to see Bob bidding against Joann because everyone gets excited and bids more. That is not the case in the wholesale markets. In the wholesale markets anytime you get visibility you got the risk of collusion, plus you are requiring people to show up to physical facilities and spend their day there which has a cost associated with it. So, I don't see where in the wholesale markets whether it is cars, planes, or trains so to speak, I don't see why it matters what we are going after where VB2 can't do it better than a live auctioneer.

Have you sized that market opportunity?

Right now we're just looking at the straight car auction marketplace and we will see how we do. If we're successful there, then you know we will be marching forward.

Okay, terrific; we’re behind you.

Tom Lam of Live Asset Research Management.

Hi, it is (indiscernible) Lewis at Live Asset Research Management. I just want to ask about the sustainability of your competitive advantage with VB2. To my knowledge nobody else has anything like this. If I am wrong please let me know. But, also, what do you think the odds are that a competitor could duplicate something like VB2?

Well, I haven't gone too much down that path because the current competition out there is basically saying they have made an outward statement that they want to be live auction based. And that they want to use Internet enhancement, which is what we did back in 2001 and '02 and '03. If that is their goal in life, that is good for us and we are focusing on improving VB2 and expanding the VB2 marketplace.

Makes sense. Do you have any idea about what your market share in your business is at the end of 2004 versus what it was in 2003? Presumably you've taken quite a bit of market share.

It's difficult to say, I would give you the same numbers I have given people in the past is about 35 to 40 percent of market.

Thanks and congratulations.

Keith Nay (ph) at Lawndale Capital Management.

My question was answered. Thank you.

(OPERATOR INSTRUCTIONS) Greg Schultz (ph) of FAC Capital.

A couple of questions. I guess all of, most of your revenue growth was same-store and you sort of said, hey a lot of that came from increase of gross proceeds per car. Is that the majority versus volumes or was it, what is the sort of mix there?

That is one factor. All of those had a significant impact. We're not going to quantify which, how much percentage is related to each of those factors. I would say that each had a significant impact on the growth.

The CapEx, the 60 million of CapEx you quantified as growth, does that include acquisitions or is that for existing yards?

No, that would include any potential acquisitions we would make, and again that is something that we're looking at a success based, so it's going to be for the purchase of property, the development of that property, and the facilities and the purchase of companies that are available. So what we have got in our budget right now, if everything were to be successful we could see spending in excess of 60 million. That may or may not happen.

Lastly, on the accrual, I think I heard you mention it was over 8 quarters you had been accruing for that.

That's correct.

And then you sort of reversed it this quarter?

That's exactly right.

Thanks.

Thomas Lavert of Five Corners Partners.

Great quarter. On vehicle pulling costs which was about flat year-over-year, was that, and I apologize if this was already asked, was it flat due to -- are you operating more efficiently, or can you explain why it was flat?

Sure. Vehicle pulling cost amount per car changes every year, so it's not necessarily an indicator of how many cars are involved. It is a combination of the two. So, it doesn't necessarily mean that we are processing cars more quickly. We can't have a change in the price per car; that can have an impact on that number.

Okay. So, I guess to kind of on a look-forward basis, should we expect it to go up or down or is there any way we can forecast how we should look at this?

Sure. In general terms, it is an indicator of how many cars we have in inventory.

Okay. Then the other question, with Accounts Receivable, was the growth related to advance charges, or trade receivables primarily? Or just equally both?

It’s related to both; an increase in inventory does have an impact through the advanced charges, but with the increase in revenue we also had increased buyer and seller receivables.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) Mike Corcoran (ph) of Lionsgate Capital.

Great quarter guys. Just wondering the gross proceeds over actual cash value ratio, on a year-over-year basis?

You are talking about returns?

Yes.

We monitor returns that way and we made a decision not to give that out going forward. We gave it out in Q3 just because there was so much demand for us to quantify the increases that we had seen with VB2. So we said, look, as an effort to give you the success that we're seeing with VB2, we will put that number out but we're not going to do it on a quarter-by-quarter basis.

Also, can you just talk a little bit about when you go out there making these acquisitions of the facilities, what kind of multiple do you generally pay? What kind of metrics do you look at on an EBITDA, revenue, etc.?

We obviously will do it on a per-car basis, sometimes depending on the type of accounts they've got, the type of cars they've got, the value, average selling price of the car. There will be a number of things we will look at on a per car or we can just do it on a flat EBITDA multiple and that is typically around 6 times.

Six times? What about -- okay. That's great. That's about it. Thanks.

At this time there are no other questions. I'm sorry we have had one signal. Ross Berner of Weintraub Capital.

Hey Jay, nice job. Can you just talk a little bit what you are seeing from a macro perspective? Incidence levels and things like that?

Within the market, like frequency?

Frequency, yes.

I think the market has said that frequency is down, but that is going back in the last quarter. I do not know where that's going to be with all of this -- you have to think about the hurricane doesn't just hit Florida or the Gulf states there, it goes right on up as a tropical storm or a depression all the way up to New York. And causes flooding and accidents and all sorts of stuff. I don't know what it is currently. In the past frequency has been down, but we will see what happens going forward.

I was sort of thinking outside of the weather-related stuff, or kind of the onetime weather-related stuff if you can even call it that, the trend in frequency going down, I wonder if that was kind of stabilizing and maybe improving from your vantage point?

I don't know. I look at the cars coming in. I got more cars coming in than I used to. That is kind of how I focus on it.

Okay, and definitely percentage of cars being totaled, you are still seeing that number actually rising?

That is what we hear, is that out of the total number of claims, that the percentage that becomes total loss is going up. There is an increasing percentage there. That just makes sense, I mean you are talking about vehicles that are being built today with more air bags and more safety and as they do those great improvements to the vehicles it just raises the cost to repair the vehicle. Every time you raise the cost to repair the vehicle you make it more likely it’s a total, and then on the flip side of that we are generating higher returns. If we can generate higher returns, that increases the likelihood of total loss as well.

Right. In terms of just, you don't really ever have an opinion on used car prices, just kind of the Manheim index-related stuff.

I refer everybody to that. That is all we can do.

I will talk to you later, Jay.

John Christiansen of Cain Anderson (ph).

Good morning. I was wondering if you could provide an update on the Motor Auctions Group.

Yes, MAG is doing great. They are focusing right now on VB2 as well. What we're looking at for Motors Auction Group is because it is a public auction we got so many new participants at every single sale, it is very rarely are you seeing I would say, the majority of the auction is new every week because you're seeing new public players. So, what we're looking at is having a live auction, and then in addition to the live auction, dovetailing a VB2 auction into that, where they will be able to hold the live auction and maybe a day or two later -- are you guys looking a day or two later -- yes, a day or two later they will be able to hold a VB2 auction off on vehicles that -- again that is an industry that is very different than the damaged vehicle industry and the 90 plus percent of the vehicles we run, sell in that market, 50 percent of the vehicles you run sell. So the ones that don’t sell we will be able to run through a VB2 auction a couple of days later, and add on any additional cars that come in, in that period and then run an auction and sell them. So that is where they are focused right now and they had a good year, and again we are excited about what those guys are doing.

What are your expansion plans for that?

Right now we are just looking at applying VB2 to that marketplace and I don't think we have any intent to really open up any additional facilities until we see what that impact is.

Okay. Thank you.

Ashish Pant, Farallon Capital.

Just a quick question. What percent of the salvage purchases now are being done by people who are actually paying the VB2 fee as in they are not visiting the site and doing it?

We don't disclose those numbers.

Okay. Thanks Jay.

Mike Corcoran of Lionsgate Capital.

My question has been answered. Thanks.

(OPERATOR INSTRUCTIONS) At this time there are no other questions in the queue.

Again, thank you everyone for attending our call. As you can see, we're pretty excited about things that are happening in the company. I want to make a final note and thank my team in Florida, Dan and the rest of the team there are really doing a great job. These guys are working seven days a week. We have expanded the hours at those facilities to 12 hours a day, so you are really doing a good job and we know it. We are aware of you guys out there, and we will be coming out to see you soon. Thanks again for everyone attending the call. We appreciate it. Bye-bye.

That concludes today's conference call. We thank you for your participation and you may disconnect at this time.