Copart Inc (CPRT) 2006 Q1 法說會逐字稿

Good day everyone and welcome to the Copart Incorporated first quarter 2006 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 Incorporated. Please go ahead, sir.

Thank you, [Tamika]. Good morning everyone,and welcome to the earnings release and conference call for first quarter 2006. Before I start, I'll turn it over to Will Franklin, my Chief Financial Officer, and then we'll talk about how we did in the quarter.

Thank you, Jay. Good morning everyone. Before we begin I would like to make you aware of the following: During this conference call, we will be making forward-looking statements with -- within the meaning of the Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include projections about our future revenue and earnings growth, which are subject to numerous risks, including weather conditions that are adverse to our business, our ability to increase market share in a competitive market, and our ability to secure beneficial supply agreements with the suppliers of salvage vehicles. In addition, we face risks arriving from our increased dependence on proprietary technologies to conduct our auctions, including risk arriving from intellectual property litigation.

Our VB2 internet sales model may not continue to have beneficial impact on our results of operations in future periods. Our results of operations for the most recent quarter were adversely affected by hurricanes Katrina and Rita, and our margins in near-term periods cou -- could continue to be adversely affected as described in our press release. For more information on these and other risks that could affect our business, I would direct to you review the management's discussion analysis and the factors affecting future results contained in the Company's 10-K and other SEC filings. Now I'll turn the call back over to you, Jay.

Thanks Will. Well, good morning, again, everyone. As you can see from the press release, Copart earned revenues of 119 million in the quarter, as compared to 104 million one year ago. This is an increase in revenue of 14%, and we generated $0.25 in EPS, as compared to $0.24 a year ago. Now this is due to the increased cost in the quarter associated with the handling of cars in the Gulf region. Due to hurricane Katrina and some of the other hurricanes that we've been dealing with there, we have incurred a number of costs in Q1 and are continuing to incur costs in the current quarter, Q2. And that will happen as we have picked up all these vehicles and we're storing these vehicles. Yet in Q1, we have really not sold any vehicles.

So, as you can see in the press release, we said virtually no vehicles are sold and that is the case. We have literally not sold anything but we picked up all these cars. We will be selling those cars now in Q2, Q3, Q4 and even potentially into fiscal 2007. We have literally not sold anything, but we've picked up all these cars. We'll be selling those cars now in Q2, Q3, Q4, and even potentially into fiscal 2007.

Now typically in a normal hurricane, we wouldn't be selling cars a years later. But this is -- this is, obviously, not a normal catastrophe situation. We picked up thousands and thousands of vehicles, and this has created an environment where there's going to be a significant amount of time involved in processing the titles, and then going through the process of disposing and liquidating the vehicles. So that is -- you know, at the end of the day, I'm excited about the -- the -- revenue growth in the quarter, and Will will comment more on margins and how that would have affected us from that perspective. But I think what investors need to be aware of is that we do have costs associated with handling those vehicles, yet we don't have any revenues associated, so that's putting a little pressure at this time. We finished the quarter with 255 million in cash. and new stores for the quarter, we opened up a facility in Hawaii, and we acquired two facilities in Nebraska.

Before I turn it over to Will, I just wanted to give you a little bit more on the hurricanes. First of all, I want to thank all of our people that are putting time in down there. We are expending a lot of financial resources and, at the same time, a lot of human resources in handling these vehicles. We're still picking cars up, we're still processing vehicles, and we've got a number of folks that are on the Copart team that are living down there, and that are traveling and literally being a way from home for weeks to get these vehicles processed. I wanted to take that moment to tell you guys how great you are, if you're listening to the call.

The other thing that I think's important is that a bill, H.B. 11, has, at this point, passed the legislature and we are waiting for signature from the governor. Our guess is that the governor will sign this bill. This is a bill that -- that, basically, will put -- will label any vehicles that have been damaged to a certain extent a junk vehicle, meaning that it will not be rebuildable and that the vehicle will have to be parted out and crushed. This is going to have an impact on the cars that we're selling. What kind of an impact at this time I do not know, simply because, A., the bill's not even passed yet and, then, when the bill does pass, when's it going to take affect. But, obviously, I think there'll be -- there'll be some impact of processing vehicles due to H.B. 11 and what the vehicles will sell for.

At this time, as I said in Q4, I anticipate -- as I said in Q4, there's going to be a lot of costs associated with handling the hurricane. But just to, kind of, I think let people know where we are at on the other side of that equation, as I anticipate, that the Company won't show a net operating loss due to handling these vehicles. I think we'll be able to handled these vehicles. I just don't anticipate that, you know, there's going to be some huge windfall with all the costs that incurred. But I -- to be really straight-up on this, there's a lot of unknowns that we're dealing with right now, how the vehicles are going to sell, the damage. These are vehicles that are damaged pretty extensively. Unlike a typical hurricane, we've got a bill, H.B. 11, that could be an impact. So, there's a number of factors going on and I would like to be able to quantify it more for everyone but, quite frankly I don't really know what's going to -- how we're going to end up, with respect to those vehicles.

So, I'm going to turn it over to Will now. He'll give you an update just on the financials and how we did in the quarter and how it looks going forward. Thank you very much. Will?

Thank you, Jay. We are pleased with results for the quarter as we continued our solid growth in unit revenue, as well as growth in revenue unit per car. For the quarter, revenue was $119 million, an increase of $14.9 million or more than 14% higher than Q1 of last year. Revenue during the quarter was negatively impacted by the Gulf hurricanes, as normal operating activity for the four affected locations in the area was interrupted during the quarter, and virtually all the additional salvage units associated with disaster remained unsold at the end of the quarter. Same store sales, stores opened for more than 12 months, grew by almost 10% over Q1 of last year.

Yard expenses were $71 million, or $11.6 million higher than the same quarter last year. The growth was due primarily to growth in unit volume and the additional cost incurred as a result of the hurricanes. These additional costs, characterized as abnormal buy FAS 151, were recognized in the current quarter. These costs include the additional sub-hauling, payroll, equipment facilities expenses directly related to the operating conditions created by the hurricanes, and they will continue. These costs do not include the normal expenses associated with the increased inventory created by the hurricanes. These normal costs are deferred until we sell the vehicles and reflected in vehicle pooling cost on the balance sheet at the end of the quarter. Yard margin was 40.4%, or 260 basis points lower than Q1 last year. Excluding the impact of the hurricanes, yard margin would have been higher than the same quarter last year. The 12 yards added in the last 12 months contributed $4.9 million in revenue during the quarter, and they were profitable.

General and administrative costs for the quarter were $13.8 million, $4.2 million higher than the same quarter last year. The increase was due primarily to increased payroll costs as IT, development and finance headcount grew, recognition for the first time the expense associated with equity compensation under FAS 123R., additional expense associated with the network build-out and the disaster recovery site, and increased audit consulting expense. Operating income was 32 -- excuse me, $34.2 million and operating margin was 28.8% for the quarter, both lower than the same quarter last year, due to the hurricanes. Income tax expense for the quarter, after certain adjustments to estimates and valuation allowances, was $13.8 million, for an effective tax rate of 37.8%. Net income was $22.8 million, and net income percentage was 19.2%. Excluding the impact of the hurricanes, operating and net income margins would have been relatively consistent with the prior quarter.

On the balance sheet, Copart ended the quarter with over $255 million in cash and short-term investments. Our short-term investments consist primarily of option rate securities. During the quarter, accounts receivable, vehicle pooling costs and deferred revenue grew as inventory increased. Total equity has grown to over $735 million and after-tax return on average equity on a tr -- trailing twelve-month basis has been 14.7%. We generated $28.6 million from operating activities during the quarter. Net income and non-cash expenses generate $32.6 million, while we consumed $4 million in the balance sheet. Cash consumed in investing activities was $27.3 million. CapEx was $24.3 million and included the acquisition of two facilities in Nebraska and the completion of our New York and Hawaii. Cash from financing activities was $1.7 million, and came solely from the exercise of stock options.

With that, Tameka, I'll turn the call back over to you for questions and answers.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Bob Labick with CJS Securities

Good morning. I wanted to ask was regarding the H. B. 11 legislation you just spoke about.

Morning, Bob.

Hi, the first question I wanted to ask was regarding, you know, the H.B. 11 legislation you just spoke about. Now, I guess it's fair to assume that we're going to have higher volumes from cars from -- from these hurricane cars, but then they're going to potentially be at lower sales prices. So, where do you see margins going forward on this basis? Is, you know, there enough higher volume to make up for the lower sales price or are margins going to be impacted? And then, associated with that, how are margins, excluding these unusual items?

Well, I mean, let's not talk about H.B. 11 for one minute, and let's just focus on the abnormal volume associated with the hurricanes. We've got significantly higher costs due to working in a hurricane environment, i.e., a catastrophe environment, where you've got people that are living down there and there's just a number of costs from anywhere from personnel expense to housing expense to transportation of vehicles, getting vehicles picked up. So the costs are going to be higher if the vehicles were at the normal selling rate, which, obviously, normal selling prices and higher costs, you're going to reduce margins.

When you focus on H.B. 11, that's kind of the -- it's kind of the unknown. But I mean, look, I was in an unknown state before H.B. 11 simply because, in a typical hurricane that I've seen over the last ten years, as an example, waters come in, waters go out. These are vehicles where waters came in and waters stayed. So, we've got vehicles that, literally, have significantly more damage on them than we've seen in the past. I don't know, Bob, what the selling price would be regardless of H.B. 11.

Now when you factor H.B. 11 in, I would assume it only will reduce the average selling price. I can't see where selling a vehicle on a junk certificate on a nonrebuildable is going to help the sell -- selling price. We'll see wh -- how H.B. 11 affects the vehicles, we'll see when it takes place. I think everyone out there who can research it the same way we can, your guess is as good as ours at this point. It's just an unknown.

Got it. If you could, maybe, just ballpark, give us what percentage of your sales in the next few quarters do you think will be related to this, because it's hard for to us gauge on? Obviously, it's a small region of the country and you have a lot of other operations that are still performing very well. So, just to get that impact?

Yes, I have no idea. I tell you, the reason I don't know, quite frankly, is titles, for instance. I mean, we've received a number of titles from insurers, and we've processed those titles and we've sent them to the state, and the vast majority have not come back yet. So, you're talking about, I think it's primarily four states, Florida, Alabama, Mississippi and Louisiana, that have these types of volumes.

And sending this in to the state, it's above what they're used to, so there's going to be a timing lag before we get these salvage certificates back. And, then, once we do, we may get those salvage certificates back in volumes that we can't handle. In other words, there might be this huge delay, then by the time they send the salvage certificates back to us, they come back in such large numbers that we can't sell the vehicles that quickly, and then there's a delay in us processing. All I can tell you, Bob, is that the vehicles are going to be sold in Q2, Q3 and Q4, And I fully anticipate we'll be selling some left-over amount in the next fiscal year. But I think the vast majority will be sold off in this fiscal year, '06.

Got it. Okay, and the last question, I guess, focus more on the hurricane related. How -- what's been the reaction from -- you know, from your suppliers in terms of the work you've done in getting all this together and sometimes, obviously in concentrations like this, you guys have an opportunity to show your higher level of service. Do you have any, you know, comment --

I think -- I think our people have done a fantastic job. We have, as a Company, leased land, acquired land. We've filled those locations and all the existing locations that we've had with vehicles. Like I said, we've got people that are down there that are really living this. And I've been down in the affected area I think six times now, five or six times, something like that, and every time I go in there, I'm just impressed by the job that we're doing. I think the insurers are very impressed. I've heard a lot of positive remarks from all the major insurers.

So, at this point, I think it's only good. The hurricanes' a bad situation, but I think the impact that Copart has made, the service levels we've been able to produce and what we've -- you know, the way that we've been able to prove ourselves to the sellers I think is -- I think we've been outstanding, and I think they've recognized that, so that's good.

Great. I will get back in queue. Thank you.

We'll take our next question from Michael Friedman with Sawgrass Capital.

Good morning. I appreciate the additional color. If, as a shareholder, we just kind of step back and take the big picture look, you guys have been a great growing business for a long time, and we look at this hurricane as kind of a one-time event. I think shareholder are still a little bit confused. If you looked at, kind of, the original fiscal '06 plan and then this hurricane was layered on to it, whether it will ultimately prove to be an accretive or a dilutive event. Could you even give us that kind of black and white.

I wish I knew. I literally, Mike, at this time don't know. I mean, you can see the costs that we had associated with handling of these vehicles in Q1. And the question is going to be what are the cars going to sell for. We haven't -- we sold virtually none in Q1. We've sold such a small amount in Q2 that it's just too -- way too soon to even be able to tell. So it's just a big unknown at this time.

Okay. Fair enough. Could I just ask you a couple of follow-ups?

Well, Mike, just so you're clear. You know, I did mention on the call we don't expect a loss on the vehicles. I don't know if it's going to help.

That kind of scared me a little bit, because you guys have been earning money at a pretty reasonable clip, so that's what kind of made me ask the question.

Well, you know, we're handling cars at abnormally high cost. They may not generate the revenue we're accustomed to. So it could be something where we're just handling vehicles. In other words, not really making anything on them. But I don't -- like I said, I don't anticipate a loss, I don't anticipate losing money on the cars.

Just to kind of understand or cut it another way, in terms of the total number of vehicles that you expect to process in fiscal '06, what percent of the total number of vehicles do you think will be hurricane vehicles? I know that you can't figure out which quarter the revenues are going to fall in, but just of your total units that you expect to process this year,.

Well, I've said that we're handling thousands and thousands of vehicles, so we've picked up a number of vehicles. I don't know the answer, simply because I'm still picking up cars, I'm still getting assignments. There are parts of Louisiana -- there are parishes in Louisiana that they just opened up. We just got hit by a hurricane in Florida. We are still not done picking up those hurricane vehicles in Florida. I don't know what the total units are going to be. I'm in the process of having cars to pick up that we haven't picked up. They've been assigned to me and I haven't got them yet. And then I'm still receiving assignments, so I don't know where it's going to stop.

Can you even speak to -- of the vehicles that you've picked up so far, divided by your fiscal plan.

I don't think so, Mike.

Okay. Okay, thanks.

Okay.

We will take our next question Gray Prestopino with Barrington Research.

Hey, Gary.

Hey, how you doing?

Good.

Could you just kind of tell us, you said your gross margin was down 260 basis points. Xing out what's going on in the Gulf Coast, what would it have been?

We didn't address that. What what we did say is that on our -- our operating margin level and on the net income margin level that it'd be very consistent with our prior quarter, Q4 of last year.

So it would be consistent with last year?

Last quarter -- last quarter of last year.

Last year's first quarter?

Oh, no, last of last year.

Fourth quarter.

Our prior quarter.

Okay. What would were the percentage of PIP cars and what were the percentage that were sold out of state and internationally this quarter?

No, Gary, the percentages didn't change that much on the PIP side. They've been fairly consistent for the last few quarters.

So that's about 67%?

Yes, about two-thirds.

Okay.

And then we have seen a very slight growth in the out of state and the international cars. But we certainly haven't seen the type of growth we saw upon the introduction of VB2.

That's obviously going to happen. But what -- was that consistent with what it was last year or the Q4 or what?

Fairly consistent with Q4.

Okay. If this legislation is enacted, I mean, the way the writing goes here, I would assume that most of the cars that you're going to be picking up are going to fall under this H.B. 11, or you have picked up? I mean, if the water came and the water stayed, is that a correct assumption, Jay?

You know, Gary, the question will be when they -- you know, if -- first of all, if they pass the law, and first of all, if the governor signs it, which, as I said, we anticipate that she will. But if that's the case, then the question is when will they enact it. And I don't know, will they say that it's immediate, will they say that it's happening in 90 days? I don't know. So I don't know what percentage of the vehicles it's going to affect, to be honest with you.

But as long as that's out there, you can't do anything with these vehicles. So if this thing gets tied up in the Louisiana le -- government or whatever, it could be a fairly long haul here?

I don't know. I don't know what's going to happen. I mean, at this point, I'm selling vehicles. There's no reason I can't process vehicles I've got. We deal with new legislation in every sta -- you know, in states all the time, and I don't stop selling salvage cars for a year until they pass some law. So, you know, I've got existing law to deal with, and I sell cars under existing law, marking the vehicles as water-damaged vehicles, and all that's taking place. And if this passes, then we'll deal with it.

Well, if it does pass, if say, for instance, you got a car that's just got to be crushed, how do you work that with the insurance company? Do you recoup your -- at least your costs, because if it's just a crushed car, what processing is involved there?

Yes, it just depends. I mean, it's -- it would just depend on the insurer and how we handle that.

Okay. All right. Thank you.

You bet.

We'll go next to Scott Stember with Sidoti & Company.

Good morning, guys.

Good morning, Scott.

Just going back to the core business again, you guys have given a good amount of information on the hurricanes. But it seems like your revenue growth has remained pretty strong heading up to this point and your comp growth, as well. Can you talk about what VB2 is doing past the anniversary date, obviously, of its implementation and there any new modules that have been put in place which are helping to increase your returns?

Well, when you look at the -- I think if you just back up and look at VB2, it's been out all of '04 and now all of '05, literally and so we've got -- as of December 1, it'll be a two-year run. We rolled it out December 1, 2003. So what we are looking at, I believe, is a product that people are -- it's been out now awhile. It's been out two years and people are -- people being buyers are getting comfortable with the product. They understand how to bid on the product. It just makes it stronger. We're getting more international, I think, presence. We're seeing those international numbers mature, as Will said, but at the same time, we see more and more international buyers that are becoming aware of the product. I think there's more local buyers and more interstate buyers that are becoming aware of the ease of finding product and procuring that product, and so that's helping. When we look at selling prices of cars, we're up. We're up, again, compared to last year, so that's a good thing. Is it, Will? Yes, it's a historical high.

Okay. Just shifting gears over to the wholesale side, could you talk about how the licensing of your VB2 technology into that side of the business is going right now?

Yes, I mean that's a -- with respect to -- VB2's got a number of fronts, but with respect to the dealer business, we've licensed a number of options to utilize the product and we're continuing to process vehicles under that. I think it's -- quite frankly, it's probably kicked off a little slower than we expected, but it's growing and this is not something where, you know, I think we're going to roll it out, soon the whole world's doing it. This is something where it's going to take time and diligence, and that's exact where would we are at. So we're -- we continue to improve the product. We're continuing to look at new features for the product, and to try to roll that product out into more markets. nd, at this point, I think we-re happy with it. It's -- you know, like I said, it's going to be a -- it's going to be a long process. It's not going to be something where you're going to see an effect in a quarter or two, but we're in this for the long haul. We're long-term thinkers, so that's okay with us.

How many locations are you at right now with the product, at least on wholesale -- the dealer side?

On the dealer cars, we're at 44 auctions.

The last question is, have you gotten any anecdotal evidence or stuff from the dealers about how the customer is relating to this totally on-line system compared to the salvage side of the business?

I really don't. I really don't at this time, and I think it's just because it's a small -- it's still a relatively small number of vehicles, even though we have 44 different auctions on. So it's just a -- you know, small samplings give you small results. You know how that is.

Right, got you. Okay, thanks a lot.

Okay.

Thanks, Scott.

[OPERATOR INSTRUCTIONS]. We will take our next question from Craig Kennison with Robert W. Baird.

Hey, Craig.

Good morning. Congratulations to everyone at Copart on the tremendous job you guys are doing down in the Gulf.

Thank you.

One question on that, I think you've addressed it, but on the cost side, and you made the comment that you don't expect to report an operating loss. That's specific to the hurricane-related business, correct?

That's specific, obviously, to the hurricane business and that's looking at it from the whole -- the whole process of handling all the cars. Obviously, there's been costs associated in this quarter, there'll be costs associated inQ2. It's just the nature of the way we do our accounting. And, then, we'll be selling those vehicles off in subsequent quarters, where we'll generate revenue. I'm saying that, if you look at all the vehicles, I don't expect us to incur a loss.

Got you. And then, with respect to your acquisition strategy, you made an acquisition in Pennsylvania. What -- how big can you get on the acquisition front before you are saturated? And then maybe comment on the strategic value of [inaudible]?

Yes. Well, first of all, let me just say we're excited about that acquisition. It was a company that had been in business a long time, well-represented in the industry. We were really happy to be able to make that deal come together. Looking at the total acquisitions out there, I don't really know off the top of my head what the whole marketplace is. I can tell you that our strategy is similar to what it's been for the last five years which is to go out and look and try to open up six to ten location a year. Those six to ten locations will be acquisitions, they'll be start-up locations. Just depends on the opportunities, where they exist and trying to seize those opportunities. At the end of the day, Craig, we're really happy with making that -- making that deal in Pennsylvania.

On the organic revenue front, sounds like it grew almost 10%. How does it feel in the early part of the second quarter, and is that a decent runrate for the year?

First off, we're real happy with that, and that came on the heels of a nice growth in our unit volume. We just don't make any predictions about what will happen going-forward.

Perhaps you could just address, and this is my final question, how your business has responded when the economy turns towards the recession?

Well, in the past, I saw a recession in the early '90s and then, of course, we saw a dip after 2001. But in the past, we're pretty recession resistant is how I like to term it, in the sense that, I think, any time you go into a recession there's going to be -- people, potentially, will drive less, the same way that, if fuel prices go up, people will potentially drive less. ut, there's still vehicles on the road, there's still vehicles being insured, and, for the most part, we come out of that pretty unscathed. We end up handling vehicles. And in some of those experiences, we've been able to grow during those periods. I hope you're -- I hope you're not telling me you think we're headed for a recession.

Just trying to prepare for the worst here. [LAUGHTER]

Okay. Thanks, Craig.

Thank you.

We'll take our next question, Matt Nemer with Thomas Weisel Partners.

Hi, this is Kate [Mefler] for Matt Nemer.

Hi, Kate.

How are you doing?

Good, thanks.

Good. I just have a few questions. First of all, can you give me a sense of the difference between margins on a normal salvage vehicle and one that has been dismantled or crushed?

No, I couldn't break that out. It'd be too difficult.

Okay, so next, I guess, on the expense front, looking at the three components you laid out in the release, can you give me a sense of which factor was largest contributor to the increase in cost, so between the sub-hauling, the facilities and equipment, and the payroll?

Sure, it was sub-hauling.

Was the greatest.

We brought almost 300 sub-haulers from outside the region into the area to handle the volume of cars we had to haul in a short period of time.

Okay. and so those were sub-haulers that you already owned or leased.

No, that's -- by virtue of the word sub-hauler, it means they're independent of Copart, but they came from anywhere across the country. We had subs that were down from Chicago and Virginia and Kentucky and Florida, you name it. So, it's just a matter of bringing them in and setting up housing and getting them to start hauling cars.

Okay. And then on the facilities and equipment, I know you guys had mentioned last quarter that you were using generators and trailers and those kind of things. Were those items that you -- that you purchased and are later going to sell, or --

Yes, the majority of everything from land to generators to trailers, we just acquire it. When we're done with this, we'll try and liquidate all that stuff off.

Okay, got you.Thanks a lot.

Okay. Thanks, Kate.

We'll go next to Edward Hemmelgarn with Shaker Investments.

Do you have any information as to the number of vehicles you're holding now, relative to the number of vehicles you were holding a year ago?

No, we don't break out unit sales or inventories or any of that information.

Okay, well, can you give any idea of percentage?

No, we don't break it out, so I don't know how to respond to you.

Okay. Thanks.

You bet.

We'll go next to Alex [Vaukue] with Neuberger Berman.

Good morning everyone.

Good morning. How you doing?

Going back to the core business and to exclude the effect of the hurricanes. any trends in the business that, in your opinion, would have a negative impact on the strategy of benefiting from the economies of scale, increasing operating margins going-forward?

Well, that was a pretty intense question. I think the Company's doing better than it's every done. I mean, we're -- we're very happy with the way that we're operating the business and the growth we're staying with new accounts. So, if you would exclude the hurricane cars for the moment and just talk about the core business, we think the core business is doing great. I don't know if that answers your question or if you're got more detail there?

No, we were just looking for any negative trends in your core business that we might have missed.

Well, look, there's always something in the business. This is a business, it's not a sterile environment, so there's going to be something that I'm sure is negative. I would love to be handling all those cars and not be incurring the expenses we are, so there's always something negative. But, if you -- if you look at the business as a whole, where we are at today versus a year ago, I think we're a better business than we were a year ago.

Great. Thanks.

You bet.

We will take our next question from Tom [Lam] with [Waywasit] Research.

Good morning, gentlemen. Good morning, Tom. Two questions. One is -- the first one is regarding the competitive landscape, if you see any companies with a similar product out to VB2?

No, I'm unaware of anything out there even -- even close to what VB2 does.

Okay, that was easy. Then the second question is regarding your views on dividends. I mean, you've got -- you're amassing a considerable amount of cash and seems like you'll continue to do that.

Yes.

Any thoughts on when you might pay a special dividend or when you might start buying back shares or what you might do?

No, not really. What I've said in the past is that, you know, as a Company and as a board, we'll look at all those possibilities,and if we decide to do it, we'll report at the time. But I'm not going to give any kind of future guidance or --

Sure.

-- on what we're going to do.

Sure, but you are -- you do consider those measures, don't you?

Yes, we do.

Okay, alright. Appreciate it. Thank you.

You bet.

We will go next to Sherwin Pryor with NorthPoint Capital.

Hello?

Mr. Pryor, your line is now open, if do you have a question.

Okay, thank you very much. Thanks for taking the call.

Hi, who's this?

Sherwin Pryor, NorthPoint Capital.

Okay, thanks. Hi.

Okay, two questions for you. First on the tax rate, should we use just the 37.8% kind of on a go-forward basis for the year?

No, there was an adjustment that brought that down about 30 basis points.

Okay. Next question is on organic growth,specifically have you got any new customers just as a result of other insurance companies seeing your work out in that area, hurricane region area?

Have we signed up any new business, as a result of the hurricane?

Right.

At this point I can't report on any. I wouldn't expect anyone to be thinking of making a decision to switch vendors in the middle of a hurricane. You've got a -- these are such big projects, both for Copart and the insurance industry. that I think the goal for everyone involved is just to get them handled, to get them processed. And then the potential for that to happen afterwards is definitely there.

As a follow-up to that, can you give me an idea of how new business is generated?

How do we go through the process?

Right, with an insurance company.

Well, we have a sales force that meets on a regular basis with existing and prospect accounts, and you try to show the benefits, try to articulate and demonstrate the benefits of dealing with a company like Copart versus the current vendor that they are with. And, sometimes you'll end up signing some business on a test basis, sometimes you'll end up signing local business, state business, regional business. Sometimes it's even a national account. Just depends on the -- the flavor or how the seller feels about going forward.

Okay. Thanks a lot, guys. Again, great job.

Yes, thank you.

[OPERATOR INSTRUCTIONS] We will go next to Chris Blackman with Empirical Capital.

Yes, thank you. Would you comment on possible change in demand in the Gulf region? Obviously, a lot of people lost their cars and you would, obviously, think that there would be some change in demand for needing of cars. Have you seen any change in the pricing of the cars you've been able to sell in that area that have not been affected by the hurricane?

Well, you're -- I mean you're -- the statements you're making I'm assuming are -- you're talking about demand on whole cars, vehicles that are not damaged at first, because these people lost their cars.

Yes.

A lot of these people don't live in those areas any more. They've left, they've got to surrounding areas like Houston, Texas, so -- and I personally don't track whole car demands and what's happening there. It just kind of literally makes sense to me that, you know, they lost their car, they need a new car. And the affected area, you've got a number of cars that we're handling that are insured vehicles, and then there's an enormous amount of vehicles that will have to be sold off that were uninsured vehicles that people lost, and now have to be processed and sold off. And I think that those decisions on how they dispose of those vehicles have not been made yet from wha -- from my sources. And at the end of the day, we're going to be putting a lot more supply into the marketplace and I don't know how that's going to affect the sale prices, simply because it's not so much a supply-demand curve as it is, how am I going to be selling the vehicles, who's going to be buying the vehicles, those kind of questions.

It seems like immediately post the hurricanes, the events, the demand for whole cars or even cars that need a little bit of fix-up would have significantly risen and that the price of those cars would have risen with it.

I would think.

And there's -- you can't quantify that at all?

I don't -- no, I don't look at those numbers, simply because I don't track my business off of the price of whole cars in a local market. We are not a local market business, we're a global business. We are selling well over 23, 24% of our product out of the U.S. now, so I look at us as a very globalized business. And the demand is coming from over 55 other countries, plus the 50 states.

How much did you say was being sold out of the country, 20 what?

23%.

23%. How many of those -- what are you --

That's on a unit basis.

Okay.

On a gross proceeds basis it's substantially higher than that.

Yes, okay. And how many of the vehicles -- I know you all used to put out the amount of vehicles that are being sold out of the state, what that percent accounted for?

Yes, we can give you that. Do you have that number in front of you?

Yes.

Not a problem.

The percentage out of state is 25.2%.

So, at this point, the reason we didn't discuss it in the call, Chris, is just because it seems to have matured.

Yes, the change is not -- it is -- while it is rising, it's not rising at the rate it was at previously.

We are looking at, you know, roughly 50% in rough numbers are going out of state or out of country, and that seems to be a pretty mature number at this point.

Okay, so that's plateaued out some?

And it's significantly more in gross proceeds and that's because, obviously, people from out of state, buyers from out of state and out of country are buying the higher-end units. They're not buying $50 cars, and then spending 250 to ship them.

I understand. Thank you. What was your same store sales number for the quarter? I didn't catch that.

Well, it was up 10%.

Same store sales was up ten?

Yes, it was about $9.6 million same store sales growth.

And with the addition of the new lots and real estate, how many -- how many spaces would you have now?

Oh, I couldn't break out capacity for you. Our goal as a Company is to keep acquiring lands, leasing land, acquiring businesses to try to anticipate o growth in key markets and make sure that we've got capacity. That doesn't mean we have capacity in every single market at any given time. There's always markets that we're trying to expands in. But that's -- as a Company, running it, that's our job. W're supposed to be out there anticipating the growth.

In anticipating growth, would that -- I guess rough math, from the way I calculate it, you're probably generally running somewhere 75 to 80% of your lots full, maybe something like that?

I don't break it out on a Company-wide basis. I mean, there's some markets where I'm at capacity and there's other markets I'm 50% of capacities. It just depends, market by market.

Yes, okay. What about the number of registered buyers? How are you seeing that trend grow, and can you share with us where you are with a number of registered buyers you have?

I didn't look at it for this quarter, so I can't give you a trend. I can tell you that we've got some where north of 100,000 registered buyers in the Company.

Okay. All right, and then --

Which is a significant number of buyers. I think about when I got in the business that I knew every buyer and that, literally, it was in the hundreds, so today it's -- it's a fairly large number.

And you may have mentioned this earlier, I think I heard it but didn't catch it, the number of dealers auctions or -- would that be considered license agreement or --

Yes, those are the dealer auction that we're licensing VB2 to, and that's 44 auctions.

44. So, that's -- is that increased or is that about level?

It's about level, I think. I don't know that it's increased since last quarter. We may have added a couple.

And any -- can you give us any sense on what you think over the next year for that -- what that number will move?

No, not at this time. I think the product's too new to -- to really get too focused in on. And at this point, I want to just try and work that product and see -- just see where we end up, and as we grow the product, we'll report it.

Okay. And then finally, expensing of options, what should we anticipate that to cost next year?

Well, it'll be about -- with the options that were granted this quarter, we are expect about a $0.03 impact on an annual basis. For the quarter they were about $0.75 million.

$0.75 million?

Of extra expense.

And any -- any comment on the long-term trend on that?

Not really.

Alright, thank you very much.

Okay. Thanks, Chris.

We will take our next question from [Gil Alexandrie] with [Darfield] Associates.

Good morning. As you look at your business --

Morning.

-- two, three years -- two, three years ago and now, could you share with us how much market share you may have picked up?

No. I've reported in the past that we believe we've got. give or take, a third of the market in market share today but -- and that we've grown market share. We've grown market share year-over-year consistently, so that's -- that's good news and that's where we're at, but we don't actually disclose what percent market we've taken.

Could you give us more color on the acquisition you made in Pennsylvania that you said you liked?

Well, I can tell you there were -- like I said, the fellow that owned the business had been in the business a long time, well respected in the industry. We have our four facilities in Pennsylvania. We had three facilities already in Pennsylvania, so it gives us seven locations total. It just allows to us further our network, it allows to us pick vehicles up closer to the location, which reduces together costs for both us and for the sellers. So it -- at the end of the day, it was -- it was key to our growth strategy, and we think it made a lot of sense to get the deal done.

And as you pick up more yards, is there a tendency for your yard -- your yard and fleet cost to continue coming down?

So what you're trying to ascertain is if we add more locations, if we'll be able to get economies of scale?

Yes, sir.

Yes, it depends, simply because when you make acquisitions, it tends to lower the cost on a per-unit basis -- we're not cost, but it tends to improve the margins, and then, as you open up -- I'll give you an extreme, because I think it helps illustrate the point. If we opened up 20 new locations next month, you're going to have all the costs associated with handling, with managing those 20 locations, yet you won't be pumping any new vehicles, through because they're start-up locations until you gain business and that obviously lowers margin. So it really is a mix of whether or not we make acquisition, or whether or not we make start up. And we don't look at making those decisions based on margin. We look at making those decisions based on opportunity. Is there an opportunity to acquire someone and is there an opportunity to gain business and open up the location without acquiring? Those are kind of the decisions we make.

And on your tax rate for the year, should we be using 38%?

It'll be slightly more than 38%.

Thank you very much.

Okay. Thank you.

We'll take a follow-up question from Bob Labick with CJS Securities.

Well, Bob, you were our first question, you may be the last, who knows? [LAUGHTER]

Okay, great. I was hoping if you could give us an update on a couple of the other products, including the [VICS] product and then your off-site sales for VB2?

Yes, sure, I'll start with VICS. VICS is -- VICS is at nice growth. Again, a small product, but very nice growth in the quarter. I think there's a number of sellers that are recognizing benefits associated with VICS. I mean, it allows buyers to get a real-time -- I shouldn't say a real time, but a real bona fide bid from a buyer versus an estimate or an average, which is pretty typical. So, I thi -- I anticipate VICS will improve quarter-to-quarter. I mean, I think that's a product that will continue to improve. And what I would like to see within VICS is the penetration of actual sold units go up.

Right now that number is low; i.e., we run vehicles, the amount that we actually are -- the amount that the insurance industry's actually approving right now for our buyers is relatively low. They're approving most of the vehicles to go to the insured. So I'd like to see the buyers which are -- they're doing a great job, they're bidding aggressively. But I think, as they bid even more aggressively and get comfortable with the cars that they're getting, we'll see those percentage penetration numbers move up. What was your other question?

Off site sales.

With respect to off-site, it's been out a number of years now. It's a relatively small product. I think it's a great enhancement product to Copart. What I typically see happen with off-site on the salvage side is that the customers will try that product, utilize it for selling vehicles, get a taste of what it's like to do business with Copart, and then, in many cases, they decide to start moving the vehicles into locations. So off-site, interestingly enough, has ups-and-downs kind of in its -- by virtue of the way the product works, you'll sea periods of time where it starts to increase the number of units that we are listing, and then you'll see, as those vehicles come into -- into the supply chain come into the facilities as the numbers can come down. And then, as the new customers come along, it'll come up again. But, off-site's doing a good job, we're happy with it, and it's good, too.

Well, great. Thank you very much. Look forward to seeing you at our conference in January.

Okay. Thanks, Bob.

We'll take our next question from Gary Prestopino with Barrington Research.

Hi, Gary.

Hi, Jay. Just a quick question --

We're almost going in the same order as when we started the call, Gary.

Looks like your yard and fleet was running at about 60% of sales this quarter. Given what you're doing down on the Gulf Coast, would you expect that to remain at that 60% level going forward, or was there a lot of one-time expenses for things like facilities, generators, et cetera, that will not be repeated?

My guess is we're going to have a lot of repeated expense in the quarter, but my guess is there were definitely costs that we incurred in Q1 that, for the most part, won't be incurred in Q2. But I think those might be very marginal costs. I don't know that they're going to be a big significant number. As Will stated, the biggest cost we've got is the towing. The second biggest cost we've got is the human side, that human resource that's down there processing and handling all the vehicles. That's the same, that's not going to change.

Were there any major independents in the Gulf Coast area that have been basically put out of business because of this -- the weather, the hurricanes?

I'm not aware of any.

Okay. Thanks.

Okay.

Your next to Michael Friedman with Sawgrass Capital.

Almost kept the order going.

Almost. You were second, now you're third.

Just on other -- on the big piece of the business, ex-hurricanes. I guess the theory went that high gas prices caused Americans to drive less and have fewer crashes and demand for parts might go down. It sounds like, based on you hitting all time gross proceeds per vehicle that you're not seeing any decrease in demand during the period of high gas prices.

I'll tell you the same thing I've said for the last, I don't know how many years, since the question has come out about how does -- how does the price of fuel affect salvage vehicles. In my gut, it makes sense to me that if fuel were to go from 250 a gallon to 350 a gallon the people would drive less. I've yet to see that it makes an enormous impact in our business. It makes sense to me that people would think that. It makes sense to me that if it would take place, but we've yet to see where fuel prices go straight up and that the cost -- the average cost per vehicle goes straight down, or the average number of vehicles -- it's not something that -- it may be happening, but I think it's such an insignificant amount at times that it can -- it's difficult to measure. And it may not happen long enough that it makes a difference. Maybe it's got to be in place a few years before it has an impact.

Okay. Okay, thanks. And just one other thing. Are you guys going to break out this FAS 151 expense in the Q?

No. No, we won't.

Okay. In that case could I just ask you. I mean, obviously, you had -- you had this abnormal expense of x-amount. And then, as Jay said, the thousands of extra vehicles, I guess the normal expenses associated with them still get capitalized and are not on the -- on the income statement for the quarter. So there was like, I guess, kind of a salutary affect from that. Could you just assure me that the FAS 151 costs are significantly higher than the, I guess, costs that got capitalized?

Sure. Basically, we capitalize the cost based on the cost that we incurred in Q4 of last year. So what rolled up in inventory was -- was based on prior quarters history. The costs that got flushed were significantly higher than what was capitalized.

Okay, okay. Thanks.

You're welcome. We take a follow-up question from Gil Alexandrie with Darfield Associates.

Could you just outline what the VIC product is, exactly?

I'll be quick on it, just because we've talked about it before. But I'll give you a quick version of it. It's a virtual auction that allows sellers to list owner-retained vehicles. These are vehicles that the insured has been informed that the vehicle's a total loss, and yet the insured has come back and said, well, I'd like to retain the vehicle, I'd like to keep the vehicle, and so I'd like you to pay me out my ACD minus the value of the car. And the difficulty in the past has been determining the value of the vehicle now that it is damaged. We all know what the value of it was prior to the loss. What is the value of the vehicle after the loss. And typically, what we've done is given historical sales numbers, guaranteed bids, things of that nature.

And so what we're doing in this environment with VICS is allowing the seller to take pictures of the vehicle and place it up on a virtual auction, where buyers can now see the car and can view the damage and the mileage and the year, make, model information, and then submit bids. And if they end up in the high-bid position on that vehicle, then the insurance company offers the vehicle to the insured at that rate.

So, if they end up bidding a car to say, $1,000, then the insurance company would say to the insured, you can retain the vehicle at $1,000. If the insured says, well, where did that number come from, they can say we have a bid from a bona fide bid from the buyer that has seen the vehicle and would like to purchase it for that amount. And if they said wa -- if they say, that's too high, I don't want it, then they would approve the bid to the buyer and the buyer would ends up receiving the vehicle. Copart would pick the vehicle up, store it and allow the buyer to pick it up. If they say, I will purchase it for that amount, then that becomes the amount they pay for the vehicle.

The goal is really two-fold. It's to allow the sellers to generate higher numbers on their owner-retained pieces, because we believe that there are many cases where they have allowed the insured to retain the vehicle below the value what if the vehicle's worth. And it's very important that the insured, if they're going to retain the vehicle, retain it at fair market. It's right for the insured, it's right for the insurance company. And then the other thing is to introduce our buyers to vehicles that are -- they're currently not getting access to. So it allows them to bid on vehicles that they're not seeing and potentially allow them to buy more vehicles -- more damaged vehicles out of the market.

Thank you very much.

You're welcome.

And there are no further questions at this time. Mr. Adair, I will turn the conference back over to you for any additional or closing remarks.

Okay. Thank you, Tamika. Again, thanks to everyone for attending the conference call for Q1, and we will report Q2 in the next year. So with that, I'll say thank you very much and we will see you next year. Bye bye.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.