Copart Inc (CPRT) 2005 Q1 法說會逐字稿

Good day everyone and welcome to the Copart, Inc. first-quarter fiscal 2005 earnings call. (OPERATOR INSTRUCTIONS). For opening remarks and introductions, I would like turn the call over to Mr. Jay Adair, President of Copart, Inc. Please go ahead, sir.

Good morning everyone. Welcome to the call, our Q1 earnings release call for 2005. As you can see from the results, we're pretty excited about what is going on and how our year is starting. With me this morning is Will Franklin. Will will be giving you an update on financial information and financial results. I will then give you some of the exciting things that are happening with Copart and with VB2. And then finally, we will open it up for Q&A. So with that, it is my pleasure to introduce to you, Will Franklin, CFO.

Before we continue I would like to make everyone on the call 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 of 1933, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may include, among other statements, projections about our future revenue and earnings growth, which are subject to numerous risks, including weather conditions that are adverse to our business, our ability to increase market share in an increasingly competitive market, and our ability to secure favorable supply agreements with the suppliers of salvaged vehicles.

For more discussions of these and other risks that could affect our business, please review the Management's Discussion and Analysis and the Factors Affecting Future Results contained in the Company's 10-K and other SEC filings. Now Jay, I will turn the call back to you.

Again, good morning everyone. As you can see from the press release, Copart earned net income of 22.7 million on revenues of 104 million. This is compared to 15 million a year ago on revenues of 91.5 million, or an increase in net income of 49 percent and a revenue of 14 percent. Fully diluted EPS for the quarter was 24 cents compared to 17 cents or an increase of 41 percent. This was done on same-store sales increases of 13 percent.

I want to point your attention to one of the paragraphs in the press release that focuses on the total number of vehicles that are being purchased by out of state and out of country buyers. Just so we're clear, these are vehicles that are sold in one state and then are bought by a buyer from another state or a buyer from another country. For the quarter that represented 46 percent of the vehicles. These are numbers that we did not track five years ago or six years ago. And then as the Internet platform started with Copart, we started looking at out of state and out of country buyers.

When you look at just this year, that 46 percent was broken out into 26 percent out of state and 20 percent out of country. If you go back just one year ago August, September, October of 2003, Copart was at 22 percent versus 26 percent today. So we have seen a growth from 22 percent out of state to 26 percent out of state. And we have seen a very material growth in out of country purchasing from 14 percent one year ago to 20 percent. Now one year ago VB2 was in the process of being rolled out, and by December 1 of Q2, which is today, we had completely finished the roll out of VB2.

The next thing I want to point your attention to is the increase in buyers. Total buyers is now over 43,000, or an increase of over 10 percent. We believe that increase in buyers, and we believe the ease in accessing vehicles has been the cause in seeing gross proceeds, or the amount that the vehicle is sold, the percentage of gross proceeds for out of state has risen to 37 percent of total vehicles for the quarter. And out of country, 20 percent. So that is a total of over 57 percent of the product that we are selling is being purchased by a out of state or out of country buyers.

As you can see from the press release, and Will comment more on it, we finished the quarter with 200 million in cash. I will talk a little bit about VB2, but we believe at this time that there is opportunity out there for us with respect to the cash, so I thought I would point that out up front, because I usually get asked what we're going to do with our cash position. And at this time we're going to see what opportunities unfolds with respect with VB2.

Looking again at out of country buyers, I often get asked who are the big countries that are buying, and where is the gain, and what is the effect of the euro? And I will tell you that the top 10 gainers this year are not euro countries, which does not surprise me. We sell very, very little to the euro countries.

Number one top gaining country for the year. This is the country that has increased in its purchasing for Copart, is Lithuanian, followed by Hondurans, the United Arab Emirates, Nigeria, Russia, Costa Rica, Lebanon, Panama, the Bahamas, and finally Poland.

Because of this significant impact that we are seeing in returns and gross proceeds, which again Will will talk about further, and the fact that so much gain has occurred through out of country buying, we featured in our annual report this year, and if you have the annual report it is on page 6, a buyer from Lithuanian. And we have documented just how a buyer goes about finding the product online, how they go about procuring it through the VB2, eventually transporting into shipping docks and then shipping it overseas. (indiscernible) our exports to obviously Lithuanian and Russia, but then further exports on to Ukraine and other areas in Eastern Europe. So if you did get the annual report, I would just recommend at least checking that piece out.

And then finally, in the spirit of VB2 and some of the things we are doing here, we believe that the only true way to feel the energy created and the excitement created in the VB2 auction is to bid at a VB2 option. So we have put together a technology demonstration, VB2 Auction. We call it the VB2 Tech Demo Sale. It will be held on January 14 at 11:00 AM Eastern standard time. To access the sale I would highly recommend that you go today to www.VB2.com and register.

Now when you register you won't have a dealer license, so just register with the information you have, and this will qualify you as a public buyer. And as a public buyer you will be able to access the Tech Demo Sale on January 14 where we will be selling electronics and sporting goods and things that people can use. So there is a desire for you to bid on the product and buy something that maybe you have a use for.

But in addition to that, you are now registered as a VB2 public buyer. And as a VB2 public buyer you have access to a real VB2 sale that will be held on December 14. The December 14 sale will be a non damaged vehicle sale, all claim title vehicles, selling at our Richmond location, MAG location. And these claim title vehicles can legally be sold to the public in that market, which is what we do. So you'll have access to bid on those vehicles. So I want to urge you to go to that sale. I also want to caution you not to get carried away and buy too many cars.

And with that, I will turn over to Will Franklin, and then they will open it up for Q&A. Thank you.

I will go over the financials. Revenue for the quarter was approximately $104.1 million, an increase of $12.6 million or almost 14 percent over Q1 of last year. The drivers for the growth in revenue continue to be, number one, more cars, number two, growth in new service revenues as buyers take advantage of the ease and convenience of buying online through VB2, and three, impact on buyer and seller fees from higher gross sales proceeds. We believe the growth in gross sales proceeds per car came primarily from the increased bidder pool created by the virtual bid process. However, more important than the beneficial impact on fees to Copart are the increasingly higher returns we are generating for our sellers.

Same-store sales, sales from stores owned or opened more than 12 months, increased by 13 percent. During the quarter 66 percent of the cars were sold under the Percentage Incentive Program, up 2 percentage points from Q1 last year.

Yard expenses were $52.7 million for the quarter, an increase of $1.1 million over Q1 of last year. The increase was due primarily to higher vehicle sales volume and the extra expense associated with three additional yards added after Q1 of last year. Gross margin for the quarter was 49.4 percent, an increase of 5.9 percentage points over the first quarter of last year.

General and administrative costs for the quarter were $8.7 million, an increase of $600,000 over the same quarter last year. The increase was due primarily to increase in software development costs, technologies hardware leasing cost, and IT payroll costs, all directly associated with the continued development and employment of VB2.

Depreciation was approximately $7.6 million for the quarter, representing an increase of approximately $200,000 over Q1 of last year. The increase was due primarily to acquisitions and expansion of existing yards and other operating assets.

Yards added after Q1 of last year, Helena, Montana, Northfield, Ohio and Anchorage, Alaska contributed approximately $800,000 in revenue during the quarter, and were profitable on a consolidated basis.

Operating income was $35.1 million for the quarter, or 33.7 percentage points of revenue. This is an increase of approximately $10.8 million, or as a percentage of revenue, an increase of 7.1 percentage points.

Total other income was approximately $2 million for the quarter, an increase of $1.1 million, and resulted from the increased interest income and a total gain on the sale of assets of over $400,000. At the end of the quarter the Company had 30 units remaining of its original transportation fleet of 724 units.

Income tax expense for the quarter, after certain adjustments to estimated -- estimates assessing deferred tax liabilities and tax valuation allowances, was approximately $14.4 million, or an effective tax rate of 38.8 percent.

Copart continues to improve the strength of its balance sheet, having over $200 million in cash. Its current ratio, current assets divided by current liabilities, it is approximately 4.5 to 1. Accounts receivable, vehicle pooling costs and deferred revenue all increased due to growth in cars on hand. Total equity has grown to $625 million. After-tax return on equity on a trailing 12 month basis has been 13.8 percent.

Cash generated from operations for the quarter was approximately $29.6 million. This is an increase over the same quarter last year of $4.3 million. Net income, adjusted for non-cash income and expenses, generated $31.8 million. However, we consumed almost $2.2 million in cash in the balance sheet due primarily to increase in inventory.

The Company had capital expenditures of approximately $11.9 million during the quarter, primarily for yard expansion. These expenditures were offset by proceeds from the liquidation of fleet equipment of almost $3.8 million. Total cast generated from all activities during the quarter was approximately $21.7 million.

With that, Dawn, I will turn the call back over to you to accept questions.

(OPERATOR INSTRUCTIONS). Bob Ladik (ph) with CJS Securities.

Congratulations on a very nice quarter. I just wanted to ask a quick question. Could you give us a little bit of a breakdown regarding the same-store sales on volume versus price? Can you give us an indication which was a greater component of that 13 percent?

They are both significant, but we don't give information about our pricing.

Okay. Could you talk a little just about I guess competition for supply in the area? So volume was up in the quarter (multiple speakers).

That's correct.

How has competition for supply been?

If you look at the competitive landscape over the last five years, I think it has been -- it is meant something where we aggressively go out and market the Company against formidable competition that is out there. And we don't look at any of the competition as being uncompetitive, and I think that hasn't changed. It is the same way it is today.

We'll continue to go out there and explain to the market the products that we have like VB2. And we believe, as we have seen in the last six months, that companies are going to recognize the value. The impact that VB2 has made in our gross selling price is very material. I gave out information on it in the third quarter. Again, we have seen record results in this quarter compared to last quarter. And so it is something that just continued to do well. And we believe that as we show those results to the insurance community out there that we will be recognized again, as we have in the past years, as having a better product, and we will continue to grow the business.

So it fair to say, as it appears, you continue to take share, or you certainly have in the past?

Yes, we have taken share in the past and we're taking share currently.

And could you give us -- you may not answer this, I'm not sure, with an update just in general on DF (ph) trade DSOs? Because I know you don't break out advanced charge receivables on a quarterly basis, but just to give us a feel for trade DSOs versus advanced charges receivables for the quarter?

I will turn you that trade DSOs are up slightly.

Up slightly. Okay, great. And was there any impact from the hurricane in the quarter?

There was. There was an impact, however, we feel the impact was immaterial. And the majority of the impact we felt was in our Q2.

Great.

Must of the cars were picked up in this last quarter. They will be sold in this quarter, the quarter we are in now. And again it is an immaterial amount of vehicles to -- two things, to the overall size of the Company and to the cost involved in having to handle those vehicles, it is an immaterial amount on the P&L profit-wise.

Okay. Well, congratulations on a great quarter. I will get back in queue.

Craig Tennison with Robert Baird & Co.

This is actually Ryan Kelly for Craig. I just have a couple of questions. First off on selling days in the quarter, can you talk about that, and if you see that as a meaningful statistic? Number two, can you give us an update on the 40 facilities that were -- that you are outsourcing your VB2 technology to? And also just an update on your public auction group business?

Jay, do you want to comment on that?

Sure, we had one less selling day this quarter than our Q1 of last year.

Is that a function of just holidays and the way they fall?

It is a function of the way the calendar is designed. I mean you'll have 21 days in one month and 20 days in the same month another year.

Okay.

So you could have 64 or 63 days in the quarter. You could have 66 days in the quarter. It is just kind of the way the months fall.

Yes, we go from 61 to 65 over the last (inaudible) quarters.

And then on the VB2 on the 40 facilities?

Yes. As I said, the first auction will be held on December 14. And at this time I am trying to keep to the same story with you is that we're excited about what we're doing with VB2 and with these partners. We think we going to really make a dramatic change in that industry. I can tell you that the market it is almost four times the size of the salvage market. We're about a 3 million car market, and that industry is something north of 11 million cars. And so we've got 40 auctions that are better excited as well. Those members are going to be accessing and using VB2 after we go through our initial auction.

I am sure on our first auction on December 14 there'll be some things that we will want to tweak and improve, and then it will be a process of rolling it out to the further auctions. And as we do that, I will be giving everyone an update.

With respect to MAG, we're introducing VB2 at those auctions as well. The first auction is going to be held at our Richmond MAG facility, as an example. So we're looking at this as an enhancement to those auction processes.

Great. And then just one more question. We have been hearing that accident frequency is down across the board. Can you talk about what you're seeing and what your outlook for unit growth is for the year?

I'm looking at the volume that is coming in. I'm not necessarily looking at frequency of accidents or even so much the percentage of total accidents that become total loss vehicles. I'm looking at the volume of vehicles that are coming in today supply-wise. And with respect to the current supplies, we think that the future looks good.

(OPERATOR INSTRUCTIONS). Gil Alexander with Garfield Associates (ph).

Congratulations. I noticed a significant drop in your yard costs. Should we -- could you give us some color as to why that is dropping? And should we assume around this range for the year?

It you look at the way that we book expenses now you'll see a significant drop in yard and fleet, and you will see a significant increase in G&A. And that is because the costs associated with rolling out VB2 and running VB2 are at the G&A level. The purchasing of all the equipment, the running of the systems, all of the options that used to be held at the facility in a physical environment are now held at the G&A level in a virtual environment. So that is why there is that big shift there. Now yard and fleet is going to grow as we add facilities and as costs go up. But other than that we expect that to be more or less the new shift in costs, that there'll be more load on G&A and less at the yard and fleet.

Thank you. But when you take a look at your operating profit there's almost a 7 percent increase in operating profit rate. Could you add 5% to 7 percent increase every year?

I think that's more revenue related, if you look at it. The majority of that increase is because vehicles are selling for significantly more. And at the end of the day, most of our vehicles are on a percentage, and so as vehicles sell for more we generate more income there.

I thank you very much. Good job.

Travis Meyer with Falcon Fund.

Just a follow-up on that last point. Can I assume from the quarter that you guys had sort of a mix shift toward higher ASP cost?

Higher what?

Average selling price cars, you know, more rebuilder cars versus scrap and dismantler?

No, I don't think that's correct.

And so the way to look at it then if your same-store revenue increased 13 percent, it seems that your same-store cost, at least in yard and fleet are (indiscernible) across the auction were flat.

Just so you understand, my average selling price is up across the board on model years five and older, 6 and older, 7 older, 8 and older, all the way to -- if I looked out any vehicle that is 12 and older, all those average selling prices are up. A year ago my average -- I shouldn't say average -- but vehicles that we look at -- vehicles that sell for $250 or less, those vehicles represented 24 percent of my product mix. Today those vehicles represent 22 percent of my product mix, yet there is no less vehicles. It is that they're bringing more money.

So we're generating a higher return across the spectrum on every single model year. So VB2 has increased the average selling price from your 1, 2 and 3 year older cars all the way to your 15, 16, 17, 18 year older cars. So from 12 years and older, they are all higher -- 5, 6, 7, 8, 9, 10, 11 model years are all higher.

Are you guys going to give any guidance on the rest of the fiscal year?

No.

(OPERATOR INSTRUCTIONS). Cedar Creek Management's Terry O'Connor.

Jay, could you give us a quick capital expenditure update? And if you have a target that you're willing to talk about for the number of yards at year-end or yard expansion or anything like that?

Yes, I mean we gave -- at the end of the year we gave CapEx numbers of 60 million for investments, 10 to 15 for maintenance, so 70, $75 million number. What did we spend in the quarter, 11?

Yes.

A little under 12.

Right.

Again, it is an opportunity metrics, so at the end of the day are we going to have the opportunity to make some acquisitions? At this time I still think we will. We may not, we may spend less than that. But this time I think that if those opportunities arise, and we will spend the initial amounts that we thought we would, but we will see.

So do you think you'll still spend the 70, 75 or does that include a significant acquisition component?

I think there's going to be an opportunity for a significant acquisition. We will see. That could be land, not necessarily the purchase of a company.

Just so I understand, the 70, 75 million would not include that significant acquisition?

No, it would.

It would. Okay.

Yes, at this point in time I'm expecting that we're going to -- that there is the potential to make a significant acquisition. And that may not happen, but if that does happen, then we will probably spend the number that I originally gave out.

Okay. The options in December and January will they include preliminary bidding and so forth, as essentially a complete demonstration, so that we can go and see what electronic stuff you want to sell it, and we can bid on it a week before hand?

Yes. I mean it is a VB2 auction, so there'll be a three-day preliminary bidding period prior to the 14th. And you'll be able to access that sell in the preliminary bidding method, and then that will be followed up by the virtual auction. We will be doing a press release on it. We will be mailing out information on it to people that we've got on our mailing list. I know you're on the list, you'll get something regarding it.

Again, it is the opportunity to bid on everything from DVD players to golf clubs. It is to buy stuff that would have value to people so that they feel an urge to buy, and then that is what really makes you feel the power of VB2. Our buyers want to buy damaged cars. And they get excited about buying damaged cars. And when you try to take someone who doesn't buy damaged cars and explain that to them sometimes they don't really get it. But if you're into a new driver or you're into a new camcorder or something of that nature and you have a need for it, you bid, you'll feel a little bit of the excitement. I was going to put cognac and cigars on that, but I didn't want to go down that path with ATF, so we decided not to. It is just going to be the basics.

And one final thing. Other income X the interest income and fleet sale component, that number bumped up a little bit. Is there anything related to VB2, anything interesting in their?

Now, there's really not. The only other thing we have -- we have sale of the piece of property in Louisiana that generated about 300,000 in gains.

Gary Prestopino from Barrington Research.

Could you talk about this wholesale auction with the MAG where you're going to be using the VB2? That is a public auction, right, the Richmond facility?

Correct.

Okay. How are you making your buyer base aware that they can bid on these cars through VB2?

We're setting it out as an enhancement, not a replacement to the auction. So there will still be the normal live auction that occurs in Richmond. And then what happens at our facilities today is that that store would have an auction on Tuesday, and they would not have another auction until Tuesday the next week. So buyers that didn't get enough for their car will have to wait for the next week. They pull the car out, take it to another auction,. There's a lost opportunity.

And so what we'll do with VB2 is we will tack (ph) an auction on, is it Friday? Yes, we will tack an auction on Friday so that the buyer who -- or the seller rather who brings the car to the sale on Tuesday and doesn't achieve the right amount of money, and sellers that one to bring cars in on Wednesday, Thursday, Friday, typically for a Tuesday sale can bring those vehicles in, and then we will hold a VB2 sale on Friday liquidating any product in that sale. And anything that doesn't sell in that auction will be rolled over to the next Tuesday sale.

So this gives us the ability to really leverage the facility and have two auctions a week and introduce our buyers to a virtual auction through our VB2 product. So when they come to the Tuesday auction there will be kiosks there at the facility. There will be -- the product will be explained to them -- to the public, to the dealers that show up. So if they understand it, they will be able to submit bids. All of that experience will be there for them.

And then on the VB2 Website you have about 48 odd wholesale auctioneers signed up. Number one, could you give us an idea of when the VB2 be totally rolled out to these 40 auctioneers? Have you determined what kind of a fee structure you're going to have with these auctioneers? And what percentage of the cars that they sell are more of the higher end institutional versus the dealer cars?

Yes, well, with respect to timing, the first sale is going to be December 14. And as is customary for me, I rarely talk about things that are coming down the pike until they have actually happened, or try to predict dates until I have gone through my first sale. So after we have our first auction on December 14 and we see how everything goes, I think we will be much better off, in a much better position to try to project timing. But we are quick moving Company. And being that I think that after we have the first auction we will be able to start tweaking and making modifications and then rolling the product out in the new year very quickly. But I will comment on it in the next call and give more flavor on it as we see what is happening.

I don't really know the product mix because every auction is different. Some of the options are selling very high-end product -- vehicles that are off lease, vehicles that are rental cars. Some of the options like our MAG stores are selling a lot lower end product. A product that is more dealer trade in stuff that has a closer average selling price to $3,000. So it just depends. We have -- out of the 40 auctions that we've got, we've got varying sizes with respect to many cars they are selling. We've got varying product and quality types of what they are selling.

Okay. And have you determined what kind of fee schedule or what kind of fee will be charged per car?

Sure. But you don't expect me to talk about it on the call, do you?

Well, I can try. (multiple speakers) What is your tax rate? What do you think your tax rate is going to be for the rest of year?

I think around with the 39 percent range that we have (multiple speakers).

John Kim with Southfield Investment Management.

Could you comment on what capacity utilization is like at your facilities across the country, and whether or not VB2 has helped increase capacity utilization or throughput in some of your mature facilities?

You know I think there's a common thought or belief that VB2 allows us to move the vehicles quicker through the pike. We still have to pick the vehicles up, and we still have to store them while we're waiting for titles to get transferred from the insured to the insurance company. And then we still have to salvage the title and do a salvage certificate, or transfer it to a salvage certificate. All of those pieces of the puzzle don't really change.

So what changes is that we're opening up the marketplace and making it easier. Buyers today literally does not have to attend the facility. They don't need to. They can -- they have three days prior, which is better than a live auction method because only had one day car. But now you have three days prior to attend. But if you want, you can go online, and you don't just have to rely on the ten pictures of the vehicle. You can go online and you can contact an appraiser and they can describe the vehicle to you. So you don't have the need per se to go to the facility. But really doesn't compress the time.

And so with respect to capacity -- what helps capacity is when we add more stores and when we expand those stores. And that is the reason for the capital budgets in this year. The goal this year it is to add facilities and to expand facilities. And at the end of the year we should have even better capacity than we do today. It is hard to give you a number because if I told you it is a percentage it is misleading, because some stores are at 50 percent of capacity and other stores are at 100 percent of capacity. And what we have got to do as a management team is focus on the stores that are running 80 percent of capacity or more. And we've got to focus on expanding the stores or adding additional locations.

Maybe if I can ask that question a little differently then. The CapEx that you have budgeted for growth CapEx, how much of that is going to expanding existing locations versus entirely new green fields or new geographic locations?

How many new stores are we going to open up?

Or how much of the budget that you have budgeted for growth CapEx, how much of that is going to expand existing locations or regions versus --?

Yes, I think we're pointed open roughly 8 to 10 ten stores from the beginning of the year to the end of year. That is our goal. And at this time I don't see why we won't achieve that. With respect to how many dollars are being spent in those 8 to 10 stores versus the expansion of stores, I really don't know off the top of my head.

Gil Alexander with Garfield Associates for a follow-up.

My question has been answered. Thank you very much.

(OPERATOR INSTRUCTIONS). Gentlemen, there appears to be no questions at this time. Mr. Franklin, I will turn the call back over to you for any additional or closing remarks.

Thank you. Jay would like to (multiple speakers) closing remarks.

Sure. No problem. Again, I want to thank you all for attending our conference call. And we think Q1 is indicative of just the success we're seeing with VB2. And we think it just shows to how our year has started. And we think are going to have a great year, and we look forward to reporting the results in Q2. Thank you. Bye-bye.

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