Copart Inc (CPRT) 2005 Q4 法說會逐字稿

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

Thank you Melanie. Good morning everyone and welcome to the fourth quarter conference call for Copart Inc. Before I start, I will turn it over to Will Franklin, CFO, and then and I will give you an update on how we've done for the quarter and for the year.

Thank you, Jay. During this conference call, we will be making forward-looking statements within the meaning of Section 27 of the Securities Act of 1933 and Section 21-E of the Securities and Exchange Act of 1934. These forward-looking statements may include projections about our future revenue and earnings growth which are subject to numerous risk, 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 beneficial supply agreements with the suppliers of salvage vehicles. In addition, we face risk arising from our increased dependence on proprietary technologies to conduct our auctions, including risk arising from intellectual property litigation. Our VB2 Internet sales model may not continue to have beneficial impact on our results of operations in future periods.

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 of affecting future results contained in the Company's 10-K and other SEC filings. Jay, I will turn the call back over to you now.

Thanks, Will. Well, good morning everyone. As you can see for the fourth quarter, we generated net income of 25 million on revenues of 112 million. And compared to the same quarter last year, that was 21.4 million on revenues of 100 million. EPS for the quarter was $0.27 compared to $0.23 last year and Will will give you a little further update on EPS and some of the adjustments that occurred in the quarter.

For the fiscal year, for 2005, we generated net income of 102 million on revenues of 457 million. This is compared to 79 million a year ago on revenues of 400 million. And from an EPS perspective for the year, we earned $1.10 compared to $0.87 last year.

Finishing up cash for the year, we ended up with 252 million in cash and you will see inventory increased as accounts receivable went from 81 million to 91 million year-over-year comparing fourth quarter 2004 to fourth quarter 2005.

Some of the things that occurred during the year, new looking at new yards, we made acquisitions in Lexington, Kentucky and in Columbia, Missouri. We opened up greenfields in Cleveland; Ocala, Florida; Knoxville, Tennessee; Atlanta, which will now service the eastern side of Atlanta; Spokane, Washington; Tallahassee, Florida and Miami, Florida.

Looking at major expansions, there were quite a few major expansions where we added anywhere from eight to 20 acres at a facility. We expanded in California, Chicago, Illinois, Baton Rouge, Boston, Kentucky, all over. So there were a number of expansions in the year. This had obviously something to do or part to do with the total CapEx with year. We spent about $70 million in CapEx. Today, we occupy about 4600 acres and we own more than 50% of that property.

Also in the quarter, we bought -- or in the year I should say -- we bought out five different properties now totaling $13 million of that $70 million in CapEx. Also breaking out the CapEx a little differently, out of the 70 million in total CapEx, 63 million was in expansions, lease buyouts and acquisitions. Out of the acquisitions, $20.7 million was in land and $35 million was improvements to the property. The $7 million that was spent, the difference there was primarily G&A, network expansion, improving on redundancies and other technologies.

Looking at CapEx for 2006, as is customary, we give a range for the coming year. We're estimating that we will spend somewhere between 90 and $120 million in CapEx. This will be further buyouts on leases. A lot of growth occurred 10 years ago in purchasing companies in '94, '95, '96, '97 with 10-year leases on those properties and a lot of those facilities will be acquired in this year as the leases come due. So out of that 90 to 120 million, there will be the purchasing of lease buyouts, there will the acquisitions that will be made, land purchases and improvements as we continue to grow the Company. Obviously, that's a range. It could end up being more than that. I doubt that it will be less than 90 million because of the deals we have currently.

Looking at technology, I talked a little bit about VIX in the prior quarter. We're very excited about how that product is turning out. We've had a regular VIX sale every single day, that we have more companies now that are looking at the product and excited about the opportunity of having a real guaranteed bid on their owner-retained vehicles. So we're excited about that. It looks good. We've got some companies that are currently wanting to entertain maybe a national proposal on VIX and what it's seeing. That product could basically replace their current systems or their current methods in how they deal with owner-retained vehicles.

Give you a little update on the catastrophe. I went out again for the second time; I've been out twice now to the affected areas, the Gulf region. I went out Sunday this week, got in late last night and toured all of our facilities again. We've been affected from Hurricane Katrina anywhere from Florida, from Miami all the way up to Mobile, Mississippi, Louisiana. And of course from hurricane Rita, that recently affected Beaumont, Texas and the Houston area. This last week, I was in Houston, Mobile, Gulfport, New Orleans and Baton Rouge. So we have some great things going on there. We've picked up thousands of vehicles already and we continue to pick up vehicles for the insurance industry. We have deployed a number of people to the different areas. Equipment, everything from travel trailers to office trailers to do business out of.

So we are in full production in all of those markets, including New Orleans. We're up and running at our facility. There's no power or water, but we're up and running. We have water and generators that are in place to get everything going so we're bringing cars in in all of the affected areas -- Baton Rouge, New Orleans. We have expansion that has already taken place in Mobile where we have expanded and added yard, added property. We have expanded in Baton Rouge, we have expanded in New Orleans and we have opened up a 200-acre facility in Gulfport, Mississippi to bring in vehicles.

So we're up and running. All of our Cat team folks are out there working hard, deployed for seven days a week, 6 AM to 10 PM office hours. So it's a full-blown production that we're doing and we're handling owing cars for all the insurance industries, all the insurance companies there. And it is going to be a long haul, I think. It's probably going to be six months before we're done picking up all of the vehicles based on just the different areas that are opening up. For instance, Beaumont, Texas has not opened up yet. It was hit very hard and it's just now starting to open up. This week I believe, we will be able to go in there and start picking up cars. I drove to New Orleans last night and a lot of the areas are now pumped, the water is drained and the vehicles are sitting on the sidewalks and up against buildings and everywhere. So as we get access to people and we are able to confirm where there vehicle is at, we will go out there and pick those cars up.

That's kind of the update on the cats, a big deal right now. That's where all of our focus is at. We're really just trying to manage the tens of thousands of cars that have been assigned that we're trying to pick up and get processed for the major carriers in that market.

And as you can tell, we had a great year. We're excited about how Copart is doing from a service standpoint. We've got a lot of customers that are happy with their results for the year and the returns. And again, we saw record returns with respect to average selling price per car. So things are good and I guess that's what we have going for is there. With that, I will turn it over to Will Franklin who will give you an update.

Thank you, Jay. Obviously we're pleased with the results for the quarter and for the year as we had solid growth in volume as well as growth in revenue per car. This is the second full quarter after the anniversary of the complete rollout of VB2 and it continues to drive revenue.

For the quarter revenue, was $112.6 million, an increase of $12.5 million and more than 12% higher than Q4 of last year. For the year, revenue was $457.1 million, or more than 14% higher than the prior year. The growth drivers for the revenue continue to be growth in the number of cars sold which came primarily from existing yards. Growth in new service revenues as a percentage of salvage buyers that utilize VB2 continues to increase and the impact on buyer and seller fees from the growth in gross sales proceeds.

Revenue was negatively impacted by the change in our revenue recognition policy for certain fees, primarily certain seller fees and buyer relist fees. The effect of this change was to reduce revenue in the quarter and the year by approximately $4.4 million, effectively creating a permanent onetime deferral for this amount. This change should have no impact on subsequent quarters.

Same-store sales increased by 10% and 13% over the same period last year. Cars sold under the percentage incentive program were 70% for the quarter and 68% for the year. This is up 4 percentage points and 3 percentage points over the same period as last year. This increase is in part the result of the increase in dealer cars being sold. Dealer cars are sold primarily under the PIP (ph) program and dealer unit sales were up 34% over the same quarter last year and 30% over the prior year.

Yard expenses grew to 55 million and $225.8 million for the quarter and year, respectively. These represent increases of 12% for the quarter and 8% for the year. The increases were due primarily to higher volume, the additional expense associated with the nine new yards added this year and the impact of the $3.6 million adjustment in Q4 of last year to reduce expenses primarily associated with estimated insurance claims.

Yard margin was 51.2% for the quarter and 50.6% for the year, increases of 30 basis points and 270 basis points over the same period as last year. Excluding the effect of the insurance adjustment in Q4 of last year, our yard margin percentage for the quarter would have grown 380 basis points. The nine yards added this year contributed approximately 2.5 and $4.6 million in revenue during the quarter and the year and were profitable during both periods.

General and administrative costs for the quarter and for the year were 12.4 million and $42.4 million, respectively. These represent increases of 34% for the quarter and 16% for the year. The increases were due primarily to additional costs related to SOX compliance, primarily in the last quarter; increases in software development costs, technology hardware leasing costs, telco and data networks cost, IT and development payroll costs, all related to the continued development and deployment of VB2 and the opening and the operation of our redundancy site in Las Vegas, Nevada and additional administrative and finance headcount.

Operating income was 37.4 million and $156.9 million for the quarter and for the year, respectively. Operating margin percentage was 33.3% for the quarter and 34.3% for the year. On a year-over basis, this is up 320 basis points. For the quarter, it was down 70 basis points. However, excluding the impact of the $3.6 million adjustment recording in last Q4, it would have grown 286 basis points.

Income tax expense for the quarter after certain adjustments was $14.9 million for an effective tax rate of 37.3%. We expect a more normal tax rate to be approximately 38.4% going forward. Net income for the quarter and for the year was 25 and $102.1 million. Diluted EPS for the same periods were $0.27 and $1.10. These represent growth rates over the same period as last year of 17 and 26%. Excluding the adjustment to the prior year's fourth quarter, the growth rate would have been 29% for both the quarter and for the year.

Copart maintains a healthy balance sheet with over $250 million in cash and a current ratio of over 4.8 to 1. During the quarter, accounts receivable declined due to the timing of buyer payments. Vehicle pooling cost increased slightly as seller inventory in-hand grew and deferred revenue declined to the normal amortization of annual buyer fees. Total equity has grown to over $709 million and after-tax return on average equity on a trailing 12-month basis has been 15.4%.

Cash generated from operations was 32.3 million and $136 million for the quarter and for the year. Net income adjusted for non-cash income and expenses represented 95% of this amount for the quarter and 97% for the year as the net changes in the balance sheet were insignificant. The Company had capital expenditures of $25.1 million for the quarter and $70.1 million for the year, primarily for year expansion, acquisitions and network buildout. Maintenance CapEx remains well below 10% of total CapEx. As we have little debt, cash from financing activities reflects the impact primarily of exercised stock options and shares issued through the company employee stock purchase plan. The impact of these programs had the Company adopted FAS 123 during the year would have been to reduced diluted EPS by $0.02.

With that, Jay -- Melanie, I will turn the call over to you to manage questions and answers.

(Operator Instructions). Bob Labick, CJS Securities.

Good morning. Congratulations on a good quarter and year. I was wondering if you could walk us through some of the growth drivers and initiatives specifically for next year and tell us if you think we will see any impact from VB2 wholesale in '06 or if that might be more '07, and then other drivers, including pricing, volume, where you see these things coming out?

Sure. I think starting with growth, that was a lot of the reason I put those CapEx numbers out. I think that is part of the reason for them being at the level they're at, 90 to 120 million. We're going to be expanding quite a few facilities and we'll be continuing to open up new stores as we have done last year and that is going to allow for us to bring in more volume and more customers. We have a number of clients that are looking at now VB2 has been out since 2003, since December of '03. So we have all of '04, we have almost all of '05 to look at comparable numbers and we're looking at record results as we sit here today.

So we are going to continue to explain the benefits of dealing with Copart and VB2 and we will go out and continue to sign up new clients, new customers and continue our goal of providing legendary service. And by doing that, we will see additional units sold.

So I think that's going to be the primary growth driver for us from the Company's perspective looking at VB2 in '06. We have not only got the 45 VB2 auctions that we're selling cars for, but we're now looking at some off-site ventures. That's something we've talked about and we finally have those products built. So we will be working with a number of companies. I won't not name them all off, but some of the big car companies, some of the companies that are big dealerships across the country. We will be working with them to sell their product off-site meaning not bring the vehicles into an auction per se but leave them at the facility and do it completely through VB2.

Is that going to be material in '06? I don't know the answer to that. We'll have to see how we do. But as we sit today, VB2 is not material to how the Company is doing but I think that's, A, it's a new product and, B, we are doing pretty good as a company. So you have to do pretty good well to be material compared to Copart.

Great. And can you maybe give us a little more specifics? I think last call we talked about some of the changes that you instituted for the VB2 for the wholesale auctions. You had to tweak a few things to get it to fit. How is the product now situated? Is it where you want it to be? Are there more changes to come? What should we expect?

Well, yes, there's more changes to come. Are we happier today with the product than we were a quarter ago? Sure. It's a brand-new product. We're jumping into something here that's very new for us. So we continue to expand some of the different processes and product services that VB2 offers, but will we continue to expand it and make improvements? You bet. There's no question going forward quarter to quarter we will be investing time and money in making that product a better product.

And I think where we're right now is looking at the off-site ability for VB2. One of our beliefs has been that vehicles are very easy to describe through condition reports and through photos and that buyers would be able to purchase those vehicles without physically having to jump on a plane, fly into a market, drive to an auction to look at them. And the idea of driving a car through an auction is something that was done 50 years ago. And 50 years ago, the process of buying a car was very different than it is today. People lift the hood and they kick the tires.

Today, I have a friend of mine that owns a dealership here in town and we were laughing about it a month ago because he was saying people come in today and they buy cars, they don't even lift the hood anymore. People don't really care what's underneath the hood. It's more a process of what does the car looks like and what are the specs. So I believe fundamentally that we're changing. We're moving down a path where people will buy product without physically needing to see the vehicle by touching it but virtually being able to touch it through condition reports, through pictures, and that's kind of where we're at. That's our focus right now with VB2 is the off-site piece.

Great. One last question if I could, and it might be for Will. Just so we're all on the same page, could you give us an understanding of the I guess quarterly impact for Katrina? Should we expect incremental expenses in the current quarter and then as a benefit one or two quarters, or how should we look at that for next year?

I think I'll answer that for you Bob, because where we're at right now, we've spent a lot of money, yes we are. We've shipped in at this point 1600 and $30,000 (ph) loaders and I'm probably going to buy another 10. So we're moving a lot of equipment and we're spending a lot of money which is pretty common for us in a cat situation. There tend to be enormous costs associated with servicing the customer, and that is our primary focus. Our primary purpose right now, getting the cars in as quick as we can, servicing the major carriers. And will we make a profit on this? Probably not. It's probably not going to be something that's going to be a win in that situation. But that is normal for us. We handle these things, we spend a lot of money. It's the servicing of the client that we're concerned with, it's not trying to make money off of it per se.

Okay, thank you very much.

Scott Stember, Sidoti & Co.

Could you just touch once again on the wholesale side -- how many locations you're up to? I missed the first part of the call.

Yes. With VB2, we have 45 auctions that we're currently selling cars for.

Can you maybe talk about how -- is that contributing to the bottom line within this past quarter and how you expect it?

No, it's not material yet.

Alright. And can you talk about how pricing is? With used car pricing falling recently with all of these 0% discounts and employee pricing plans, have you seen that affect anything that you guys are doing right now?

Again on the VB2 side, I don't think it's material enough to talk about. With respect to Copart, we're looking at record numbers. So we are happy with the returns we're getting right now.

Just circling back to the options expense, are you guys going to be recording that $0.02 to $0.03 I guess this year within your numbers?

No, it's not. Next year, we will adopt 123-R. And with the existing options we have, I believe it's about $0.02 next year.

That's all I have for right now. Thanks.

Lee Cooperman, Omega Advisors.

First, let me just say I appreciate the excellent job you folks are doing running the business. It's doing quite an extraordinary job. But I have one question and it regards capital management. Is there something that we're strategically lacking that we continue to build up cash? For example the latest fiscal year, we have not done any stock repurchase which may be makes sense. We're not paying a dividend and we seem to have large cash balances relative to our size. So I assume either we don't like the stock price relative to repurchase or there's something bigger strategically that we're thinking about. So I'm wondering if you could give me some insight into your thought process?

Sure. We've said for the last probably I'd say three years since we've built the cash position that we have had that we think that that gives us a strategic advantage. We think that an opportunity may come along where we need that cash to expand and we want to make sure that we have the ability to do that. So that's kind of where we're at right now. And you know how it is, Lee. If you have the cash, sometimes you don't find use for it right away. When you don't have the cash, it seems like deals come up and you cannot get them done. So we feel from our perspective having 250 million in cash right now is a good deal. It's a good position to be in.

Is there some -- forgetting the specifics obviously, you can't discuss that, but is there something on your wish list that could take a couple of hundred million dollars in cash that would be good for the shareholders?

Sure.

Okay, thank you very much, good luck.

Gil Alexandre (ph), Garfield (ph) Associates.

Could you update us on your legal situation?

Sure. Yes. You're talking about the patent infringement suit is that what you're referring to, in Mannheim?

Yes.

Yes. Mannheim, I think everyone is aware, filed suit against us for patent infringement. We have countered that and said that we think it is without merit and we've gone through a process there. At the same time, we've filed a countersuit and so we are in the middle of a lawsuit. You know how these things go. So it could be a three to five-year process and it could take a long time to get it resolved and it could be millions of dollars. That's just kind of the way it is.

I did not quite understand how VIX is different from VB2.

Well VIX is a VB2 auction for vehicles that are owner retention. These are vehicles where the owner may have light damage, what we call a driving total loss. And so the owner says to the insurance company, I'd like to retain the car. And the insurance company says, well, okay, we're going to total it because the damage to the car is more than the car is worth. Maybe the damage is $5000 and the car's worth $4000. So they say, we're going to (ph). Did I do that right, or did I go backwards?

Okay, so they will say we're going to total vehicle. We're going to write a check for $4000 instead of paying 5 to fix it. And the owner says well I'd like to keep the car. It's not a lot of damage, it's a drivable vehicle. And so they have to determine a value on the car. Well the typical methods today are to call for quotes and to try to do average values and things of that nature. With VB2, or with VIX rather, it allows them to run a VB2 auction on the vehicle where our buyers bid on those vehicles and they have a real number now. And then what happens is they can use that number so maybe the car comes up with a $1000 value. They can say, we have $1000 that a buyer's willing to pay. If you want the vehicle, you have to pay us $1000, meaning that instead of getting a check for 4000, you will get it a check for 3000 and you get to keep the car. Or, you get a check for four grand and we take the car. And if the owner says I want the vehicle, then if that's the case, they get $1000 deducted. If the owner says, I don't to pay 1000 for it, then we would pick that vehicle up, bring it to our facility and the buyer would then pick the vehicle up and pay for it and we would pay the insurance company.

So it's a completely new product. There's nothing like it in the industry. This is something again that we have innovated within our industry.

May I ask two more questions?

Sure.

When one looks at your general and administrative cost as a percentage of revenue, should that start leveling out or will that continue to increase?

I don't know that it's going to level out simply because we've spent the last two years, pretty -- yes, the last two years we've put a pretty sizable investment in trying to expand our services, building products like VIX, building products like VB2, expanding in the network redundancies and the product quality and all of the things that we've done there. So there's a number of things that we have done to make our company better over the last couple of years, it makes us better in the future. As we add more facilities and we add more cars, obviously as a percentage of G&A, it tends to go down as a percentage of revenues. But like I said, we have put a pretty sizable expansion into that. So I don't know that it's necessarily going to go down the next year.

So it could level out?

I don't know that it will. We have some pretty significant things we want to invest in still in this 2006.

And when one looks at VB2 versus a year ago, can you give us an idea of gross proceeds for cars and average return for cars?

No, we don't break that out. It's up, I'll tell you that.

And number of foreign sales going abroad?

Today, percentage of units going abroad meaning that we track that the buyer has an out of country address or out of country location. It doesn't -- we have a product called e-pay where the buyer can click a button and the funds are transferred electronically. So a number of buyers have opened up locations in the U.S. where they may be buying products, shipping it to Chicago -- I'm sorry -- transporting it to Chicago then shipping it out of there to Lithuania or some other markets. So I don't know the total number of cars because there's a number of buyers out there that have U.S. locations. But looking at buyers that do not have U.S. locations that are only foreign locations, it's 22% of units, 23% of gross proceeds and the out-of-state number is 26% of units, 36% of gross proceeds. So it's roughly half of the units that are going out-of-state or out of country.

Thank you very much and good luck.

Tom Lamb (ph), Wade Fawcett (ph) Research.

Our questions have been answered, but keep doing the great job you're doing. Thanks.

Thank you Tom.

Bob Littell (ph), MD Fass (ph) Investment Services.

Thank you. I wondered if you could give us a little bit more understanding of what goes on say in the Gulf Coast area? In other words, you're bringing in big volume. How long does this take to get off your inventory out into people's hands? And another question might be, to what extent are these automobiles that have been many of them just flooded and thrown up against houses like you say -- is there anything really marketable there, or are they just scrap value? Could you give us a little bit more feeling as to what happens when you have an unusual situation like this?

Well, there is the operative word unusual, because in all of the years that I have been dealing with cats, I have never seen anything like this. This is an unbelievable, eerie kind of situation. It's actually kind of disturbing for me even to talk about it, to be honest with you. It's such a weird feeling. It has impacted me going back there. And literally I was driving through New Orleans at 8 o'clock at night last night and it's unbelievable to see what has happened in these different markets. The vehicles we've picked up so far were the vehicles that were easier to get -- let's put it that way -- the vehicles that maybe were wind damaged or vehicles that had minor flooding. Have we picked up completely flooded vehicles? Oh, yes, you bet. We've definitely picked up vehicles that went completely underwater, but there are so many out there that we have not picked up yet. There's just so many vehicles that the police would not let you into those areas. Those parishes are now opening up, some of those parishes. I went into my facility two weeks ago, I had to fly a helicopter in because they would not let you in. I went in Monday this week and they let me drive in, but I had to go through two checkpoints to get in. I went and Wednesday and I did not have a good through any security to get into my facility. So it's slowly backing off. They're slowly opening up different markets, letting us get in there with trucks, letting us get the vehicles.

A lot of the vehicles that we have picked up have value. They have component parts that are going to be valuable. They're not -- by no means are they rebuildable. These are vehicles that are just, they are ruined, but they have fenders and hoods and component parts that have value. As we get into come of these vehicles that have been underwater for weeks, I don't know what's going to happen. Right now, they are talking about some of the parishes that they have not opened up yet, bringing all of those vehicles into a site and then FEMA will sort them out and decide which ones they want sent directly to be crushed and which ones they want to be processed and we pick them up from there. So it's a big deal. I don't know how else to tell you, Bob.

It's one of these things where we have lots of great people working off their tails. And we are seven days a week and we're 6 AM to 10 PM and it doesn't really end then. That's just kind of like the office hours and it seems like a 24-hour operation. Everyone is just working and living at the sites. We have little cities built at every yard with people living there and processing cars, picking cars up at night, doing everything they can. So it's a big deal and we are going to continue to be committed to getting this process and helping out and getting it done. And like I said, I think I would be surprised if the last vehicle gets picked up in less than six months just because there's so much damage. I drove through Slidell and it's -- I could compare it to being in Oklahoma in 1998 when a tornado hit and I saw just complete devastation with homes completely gone. And that is what it looked like. There were just piles and piles of rubble and homes wiped out and cars underneath the homes. And so eventually three months from now, they're going to clear the house out and they're going to dig the car out and they'll call us up and tell us to get it. So it's going to be a long process as these areas get opened up, cleaned up and they allow us to come and get the vehicles out.

Now would you expect this increased volume of destroyed vehicles, would that show up on your topline sales?

There is going definitely going to be topline revenue associated with handling the cars and there's going to be some enormous expense going out. We pay -- we are upside-down, that's probably the best way to say it. We pay more to get cars in during a situation like this than we charge.

Now looking back at last year when you had the four hurricanes in Florida, I noticed it was the January quarter where sales growth jumped up. Is that a typically lead? Does it take -- it wasn't the October quarter, but it was the January quarter. Would we expect to see something like that this year?

The hurricane vehicles that we had last year would have been sold before January. We sold a bunch before January. So I think that is just winter volume that you're looking at.

Okay. And then when you say that there are enormous expenses involved, I remember you making that point last year after the four hurricanes hit Florida. And yet operating margins were up very sharply in both the October quarter, the January quarter slowed down a bit this year and the April quarter (multiple speakers).

But that's not hurricane related, that's VB2 related. That's the impact in higher gross proceeds and the ability for us to generate not only more revenue on a per-car basis but pump more volume through just because we're bringing more accounts on.

Okay. Now this year then, what would you expect these enormous expenses referred to? Should we be alerted that there will be margin pressure looking out over the next couple of quarters?

I don't know what's going to happen with respect to that. I just know that I'm spending money like I've never spent before. That's kind of what you do in these situations. You're out there -- I've probably purchased 25 travel trailers to live in so far. I slept in a travel trailer Monday night. That is kind of the situation. There are no hotels in New Orleans, Louisiana, Baton Rouge, any of that area. There's just -- from Gulfport to Baton Rouge is travel trailer. There is no way you're going to get a hotel, they're all sold out. So we've bought travel trailers, we've brought loaders, where buying hundreds of thousands of dollars worth of rock and dumping it down. We're buying water trucks ands we're buying office trailers to work out of and installing 100 KW generators and getting power on board. It's an amazing experience. You have to almost see it to believe it.

So we should not be surprised to see declining margins year-over-year on the October/January quarters?

It may happen. I don't know if it will or not at this point. I don't know what the vehicles are going to sell for, Bob. That's the thing. There's going to be so many of them, there's going to be basically a glut of these vehicles in the marketplace and we don't know what they're going to sell for based on the kind of damage that they have. But it's hard to look at your carriers and say -- I know we just got hit with a category 5 hurricane, but what can you do for Copart? At this point, it's what we do for you. And we're going to handle them, pick the cars up and do whatever we have to do.

Thank you very much. That is helpful.

Craig Kennison, Robert W. Baird.

Congratulations on the quarter and especially this response to the catastrophe. First question, Will, I think you mentioned organic growth. Could you repeat that?

Sure. It was 10% for the quarter and 13% for the year.

And for the quarter, is that an apples-to-apples number before the deferral?

Yes, it is.

And is there a cash flow impact at all of the deferral?

No, there's not because that would be the conversion of a receivable. I will tell you, the nature of the deferral, Craig, is this. On our seller fees, instead of recognizing certain seller fees at the time of the auction, we recognize it when the buyer pays. The buyer pays two or three, maybe four days later. So basically we are deferring the receipt, the recognition of that revenue for just a matter of a few days.

I see. And what is the impetus for the change?

We just looked at all of our revenue streams and analyzed them with respect to SAB-104 (ph) and EITF-0021. And as we went through the process, we identified some that the process may not be completed until a further step has been consummated. And in this case because of the nature of some of our contracts, we felt that the actual process (indiscernible) completed until the buyer made a payment.

The other fee affected was buyer relist fees. Buyer relist fees, there's probably more than what you would expect in the normal business of relist fees that are not paid. Previously, we had booked the complete revenue and established a sizable reserve for that, but we thought it was more conservative just to wait until we actually received payment to recognize that. So those are the two primary changes (indiscernible) recognition.

That's helpful. If we could shift to the income statement, the other income line has been a source of a significant amount of income in '05. Could you talk about what is in that number and what really could realistically repeat itself in '06?

Sure. That is primarily where we rent out space in our yards to our insurance customers for them to conduct their operations. That is the vast majority of that amount.

So is '05 a reasonable proxy for our '06 expectations?

I think it's pretty close.

Thank you. And then finally, with respect to your CapEx plans, they're very aggressive but you certainly have the balance sheet to pursue that growth. I wondered if you wouldn't mind just breaking out some of those expenses. How much do you plan to spend on property in particular to essentially purchase land that you currently lease? And just as a follow-up to that, how much lease expense do you believe will be gone in '06 because of that strategy? Thanks.

Craig, I really don't want to break it out. It's a number that is, we're guessing that we're going to do that in the year so it's a number that could end up considerably different. I hate to give out estimates and then they end up not even close. So I don't really want to break them out, and I'll just leave it at that I guess.

Maybe this is not something you're going to answer, but in terms of the 90 million to 120 million, how much of that contemplates lease repurchases, or land repurchases?

Because those deals aren't even done yet in some cases, I don't want to talk about them.

Okay, but it's part of that budget?

Absolutely.

Okay, congratulations again guys.

Steve Balong, Cedar Creek Management.

Good morning. On the VIX auction, will the bidders keep bidding if too many of the cars are retained by the owner, or is the percentage retained by the owner not big enough to discourage the bidders?

It's a risk, there's no question about that. But at this point, we have been able to get buyers to bid on the product. And I think if buyers, give you an extreme. If buyers get 99% of the cars, they're going to be there every day. If buyers get 1% of the cars, they're probably not going to be there. So we have to try and -- it kind of balances itself out I think Steve, because you end up in a situation where buyers get vehicles, they find out the quality of the vehicles and these are vehicles owners want. Why does an owner want it? Because it's a good quality car. And so these are going to be vehicles where the buyers buy them, they see the quality they're getting, they're going to step up to the plate more often, bid more and I think the product gets stronger over time. And since it has been out, we've run thousands of cars through VIX already. And so we have gotten plenty of data and plenty of information to see and we have -- like I said, we have national customers that are excited about it. There's really nothing out there where you can put a car on a sale and get a real bid from a real buyer of the next day. That's pretty cool stuff.

Very unique product. And then second question. On all this equipment that you had to buy and kind of (indiscernible) are you buying all of that, renting all of that (multiple speakers)?

Some of it we're shipping from other yards. The stuff that I said we're buying, we've moved in more loaders than that. We've moved them from Chicago and other markets, you know, Connecticut or Texas. We have gone out. One of the nice things about being Copart, 2400 employees, 300 loaders, we have resources. So we go out, we pull our people in, we pull our loaders in, we get it done the same time we buy machines. And the way that we purchase machines today, I believe is an operating lease, isn't it Will? All of the machines are operating leases. So anytime we buy -- you know, a forklift last I don't know seven years, a loader lasts about seven years and we have 300 of them. So we're constantly buying thirtysomething loaders a year or fortysomething loaders a year. And the way we purchase those is through an operating lease. At the end of the lease, then we can buy the lease out.

Great, thanks.

Katherine Hartell (ph), Thomas Weisel Partners.

Hi, this is Katherine in for Matt Nemer. Most of my questions have been answered, but I just wanted to get your thoughts on Mannheim's expansion into the salvage auction market. If you could just discuss what the threat might be there, if you're confident with where you're pricing is or that could be at risk? Thanks.

They have been in the salvage business for years. They have come out and publicly announced it now, but we have completed with them in markets for a long time where they process salvaged vehicles. We currently compete with another public company that they compete with. We have another major competitor that is private now that we compete with and then we have a bunch of independents. And so -- and we've been competing with Manheim and now they've publicly said they're going to get more into it. So there's plenty of competition. I don't know that it changes things much.

Great, thanks.

Perry O'Connor (ph), Cedar Creek Management.

These catastrophes, obviously you're going and you're spending a lot of money, you're doing a lot of customer service. You must have an idea in your head that you're going to get a lot more business down the road because you did this. Are you doing cars in New Orleans for non-customers or customers that only have a few cars with you, or are you primarily servicing guys who you've committed to already? What's the calculus down the road?

This is such an enormous amount of vehicles. The worst hurricane to ever hit the U.S. prior to this was Hurricane Andrew, and that was a category 5 hurricane that hit Florida. And this is probably twice the volume that that was, maybe even more. So we're talking enormous numbers. So my focus right now is to service my existing customers. It is not to try and go out and bring more volume in from another company. I have my hands full, is probably the best way to explain it.

I'm just thinking about this in terms of what happened in Florida last year. My understanding is you went and you got bigger chunks of marketshare from people there because you're able to do this and other people were not able to do it. I presume that's the plan here as well.

I think that occurs because some of the clients that I handle today are dealing with other -- I don't have all of their business, they split their business so they're dealing with other vendors as well. And are we going to be judged on how we're doing this? You bet we will. So we're doing everything we possibly can to service them and exceed their expectations.

Thanks. I'm auctioning off my car on VB2 this afternoon, so I'll let you know how it goes.

Great.

(Operator Instructions) Gary Prestopino, Barrington Research.

A couple of questions. Relating to what you're doing in New Orleans, are you able to increment up your fees in some extent to cover these increased costs, or do you stick with the standard fee schedule?

We're not doing any of that. So we're handling everything at standard pricing, no increases and absorbing all of the cost. And that's really the reason I have been kind of pressing on that issue a little bit with everyone is to let people understand that you don't get drivers to come down from Kentucky, Kansas City, Texas, you name it. I talked to guys yesterday that are coming in from all over and we have a little shantytown set up, they have their own -- it looks like an RV park. And these guys aren't coming in and doing this for standard pricing. They want to be paid premium rates. So we're paying all of the subs a lot more money to get the vehicles brought in and we're having to lease additional land and we're having to pay all of our employees cap pay. So there's cost associated with all of it, yet we're charging standard pricing job to all of our existing customers. There's no increased pricing, there's no surcharges or anything of that nature.

In a situation like this, is there economic value for the recyclers to buy these cars, considering they have been sitting in water for a couple of weeks now?

Yes, they're going to buy them, there's no question about that. I mean here's always somebody who will buy the vehicles for some component parts on it even if the motor and transmission are not good because they've been underwater too long. You still have sheet metal on the car. There's something that's of value, and they will crush the car and sell the vehicle for scrapped if they have to, but there's some value to it. So somebody is going to buy it.

Have you given any number as to how many sites you plan to add this fiscal year?

I don't believe I did. And you're not asking for one, are you?

Well, (multiple speakers) you have added sites, increased capacity. How much over the last year and what you're going to do this year --?

I'll tell you, it's probably going to be in the range of six to 10 locations.

Six to 10 news sites?

Yes.

Okay. So if you look at the spectrum of your sites and what you're doing here over the last year and what you're going to do this year, how much are you going to increase capacity overall?

I don't know the numbers off the top of my head.

Okay. Just a couple of other questions. With this VIX product, can you give us some idea of the percentage of cars that are actually going into the buyer?

That are going to my buyers right now?

Yes.

I will give that out later. I'm not going to give it out this quarter only because the product is so young. But as soon as we start to really get some significant volumes going through -- you know, when I get to the point where I'm running a couple hundred cars a day through the product, then I think I have a real base to talk about. Right now, I think some of the trends we are seeing may or may not be the future.

Are you dealing with -- are the major insurance companies expressing a big interest in this right now?

Yes.

And have you signed a major insurance company to do this, or is a major insurance company doing this right now?

I've got major insurance companies not only doing it currently, I'm talking to major insurance companies about doing this across the country, that kind of thing.

And if they list a car, do they have to pay a fee regardless of whether there's any transaction?

I'm not going to get into pricing, or how I price it on the call, buddy.

That's very fair. You mentioned something about dealer cars impacting PIP. Are you guys seeing -- those are the dealer cars related on the wholesale side I would assume, correct?

No, he was talking about Copart and Will was referring to vehicle consignments. We have a -- we tend to call them dealer cars. They're vehicle consignments. These are vehicles that they buy at other auctions, so they may buy them at a desk (ph) auction or an IA auction, whatever. They will go out to a competitor's auction or an independent; they'll buy those vehicles, they'll bring them over to one of our stores and run them through.

On VB2?

Exactly. And this is something that once -- the day that we rolled out VB2, we saw this enormous increase. At first, we were kind of trying to analyze it and then within six months, it was like okay, I think we have a trend. So even -- Will gave you year-over-year numbers I believe.

36% year-over.

Yes. So if you're looking at 2004, which was a year where we had six months, seven months of VB2 companywide from December to July, and you compare that to today, we're up 30-something percent. So it's a good product. And so buyers are pretty aware of pricing and what things bring and so they go to other auctions and they buy stuff and they bring it to us to sell.

Are you also seeing the regular franchise or independent dealers bring in that total marginal car that is traded in and saying, okay, I'm going to put it on VB2 and try to sell it, and the salvage guys are buying it?

If I'm understanding the question right, we have seen like some of the leasing companies, or not leasing companies, but finance companies that have -- maybe you have a repo that in the past you would have sold through a dealer auction. They are bringing some of the vehicles that are as you said marginal and they are bringing those to us. I think as we've gone out and we've talked about -- I think everyone knows Willis (ph) has spent an enormous amount of time pushing VB2 to that industry. And as he's gone out and talked about it and made people aware of Copart, they have said well wait a minute, we have some of these older vehicles or even newer vehicles but maybe they got beat up and beat up in the sense of got damaged. And why don't we run some of those vehicles over at Copart. So we have seen some growth there too.

Thanks guys.

Michael Kaminski, Newburger.

I just wanted to follow up on this issue about CapEx and use of cash. I believe you said earlier in the call that maintenance CapEx is approximately $7 million. Is that correct?

Did you say that? I didn't.

No, I said it's well below 10%. I didn't give a number.

Okay, well you said 10% of 70 I think.

I said well below 10%.

Okay, well let's assume it's somewhere --.

And were you referring to this year or next year?

I'm talking about 2005.

Okay. There seems to be some skepticism regarding the cash on the balance sheet and your ability I guess to spend that and allocate it properly. So we know what type of returns when we get if you bought the stock back through a buyback program. Could you share with us possibly some hurdle rates in terms of return on capital that you might get when you think about spending or using the cash in terms of growth CapEx?

I don't think I want to get into trying to model it out for you on the call. I think we've been a public company now 11 years, we have a good history. It has been the same management team running this company. We have proven to be good stewards of cash and I think that's what the investors have to look at. They have to look at our history. They have to say hey, these are guys that are going to spend cash wisely and I have been dealing with this, Michael, for probably the last two or three years where certain investors say, hey, we get it and other investors say, you know, wait a minute. You have too much cash on your balance sheet, why don't you part with some of that cash? And it's our job to do what we think is best for Copart. And some people will agree with the cash position, some won't.

Okay, but in terms of an internal rate of return that you're looking to achieve, while you might want to share it with us, is it safe to say you have one?

Sure it is. And do I compare my own internal rate of return to my own stock price? Sure I do. So any time I'm buying a company, I always say the company that I have I know better than the Company that I'm buying, right? And so if I'm going to buy a company that is a risk versus buying my own company back, I have to get better rate of return than buying own company. And so we always look at future acquisitions and opportunities with respect to our own stock, sure we do.

Okay, thank you.

You bet.

David Sochol, Baron Capital.

Thanks. On the margin question, I understand the goodwill it has generated and the strategic benefit of having the wherewithal to put people and resources into catastrophe areas, but is there a lot of pushback from the clients if you were to go to them and say, look, we need to charge a premium rate given the premium expenses? How does that discussion take place? (multiple speakers)

I'm not going to have that discussion. It's not Copart's style. I wouldn't do it. In a situation like this where an area has been so negatively impacted and the insurance companies -- I am staying in these markets and when we are able to get a hotel, like in Mobile we got a hotel. We couldn't in Gulfport, we couldn't in Louisiana, but we got a hotel in Mobile. I'm sitting -- I'm staying at a hotel where in the morning, we're meeting in the lobby and there's USAA, there's State Farm, there's all of these other companies with these people that have their cat shirts on. They have their company name with their cat shirt on and these people are just, they're from all over. I will talk to them and they're coming in from New York, they're coming in from Chicago. So in this kind of situation, these major carriers are doing everything in the world they can to service their client base. I have to do everything I can to service them. I just don't think it's appropriate to even think of hitting them with trying to make a profit on this. I could not hit them with a price increase, I couldn't do it.

Okay. And then on the submerged cars, you said a point that somebody will buy it, although the question was more specifically to recyclers. A car that has been under saltwater for two weeks, can it actually be sold? Does the sheet metal have value? Do problems emerge six months later or is that car just going to scrap?

It depends. I can't tell you in my history I've ever seen a car underwater for two weeks. This is new for me. I have never seen a water surge that lasts more than 24 hours. So the water comes up from a hurricane, the water washes out, we pick the cars up. This is a whole new ballgame. So I don't know that I've even picked up vehicles that were underwater two weeks yet. The vehicles that I have seen are, like I said, most of the vehicles that were under for days maybe a week. I don't if I've picked up two week stuff yet, David. It's something that as it comes in, we'll find out. If there's no value to it, it will be crushed and it will be sold for scrap. And I don't know that I'm going to be making a lot of those decisions. Some of it is going to be made from FEMA from what we can see so far. They're going to be pulling some these cars in is what it looks like and deciding on that and then telling us what to do.

Last two questions. Biohazard and given the waste that was in the water, do your people have to wear gloves and masks?

Sure, we have a whole process there.

Last I guess for Will, on organic growth, what does that actually mean? How do you define organic growth?

We exclude the results from yards that have been opened for more than a year.

So sort of a same-store sales type. Okay. And lastly on the returns, can you comment whether the returns are up from the prior quarter as well as a year ago, or it's just the full year returns are higher than the (multiple speakers)?

I'm just talking about full-year returns. I could get into quarter-to-quarter, but I'm not going to on the call.

It appears there are no further questions at this time. Mr. Adair, I'd like to turn the conference back over to you for any additional remarks.

Okay, thanks Melanie. We had quite a call here. I think we got quite a few questions, I think everyone understands how we did for the year and where we're headed. And I appreciate everyone attending the call and we look forward to communicating the results to you for Q1. Thanks and have a great day. Bye.

That does conclude today's conference. We thank you for your participation and have a great afternoon.