Copart Inc (CPRT) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the Copart Inc. first-quarter fiscal 2005 earnings call. As a reminder, today's call is being recorded. And for opening remarks and introductions, I would like to turn the conference over to Mr. Jay Adair, President of Copart Inc. Please go ahead, sir.

Thank you. Good morning, everyone. It is actually earnings release for Q2. Before we start this morning I've got Will Franklin with me, Chief Financial Officer, who will be going through just some opening statements and then I will give you a little update on what has happened. We will give you a financial review and then we will open it up for questions. Thanks.

Thank you, Jay. During this conference we will be making forward-looking statements within meaning of 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 risk arising from our increased dependence on proprietary technology to conduct our auctions, 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 salvage vehicles. For a full discussion of these and other risks that could affect our business, I would direct you to review the management's discussion and analysis and the factors affecting future results contained in our 10-K and other SEC filings. Now I will turn the call back over to Jay Adair.

Thank you, Will. Good morning again. And as I spoke to you in Q1, I think Q1 really showed the start of our year and Q2 just backs that up. We are very excited with the results for the quarter. Copart earned net income of 23.6 million on revenues of 110 million. This is compared to 17.4 million in net income on 92.6 million a year ago. Net income increased 36% on a revenue increase of 19%, and we finished the quarter with EPS at $0.25 compared to $0.19 a year ago.

Same-store sales for the quarter increased by 18% and if you look at some of the drivers that we are excited about, same or out-of-state sales for the quarter represented 25% of the units, meaning 25%, one out of every four units we sell in a state we expect to leave that state and end up in another state. So we really, as I like to refer to, converted the localized market to more of an international market. And then when you look at the 22% of our units are leaving the country, going to buyers outside of the U.S., we have really made it a global market.

These numbers together represent 47% of units and have seen growth from the same period last year of 15%. Will will comment on balance sheet, some of the changes that have occurred in the balance sheet and the statement of cash flows for the quarter. With respect to new stores, we opened up two facilities in the quarter, Knoxville, Tennessee, and Ocala, Florida, which is just north of Orlando. Talking a little bit -- that was after the quarter? That was after the quarter too.

Talking a little bit about VB2, we rolled this product out in December of '03. And so looking at not just the quarter but all way up to February 28th, this Monday, this represented our 15th month of continued sales on the VB2. I will tell you that February represented the highest returns yet that we have seen in that 15 month period. We finished with record sale prices on a per car basis and record returns. So we are very excited about where we're headed with that. I think this is really due to the maturity of the product.

We have really changed the way our industry looks at buying and procuring product. And when you think about that it has only been out 15 months, there is a familiarity now I think to the product in that buyers understand that the old way of doing business of physically having to show up to a facility is not necessarily the way it has to be done anymore. You can go online, you can see 10 pictures of the cars, you can engage a representative to go out and inspect the vehicle for you. And basically procure product all across the country without physically having to travel there, stay the night, attend the sale. And that time savings can be put into the purchase price of the car, in essence generating a higher return.

The other thing we have seen is a continued growth in the international presence with that number jumping to new high of 22% for the quarter. And I think it is a supply and demand game and we have just continued to allow buyers to find product online and in essence create more demand for the existing supply. Looking at VB2.com, Copart started the rollout of this product in January. We have just rolled, just a hair over 20 auctions out of the 40 auctions. Some of the stores have not even had but one auction so far, and have not had their second auction yet. And so it's a very new product. With respect to that, we are excited about the results we have seen.

We believe our VB2 auctions that we're doing business with are excited about the results they have seen. VB2 not only has brought them new buyers to their existing sales but it has allowed them to hold their live auctions, and then in addition to that hold the VB2 auction during the week. So it just kind of doubles up the amount of auctions that you can have at the same facility. But this time I think it is really too soon for the Company to comment on any kind of results for that product. I would expect by the end of Q3 we will then have February, March, April, and probably May under our belt, and by that time I will be able to comment more as to give you a little flavor on some results and maybe some of the things that are happening there.

But again we're happy with the results and we are excited about where that company is going to be going in the future. And with that, I will turn it back to Will Franklin, who will give you an update on the financials.

Thank you, Jay. Revenue for the quarter was $110 million, an increase of $17.4 million or almost 19% over Q2 of last year. The drivers for the growth in revenue continued to be growth in the number of cars sold, growth in new service revenues as buyers take advantage of the ease and convenience of buying online through VB2, and the impact on buyer and seller fees from higher gross sales proceeds which we believe is the result of VB2. Same-store sales, sales from stores opened or owned for more than 12 months, increased by 18%.

During the quarter, 57% of the cars were sold under the Percentage Incentive Program, up 2 percentage points from Q2 of last year. Yard expenses were $54.5 million for the quarter, an increase of $4.4 million over Q2 of last year. The increase was due primarily to higher vehicle sales volumes and the extra expense associated with the three yards added since Q2 of last year. Yard margin for the quarter was 50.4%, an increase of 4.5 percentage points over the second quarter of last year.

General and administrative costs for the quarter were approximately $11.3 million, an increase of $2.7 million over the same quarter last year. The increase was due primarily to additional costs related to SOX compliance, increases in software development costs, technology hardware leasing costs, and IT payroll costs, all directly associated with the continuing development and deployment of VB2, and additional costs, primarily marketing and labor, associated with the introduction of VB2 to the wholesale auction market. Depreciation was approximately $7.6 million for the quarter or $500,000 less than the previous quarter, same quarter last year, as depreciable assets reached the end of their useful lives and rolled off the depreciation schedule.

Yards added after Q1 of last year, Northfield, Ohio; Strongsville, Ohio; and Anchorage, Alaska contributed $674,000 in revenue and were profitable during the quarter. Operating income was $36.6 million for the quarter or 33.3% of revenue. This is an increase of $10.8 million or as a percentage of revenue, an increase of 5.4 percentage points. Total other income was approximately $1.9 million for the quarter or $1 million less than the same quarter last year, as the prior period included a gain on the sale of fleet equipment of $1.9 million. At the end of the quarter the Company had 12 units remaining of its original transportation fleet of 724 units.

Income tax expense for the quarter was $14.9 million or an effective tax rate of 38.8 percent. Copart's balance sheet remained strong with over $206 million in cash and marketable securities. Copart invests its cash primarily in tax exempt option rate securities with interest resets of 28 to 35 days. Our current ratio, current assets divided by current liabilities, was 4.6 to 1. During the quarter, Accounts Receivable, vehicle point of cost and deferred revenue all increased due to growth in cars on hand.

Total equity has grown to over $650 million and after-tax return on equity on a trailing twelve-month basis was 14.3%. Cash generated from operations for the quarter was $17.6 million, an increase over the same quarter last year of $11.3 million. Net income adjusted for non-cash income and expenses, generated approximately $30 million. However we consumed almost $12.5 million in the balance sheet related primarily to increase in inventory and the payment of income taxes. The Company had capital expenditures of approximately $13.4 million during the quarter, primarily for yard expansion. These expansions were offset by proceeds from the liquidation of equipment of almost $1.1 million.

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

Thank you. (OPERATOR INSTRUCTIONS). Matt Nemer with Thomas Weisel Partners.

My first question is, is it possible to give us a sense of the change in unit volume versus the change in price that you're seeing?

No, I think you're asking for what units we have sold versus what kind of increases we have seen in pricing.

Exactly.

We don't comment on that, so I can't really get into that with you.

Okay. What about industry growth? Is it possible to give us a sense of the type of unit volume you have seen in the overall industry?

We really don't know that ourselves, so I really can't comment on that either.

Next question is on SG&A. The increase in SG&A, how would you break that out between what you're spending on VB2 in your core business versus some of the new initiatives that you're working on in terms of selling VB2 into other auctions? So I guess it would be sort of the marketing of VB2 into other auctions versus your core technology spending.

One of the things that make it hard to do that in the first place is that all the advertising that we do for VB2 on the dealer side helps that business but I think it also helps Copart as well. And so there is -- in fact all the work that we have done to increase the buyers for Copart has helped the auctions on the dealer side. All the work we have done to help the buyers to gain buyers on the dealer side has helped the Copart side. So it's really hard for us to break it out and say that this is a set number for the VB2 auction business and this is a set number for Copart. I think they both help each other and they are both complementary to each other.

Should we assume -- I think you have 40 plus auctions signed up. Should we assume that you're going to continue to sign up as many as you can or --?

There is no intent on our part to cut any costs out of that. Our goal is to keep investing and building that product stronger. And once we get these forty auctions completed which will be relatively soon, it will be in this quarter Q3. That's what I was saying, I could comment on further when we release Q3. But once we do that I think we are going to see results that will be successful, and then we are going to go out and try to obviously bring more players into that business and get more people to sign up for VB2.

So it sounds like you're going to focus on the ones that you've sign up already, kind of getting them up and running versus --

Absolutely. Our number one focus right now is making sure they are successful, getting auctions. We have made a number of changes to the product already. We are continuing to make some changes. There are some things that we thought were obviously the right way to do it, and in retrospect as you have completed some auctions now, we're saying maybe we should have done that a little bit different. So we are continuing to make changes to the product. We're running cars through daily. We're selling cars daily. So I am not going to give any of the stats yet just because I like to get all the auctions up and running and then I can comment more as to flowthrough and that kind of stuff, as to how we're doing.

Got it. And my last question is on the vehicle pooling costs. Has something changed in terms of that as an indicator of future volume? I guess historically, there has been some correlation with that line item on your balance sheet and future revenue growth, but it seems like they were flat this quarter versus some pretty strong revenue gains. They've been relatively flat over the last few quarters versus strong revenue gains, so I'm wondering if there is some new element there that kind of distances that line item from your revenue.

Matt, this is Will. There are a couple of elements you need to take into consideration. First is, that is the number of vehicles that we have at any one point in time. It's a simple calculation. It's number of vehicles times our capitalized or our inventory cost per vehicle. As we become more efficient through scale and volume, there is downward pressure on that cost per vehicle. The other elements to take into consideration are in turns (technical difficulty), so as we increase our turns (technical difficulty) inventory number.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS). Craig Kennison with Robert W. Baird.

Good morning, Jay and Will. First question, what are your plans for cash? 200 million is a lot of money.

Yes, I would agree. I think you know the answer, but you want me to respond anyway, don't you? Yes, the Company has a large cash position, as I think everyone is aware of. Our feeling going forward is that is the right position to be in with respect to opportunity and looking at what is going to happen with VB2 and what will happen in the Copart markets as well. And then of course we will continue to look at other options such as stock buyback going forward, depending on where the share price is.

Okay, that's helpful. And relative to VB2 can you provide an update as to the status of your patent application?

Yes, it has not changed from the last quarter. We're still less than two years into this, since we filed the application. And with patents, I think most people now have learned -- I know it has been a learning exercise for me. I think most of the listeners on the call have learned that it is going to be two to three years before we actually find out where we are at. So I would expect that will have some kind of news in the next 12 months but I won't be surprised if we still don't have information on that. It just is a long process to get a U.S. patent.

Do you have a sense for what your argument is that that is in fact a defensible patent?

Yes, I can give you the commonsense version of it. I can't give you the legal approach that we're taking. But the commonsense version to me is that there is nothing like it. There's nothing like VB2. And anyone who has ever seen a traditional Internet auction and then has seen VB2 knows that the two have nothing in common. One is static and one is a persistent application where bids are coming in left and right and if you don't bid you're going to lose. You better bid to be in the high spot and it has an element of excitement and frenzy and it is not a three-day long auction. It is going to happen in the next minute or it could happen in the next 20 seconds. It is that kind of an environment. So I believe that argument alone, the fact that there is nothing like it, makes it a patentable product.

How would you contrast it to what we've seen from, I think there is a product called Live Lane or Live Global Bid?

That's our old virtual bidding product. That is a hybrid, using a live auction and then the live auction being the core or the base, and then the enhancement being the Internet, allowing buyers to bid real-time. So the live auctioneers saying seven and a quarter, have 75, now 8, and then they go back to the Internet and say eight and a quarter on the net, now 8 1/2, now 75 on the net, now 9. And so they are taking the bids from the live auction and going back to the Internet and then back to the live, whereas ours doesn't use any component of a live auction environment at all. It is a pure Internet -- the Internet virtual auction engine is controlling the auction and will finish the auction off and often determine the price.

Okay, that's very helpful. Jay if you want to comment on the insurance auto auction transaction and what implications there might be for Copart.

I don't really have a lot of comment on it, Craig. I believe from what I have read and I know about as much as -- probably less than all of you, but for what I have seen they have got the same management that will be running the Company. And so I would expect that we will continue to compete and it will be business as usual.

In then finally, we're passed the anniversary of the first initial launch of VB2 in December '03. You showed tremendous margin expansion in that year. Can margins continue to grow now that we have reached the anniversary?

Well, we have got great margins. There is no argument about that. I don't know if they're going to go up or down in the future. My goal is to just continue the growth. We're going to add a number of new facilities in the next 12 months, and of course that has a downward pressure on margins as we do that. But depending on how quickly we bring additional cars in, that has an upward push. So it is really an unknown even to me, but at the end of the day the goal is to continue to bring in more product, sell more cars, and to grow revenue and profits.

Great. Thanks so much.

Lee Cooperman with Omega Advisors.

Thank you very much. My question was sort of answered on the cash side, but given your response maybe if I could delve a little deeper. You didn't mention dividends, so I guess if your stock is at a price you think is undervalued, you would prefer to buyback stock or build cash. From the standpoint of acquisitions are you strategically complete? Is there anything out there -- I'm not asking what -- but is there anything out there that you could see spending a lot of money on to buy?

Yes. They are still some acquisitions out there that we would be interested in, Lee, and if the opportunity came along to buy those companies we would be there. I think those companies know who they are and those owners, they know that we are interested, and if the time comes along we would be interested in that. And then of course as you stated with respect to share buyback, it's not that we are against a dividend but one of the benefits of a stock buyback is obviously all of the existing shareholders end up owning more of the Company. And obviously we would want to do a deal. With the return you get on cash nowadays, it would be an accretive deal when we buyback the stock, as well.

So I think at the end of the day it is a lot of cash that is on our balance sheet but there is a lot of opportunity out there as well. Besides buying existing salvageables and buying back stock, there is a lot of opportunity just with VB2. It's a brand-new product. It has been out literally two months, and really not even two months because we started the rollout in January and it was slow to start, and now it's to ramp up. We would like to see what happens in that arena and what kind of opportunity exists there before we did anything else.

Got you, thank you very much.

Matt Berg (ph) with Highbridge Capital Management.

Thanks. I just wanted to ask about the VB2 launch and the whole car auction business. What types of auctions are you targeting and is there a play for some of the larger chains, ADESA or Manheim, to license the VB2 technology?

I'm not going to say there isn't there, but I think the goal -- in fact I know the goal right now is to work with the wholesale dealer auctions that are basically the business that ADESA and Manheim are in. We're working with those independent auctions in building and basically improving their current model which is to utilize live auction. What we want to do is allow them to not only have a live auction on Monday, but tag onto that a VB2 auction on Thursday. And this allows them to in essence double throughput through those existing locations and then open up their buyer base through the use of VB2 technology and bringing buyers in. If anyone has watched the auctions, you can get into the auctions and watch them, you will see a number of bids from out-of-state players and from out-of-country players. So it is successful so far and we're selling so cars and we're happy about that. But once that matures, then it is just a matter of going out and pushing that, Matt, to other participants in the industry.

Is there any revenue from that business heretofore?

Yes, of course. We're definitely charging from day one and the business has generated revenue. I just don't want to comment on revenue, units sold, units run, or any of those numbers until I've got some actual volume under my belt.

Sure, that makes sense. And what kind -- these are smaller auctions? How would you compare these? Are they in major markets?

They are in major markets. They are direct competitors in some markets of Manheim. They are direct competitors of ADESA. They are direct competitors to some of the other larger independents. It's a very big industry. It's an industry that moves something like over 11 million vehicles a year. So it's a big industry and there are a lot of players.

Okay, thank you very much.

Chris Blackman (ph) from Imperial Capital.

Thank you. Congratulations on a good quarter. How many -- I know that Knoxville is a new site for you all, but that was a sublot I think prior to opening that up as a full lot. How many sublots do you currently have?

Sublots? This concept of storing product and selling it at another location?

Yes.

I don't even know the number. It's a small number, maybe three or four. I wouldn't even know.

On your acquisition opportunities, is there is size, generally a range, in dollar amount of acquisitions you would look for? How small of an acquisition and up to what size?

How small of an acquisition?

Is there a threshold on size that you would be willing to acquire?

We've done some extremely small deals just because they've been in places that we got to be. They are at in small markets. And then there's no real limit on top end size. I can't -- I would buy the largest there is, so there is not an issue there with max. Maybe on the minimum size, maybe 2,000 cars a year processed. But everyone in that industry that is out there today, we are interested in.

CapEx, are you -- your CapEx budget is it still consistent with what you have said in the past or do you see that expanding at all? And can you break that down into how much of your percentage of CapEx should go towards investments and how much towards maintenance and what of that may be budgeted for acquisitions?

This is Will. I will respond to that. At the beginning of the year we give guidance to a CapEx estimate of about $75 million, 15 million being maintenance, the balance being investment. But we also stated at the time that that was contingent on opportunities. We just don't know when these opportunities will avail themselves. At any one time we could have a CapEx expenditure of several millions of dollars, so we're not changing that estimate. Today we have spent about $25 million. The balance of the year, once again will be dictated by the opportunities that present themselves to us.

So you have spent approximately 25 million of the 75 million so far?

That's correct.

Your 15 million in maintenance should be pretty consistent so the variable obviously is on the investment side. As you go forward and your licensing of the VB2 becomes more prevalent in your business, will you be breaking the revenues out for those two segments, straight car sales and salvage vehicles?

Well, at this time I would just like to see how the product grows. Obviously if the product becomes material we have to. But at this time let's just see how she does.

With the FASB ruling having come down, the expensing mandate having been finalized, can you give us any guidance on what kind of dilution we should expect on an EPS related to that ruling?

Are you talking about FAS 123?

Yes.

I think it was $0.03 last year.

$0.03 last year?

You can -- the footnotes show it on a pro forma basis. I believe it was $0.03 EPS.

Should we consider any big option grants coming in '06?

I can't think of anything that's planned right now, but I am not go really going to really comment either way on options.

Okay, if I may just ask one ask one other question related to that and if you don't want to comment you don't have to. I know that -- and obviously you all have done a great job building this company and I'm excited to be a shareholder -- but I know there was a significant amount of insider sales that occurred in the June/July time frame. I was curious if you all would contemplate doing a stock offering on that large amount of shares that come to the market as opposed to it bleeding into the market over a two or three-month period of time.

You mean have we contemplated doing a filing and selling the stocks that way?

Yes.

No, we haven't, and I would doubt that would happen in the future.

Thanks very much.

Bob Labick with CJS Securities.

Congratulations on the quarter. I just wanted to dig a little further into the vehicle pooling costs and ask, can you remind us first of the transition from your own fleet to the outsourcing? And during this transition, has it become less expensive per car because you're outsourcing versus the owned fleet?

You want me to comment on the fleet?

Sure.

The issue -- you can't really look at whether it has become more expensive or less expensive now because we've seen enormous fuel increases and it's over a year ago since we converted. So it only makes sense that costs would go up over last year.

So in general cost per vehicle, getting them from the body shop to your yards, has gone up?

It's about flat right now.

Okay, what are the --

You understand what I'm saying? Even though it's flat, we have had to absorb the cost of fuel and other costs that exist. The fact is, fleets go up every year. There's no way to bust a fleet down, there is just no way to do it. So the fact that we have converted and been able to get through this conversion and then flat is a success story for us.

Absolutely. Could you tell us some of the internal initiatives that you have in order to compensate for the higher fuel costs to keep it at flat?

I got really -- kickin' people. I was going to use another adjective but I figure I better not on the call. I've got great people and those people make it happen every day. They've got great systems in place, they work those systems and they do everything they can to make sure that we are good operators and that we control our costs and we, as a company, are very good operators.

Okay, great. Could you give us just a specific example. I think you have discussed, you have some new products if you will, that in addition to better returns on the actual cars you have new products and services that you're offering. Can you tell us about some of the new services you're offering that are helping gross sales as well?

Some of the new services that are already out that are helping gross sales or that are coming?

Both would be great.

I guess I opened that box. Some of the things that are already out that are helping our customers -- you're talking about costs. We've got some internal things that we do with respect to operating systems that it would take too long to get into all the details. But they've got things, products that we use, systems that we use, that basically form a competitive environment. And we are a company that is driven towards operational excellence and providing a legendary service level and making everyone aware of where we are at on that so the people can see how other players in the business are doing and that creates just a natural competition, no different than if it were or a ball game. It has the same effect.

And on the customer side, we have continued -- if you look at the last year, we've gone from five pictures to ten pictures. We've expanded our website to allow buyers to get appraisals on the vehicles at the yards, so they don't have to physically show up. If they're not comfortable bidding on the 2004 Porsche 911 without seeing it, not just going off pictures, they can actually have an appraiser go out, physically touch the vehicle, look at it, describe it to them over the cell phone, for a fee, and those people are independent of Copart. They don't work for the Company, but we provided the system so they can find them and then they can go down the path of finding a dispatch towing company that can move that vehicle coast-to-coast.

And we had even started to work on exporting links on the site so that so that buyers can better find people that can export that product. So that if you want to ship it to Lithuania or you want to ship it to Cambodia, that you have an ability by working with the ports. So those are some of the things that we have done on the buy side. On the seller side, we have continued to build interfaces, whether it be XML interfaces or EDI EFT interfaces, but we continue to build interfaces. We are now taking over half of our assignments online. We don't take those assignments over the phone or over the fax, where ten years ago 100% of them came in that way. Today only about 50% do.

So that just makes it where the adjustor or the claims rep does not have to spend the time assigning the vehicle, it can just automatically come in. And then once the vehicle is assigned we will email them throughout the process, the pickup of the location, the fact that we have received title, the fact the we've sold the vehicle, what it sold for, all that information can be pinged to them. They can run all sorts of reports via Excel. So those are a lot of things that happened recently.

Going forward, looking forward, we are looking at a new owner retention program where insurance companies will be able to list their owner retention vehicles. These are vehicles that typically the owner will retain. So it's a '93 Ford Taurus of light damage. We estimate there's about 600,000 owner retention vehicles in the U.S. that get retained every year. And what we want to do is provide a service where they can get real bids on those vehicles versus just getting bids that come out of a database, but actual bids where the buyer would be allowed to bid on that vehicle.

So we're working on a product there. That is all the light I'm going to give you on that product because it will be out in this quarter, and we will have enough information where I can comment on that product in Q3 as to how it's doing. But the idea there is just simply to allow insurance companies to generate a higher return on those owner retention vehicles so that they're not retaining them at too low of a price. And that will positively impact all of our sellers. So how's that?

That was very helpful. That's terrific. Thanks very much.

Charles Kantor with Neuberger.

Brennan Hawkin (ph) here from team Cominskey (ph). I don't want to congratulate you on another great quarter because it just seems like it goes without saying. Quick question for you.

We'll actually take the congratulations right now because I've been on the other side of the stick of a public company, and it's pretty tough when it is not like this. But anyway, go-ahead.

We're really, really happy with what you are doing. But a question on VB2. Do you have any marketing plans to increase awareness of the product in and of itself?

Well, we are doing a significant amount of marketing now in trade magazines and journals, in addition with the net. The most powerful marketing out there is actually calling the major players and setting up meetings. And Willis has spent the last 12 months or more on the road meeting with all the major players in the industry and he continues to do that. He is on the road at least every other week. And I think that is the best marketing. Out of everything that is the most powerful marketing you are going to have is actually getting out there and meeting with the major players of these different public companies and leasing companies etc.

And he's been doing that for how long?

Oh, he has been doing that at least 12 months, probably more.

Have you seen any results of that?

I've got 40 auctions that are utilizing the VB2 technology and the next step is to not only expand that but to offer more methods like off-site. We are doing some off-site selling for the auctions where they are -- instead of bringing vehicles down to their auction, they are going out and imaging those vehicles at dealerships and at the different locations that they are at and then running them through the auction. Then if the vehicle sells, they will bring it into their auction for pick-up and processing. And some of those things just would not have happened without the heavy push to get people out there to be made aware VB2.

That's great, thanks.

Pat Naccarato, Philips Hager & North Investment.

Just trying to get a better understanding of the business model, the wholesale business model. I guess the first part of the question would be, are all the costs already in place? In other words, you have obviously built the software. Is there any real estate costs or is there any other infrastructure costs that are needed? The fact that you have 40 participants, does that change if that goes to 140?

Do the costs -- yes, the costs will go up if we go to 140 because you've got to buy more systems, you've got to buy more servers. There will be additional programming that is going to take place because everybody has their own kind of unique request that they want to processing vehicles. So there are some costs there as well.

So it is all variable costs in that regard. How much would be variable relative to fixed costs that are already in place?

Do you have a feel for that?

I think we have -- the fixed costs are stepped in nature and tied (technical difficulty) to volume. But at some point, the margin return on this ASP model is very high and that's what it is, it's an ASP model.

Okay. And basically you have been able to secure these 40 participants already. Are these exclusive? How does that work? In other words, you're obviously going out there and taking these players or these participants from someone else. How does that work in that regard going forward? Shouldn't you be able to grow this business? Is it all marketshare?

I want to make sure I understand your question. Are you saying, going forward VB2, how are we going to grow the business? Is it all taking marketshare?

First of all, however you got these first 40 -- I am assuming they were selling these vehicles at another forum with some other player, is that correct?

They still are. They are using live auction, the live auction method to sell product. And Willis met with them and said I've got this VB2 technology that we have utilized for Copart. It is been a tremendous success. Look at some of the results. Would you be interested in setting up VB2 auctions in addition to live auctions? And that is exactly how the process started. And they said yes, I'm interested, and of course we have had auctions and thus far they have been successful. And it allows them to in essence run a live auction and then in addition to that, run a virtual auction.

So instead, prior to VB2, what happened in that industry is you may bring your vehicles over to X city, you run those cars through that auction. The ones that sell, sell. The ones that don't you ship to another auction for Thursday. Now what it allows those buyers to do is leave -- or those sellers to do is leave those vehicles at that auction and run them through a VB2 auction on Thursday, and then more vehicles come in for the Monday auction again. So it is allowing the auction to get another chance at selling the car and it is allowing the seller to have another chance of selling the car without the cost of moving it to another auction.

Okay, okay. I better understand now. So all the real estate costs is all housed at their lots? It is like you have any costs in that regard?

Like Will said, we're really application service providers. We are not in the owning of land process there. It is not like Copart where we own the facility and (multiple speakers) processing. This is, they provide the facility, they provide the people, the resources. We provide the systems to sell the cars.

Okay, great. Thank you.

Steve Balog with Peter Creek Management.

All our questions were answered. Thank you very much.

Mark Cohen (ph) with Force Capital Management.

Just a few questions. On the salvage side --.

I felt like we were in a Verizon ad for a minute there. I didn't know what that was all about.

In Canada, do you see more opportunity for expansion on the salvage side?

Yes, we have already. We have grown in just the last quarter. We have been able to take on some more, bring in some more business and expand with some of our existing clients. So we are very happy with what is going on in Ontario.

Great. Also on -- just recently, just this morning on another conference call, probably the largest DIY auto parts retailer in the nation announced that they would be selling salvage parts in their stores.

Terrific. Who is it? What is the company?

AutoZone.

That's terrific.

It's new to me. They just announced it on the call this morning.

That's terrific because that is going to increase demand for used parts. I'm sure they're going to -- I'm not sure but I would imagine they're going to do it through a network of dismantlers and recyclers. Recyclers will probably provide the product and then the recycler is going to have more demand for product, they're going to be out buying more product from us. That's great.

But you have no involvement in that directly?

You can tell, I just heard about it.

I just want to follow up. You said that cars, that every day you're selling cars on VB2 -- you are selling cars on VB2, whole car?

Yes.

And are you selling any cars out of the country?

Yes.

Whole car?

Yes.

Thank you, take care.

Vladimir Velkov with Freedom Capital.

Yes, I wanted to ask. There was some notion that you might take over the used car auctions. I got late into the call.

No, I don't think that's the case. All we are trying to do today is provide additional service to that industry. We are doing it right now through wholesale auctions and we will sit back and watch that product grow and try to continue to offer services in that industry. But we are not trying to get into the actual owning of auctions in that industry.

Well, there was some notion that you would expand into the wholesale by buying I guess some of the wholesale dealers.

No, that is not the case. It is just not the case. The Company right now, our goal is just to provide services to those wholesale auctions, but it is not to get into that industry by owning physical facilities.

If you could just run through the metrics on the free cash flow side please, the CapEx the D&A and the use of it. Thanks.

I did that on my comments. The CapEx for the quarter was $12 million.

No, for next year. Not for this quarter.

Next fiscal year? We won't do that. We disclose what we think CapEx will be towards the end of the year. We won't do it in Q2. It's too early.

So what should we expect for a run rate basis 12 months out?

You should look at this fiscal year were in right now, and the estimate we gave was 75 million, 60 million would be investments, 15 million maintenance. And we have spent, to date, about 25 million.

And the D&A?

I would expect it to be between 30 and 32 million.

And the use of the free cash?

We have discussed that on and on through the call. I have said already, the purpose in generating cash is to keep that cash write down until opportunities exist, whether they be in VB2, whether they be in buying stock back, or whether they be in acquiring salvageables.

And what are the metrics you would use to make the decision on those different uses?

I would not disclose on the call what my price would be on a stock buyback, if that's what you're getting at. We have methods of buying salvage companies. I'm not going to comment on that either for competitive reasons. For me to give out what I paid for companies just wouldn't make sense.

I would add though that we do a financial profile of all of our acquisitions and we measure the EVA and IRR and make sure it meets our standards well in excess of our weighted average cost of capital which is 13.4%

Just lastly, what is the current ownership of senior management?

25 on a diluted basis, 23 on (technical difficulty) basis.

Thanks, keep up the good work.

A follow up from Matt Nemer, Thomas Weisel Partners.

Just one quick follow-up. On VB2, selling it into the wholesale market, are you replacing an existing technology platform at those auctions or does VB2 work -- will it work in concert with maybe other technologies?

No, it is in new technology and so it really is a completely new product and new concept of selling vehicles. So what they will be doing is utilizing whatever technology they have got with their live auction today. And then in addition to that, holding VB2 auctions.

Got it, great. Thanks so much.

(OPERATOR INSTRUCTIONS). Matt Berg with Highbridge Capital Management.

Most of my questions have been answered, but just quick read on trends in the scrap metal market.

Where are the trends?

Yes.

They are up. Do you have any kind of knowledge on that? They have been up for the last six months and I don't know that they are at a new peak right now or they're low. They are basically up compared to where they were a year ago.

Okay. Percentage, do you have that?

I don't. I just don't look at it that closely. Not that big of an impact in the vehicles we sell because it only represents a very small -- it represents less than 5% of our proceeds in what we sell, the actual junk cars. Obviously it represents a lot of units but a $100 car does not represent a lot of proceeds compared to selling a $15,000 rebuilder.

Sure, okay, thank you.

Chris Blackmon, Imperial Capital.

Thank you. On your licensing of VB2, are any of those sales factory sales by chance? I know Honda held a --.

We held a Honda sale.

Okay, can you comment on the potential of factory sales and where you think that stands in your rollout of the licensing?

I think, again, I just don't want to get into too much detail on VB2 yet. It is such a brand-new process now with the fact that we've just rolled out a little over half the auction. So if you'll just hang with me and wait until Q3, I will get into more detail on what's going on there.

Okay, it just seems like a considerable breakthrough -- but I'm sorry. Two other quick questions. DMV, are you seeing any trend towards improvement of receiving good title as far as the timetable? Are states upgrading their processes at all? Is there anything that you can do or that you are currently doing to improve that?

The states are becoming more technology driven. We are now processing titles, for in stance in the State of California, versus having them do them. But it is not the big trend across the U.S. and I wish it was but it is not yet. And let's face it, eventually it will have to be. I can't imagine that the forty-something states we do business in are not going to eventually go computerized. We do it in California. We do it in Arizona. We do it in Pennsylvania. So there are a number of states where we do it but it is still not the big trend companywide.

Okay. And then earlier in the call you commented that I think February was the best month that you have had. I assume you --.

February is the best month with respect to returns. People keep saying what is going to happen, when is it going to tailoff? And I am excited because I meeting with major carriers on a weekly basis. I've met with a major carrier this week, I will be meeting with another one next week. And I'm able to show them results of VB2 for the last 15 months now and it gets better and better and better. And so it is going to be more of a compelling argument as time goes on to utilize Copart or to test Copart in specific markets.

So does that -- I assume that would suggest that your percent of ACV February was higher than it has been prior. And it seems like prior to live Internet you were running 14 to 16%. Then I think you made a comment, maybe it was last quarter, that you were 18, 19%. So that would suggest we're running above that now.

I have never made a comment with respect to what the returns are on a percentage basis. I will simply tell you it is higher than it has been in the last 12 months.

Thank you very much, great work.

At this time we have no other question standing by. I would like to turn the conference back to our speaker for any additional or closing comments.

Thanks so much. We appreciate all of you being on the call. And as I said, we look forward to reporting on Q3 and the results of VB2 and what is happening in the Company. Thanks again. Goodbye.

Thank you again for your participation on today's conference call. You may disconnect at this time.