Copart Inc (CPRT) 2006 Q2 法說會逐字稿

Good day, everyone, welcome to the Copart Incorporated second quarter fiscal 2006 earnings call. [OPERATOR INSTRUCTIONS] 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. Good morning everyone, welcome to the Q2 conference call and earnings release for Copart. We've got a number of things to talk about. Before we go into that, I'll turn it over to Will Franklin and he'll give you a brief introduction.

Thank you, Jay. During this conference call we will be making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities 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 suppliers of salvage vehicles. In addition, we face risk arising from our increased dependence on proprietary technologies to conduct our auctions. Including risks arising from intellectual property litigation.

Our VB2 Internet sales model may not continue to have a 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 could continue to be adversely affected, as described in our press release. For more discussion of these and other risks that could affect our business, I would direct you to review the management's discussion and analysis and the factors affecting future results contained in the Company's 10-K and other SEC filings. Jay, I'll turn the call back over to you.

Thank you, Will. Again, good morning, everyone. I'll first report on some of the earnings for the quarter. The Company had revenues of 125 million, of which 26.1 million was net income. Going into the quarter, we had revenue growth of 17.4 million, or 16% and net income growth of 11%. This difference between revenue growth and net income is associated with further investment in G&A and costs associated with the hurricanes.

Same store sales for the quarter were up 9%. This is primarily due to an increase in market share and record average selling prices for the Company. Again, record for the year and for the history of the Company. Looking at Katrina, last quarter, we first reported on some of the impacts of Katrina. We have quantified that for the quarter and for the six months. We believe the abnormal expenses, expenses that we're not capitalizing in deferred costs for the quarter, to be approximately 4.9 million and 9.5 million for the six month period.

As I've said in the past, the Company anticipates selling these vehicles and not generating a profit but not incurring a loss as well. So at this time, we've only sold about 10% of the product. We've got 90% sitting in inventory. And so we really have no gauge on knowing how the vehicles -- what the average selling price will be. And as those vehicles sit longer we anticipate that the average selling price, obviously, would go down as those vehicles continue to age and get older. Vehicles obviously depreciate at a pretty quick rate. So, there's not a lot I can comment on that.

And I'm saying that up front just to kind of head off any questions that are going to be related to average selling price on Katrina vehicles. Again, our position on the Katrina vehicles is that we anticipate selling those vehicles over the next three quarters, the majority of them. And so we've incurred costs in Q1 and Q2. I would expect that we'll then get that revenue back, that expense will come back through the form of revenue in Q's 3, 4 and the first quarter of '07.

Looking at acquired and open stores, we acquired four new locations in the quarter and opened one new greenfield. The four new locations acquired were in Pennsylvania and Maryland. York Haven, Chambersburg, Altoona and Salisbury, Maryland. The new opening was in Lansing, Michigan. There is some tax effect for the quarter, I'll let Will comment on that.

And I'm jump straight into the MAG business that we have currently. We got into that business in 1998 through the acquisition of our Detroit facility, yard 61. In acquiring the first public auction, we built systems around that, started to analyze that business, and felt it was a business that we could grow. We then expanded that business over the next four years to six locations, looking at trying to build the ultimate model in the public auction arena to generate the return that we wanted and to be able to grow that business nationally, with a national footprint.

With everything we're doing today, the way that the business has changed, with VB2 and some of the opportunities that we have in our own Company we feel that the best use of our resources today are focused on Copart and other initiatives. Rather than trying to grow a business that, up front, we have not received the type of return on investment that we thought we originally would. And there's some other factors that have changed in the marketplace, the reselling of used cars, et cetera. But at the end of the day, the point is that we are discontinuing the operations of that business.

We'll be selling off two more locations. We've already sold one location. And we'll be converting the other three locations to salvage operations as they do have use permits for our business. And we are continuing to meet capacity in the growth of the salvage operation.

Lastly, I wanted to talk about the repurchase of shares made in the quarter. I'm often asked what we're going to do with our cash and our investment. We felt that it was the right time to start buying some stock back. The Company acquired 366,000 shares in the quarter at an average price of $24.24. And then finally, I'll just end with that, we have finished the quarter with 202 million in cash. And we do have record inventories for the Company.

So going forward, we're anticipating selling off a significant number of vehicles. Both associated with the hurricane and not associated with the hurricane as the core business is up record as well. So with that, I'd like to turn it over to Will Franklin, our CFO, for an update and then we'll open it up to questions.

Thank you, Jay. During the quarter the Company adopted a formal plan to discontinue the operations and dispose of or convert its MAG assets. Also during the quarter, we concluded that the carrying value of the MAG assets had been permanently impaired. Accordingly, the operational results for the MAG yards held for sale, along with an impairment of approximately $22.3 million, are shown net of tax as discontinued operations in the income statement.

The MAG yards to be converted into salvage facilities will remain in the results of continuing operations. We are pleased with the results for the quarter, as we continued to grow -- have solid growth in revenue. For the quarter, revenue was $125.1 million, an increase of $17.4 million or more than 16% higher than Q2 of last year. The majority of the revenue growth came from increased volume. However, we also saw a nice uplift in revenue per car, driven by growth in gross proceeds per car and return percentages.

Same store sales, stores opened more than 12 months grew by almost 9% over Q2 last year. However, this measurement is becoming less meaningful as our facilities network becomes more dense and assignments may be redirected from existing yards to new yards to minimize towing cost. Yard expenses were $74.5 million or $14.5 million higher than the same quarter last year. The increase was due primarily to growth in unit volume, a general increase in subhauling cost and the additional cost incurred as a result of the hurricanes. These incremental hurricane costs include additional subhauling, payroll, equipment and facility expenses directly related to the hurricane response and will continue.

These costs do not include the normal expenses associated with the increased inventory, which are deferred until the sale of the vehicle and reflected in vehicle pulling costs. Yard margin was 40.4% or 390 basis points lower than Q2 last year. Excluding the abnormal cost associated with the hurricanes, yard margin would have been approximately the same as Q2 of last year. The 16 yards added in the last 12 months, contributed $8.6 million in revenue during the quarter and were profitable.

General and administrative costs for the quarter were $13.6 million or $2.4 million higher than the same quarter last year. The increase was due primarily to increased payroll costs as IT development and finance head count grew, recognition of expense associated with equity compensation under FAS 123R and increased audit, legal and consulting expense. Operating income was $37 million and operating margin was 29.6%. Excluding the cost of the hurricane, the operating income would have been $41.9, 14.8% higher than Q2 last year in operating margin would have been 33.5%.

We recorded equity loss -- equity and losses of investments of $849,000, reflecting our portion of start-up cost of lanelogic. Income tax expense for the period was $12.6 million and includes a $1.8 million downward adjustment relating to an immaterial correction originating in a prior period. It also includes other beneficial settlements of certain tax disputes. Excluding these adjustments, our effective tax rate would have been approximately 38.3%.

Net income was $26.1 million and net income percentage was 20.9%. Utilizing a normal tax rate and excluding the hurricane costs, our net income from continuing operations would have been approximately $26.9 million and our diluted EPS would have been $0.29. Copart ended the quarter with $202 million in cash and short term investments. During the quarter, accounts receivable, vehicle pulling costs and deferred revenue grew as inventory, due to the hurricanes, as well as normal seasonal growth, increased significantly. We estimate that approximately 90% of the incremental salvage vehicles generated by the hurricanes remained in the inventory.

Looking at cash flows, in approximate and general terms. During the quarter our primary sources and uses of cash were as follows; Cash generated from all operations, including depreciation and amortization, was $34.2 million. And $2.2 million was generated from the proceeds from the exercise of stock options and the issuance of stock through the ESBP. The primary uses of cash were; $26.5 million for the payment of income taxes. $8.9 million for the repurchase of stock. $6 million for the completion of our funding commitment for lanelogic. $11.2 million for the buyout of certain leases. $19.2 million for acquisitions. $8.6 million on other CapEx. And finally, we consumed $9.3 million in working capital, primarily to fund growth in inventory.

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

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

Good morning. Congratulations on another strong quarter.

Hi, Bob.

First question I wanted to ask, I can't know I can't ask for that average pricing on Katrina cars, could you give us a sense though of the percent that Katrina cars sold out of the country? And is there any way that you can influence this, which may benefit sales?

I don't have those numbers in front of me. I would anticipate that that percentage is high, just from looking at individual sales. There's about 6 or 7 yards that are impacted by this. So, I know from looking at individual stores, one here, one there, it is a high number. So, I'll leave you with that. It is a good percentage of vehicles that are going out of country.

Yes. Let me add this, Bob. We did have a record percentage of cars being sold out of country this quarter. It was well over 23%.

For the Company?

For the Company.

Yes, for the whole Company.

Okay. Great. And then just staying with the Katrina cars, could you walk us through what you think the overall industry impact will be of this -- volume of these cars hitting the market over the next two to three quarters, as you've outlined in terms of sales volume, pricing and what you see -- how you see this impacting this industry?

Well, it's a small amount of units in the overall marketplace. Even if it were just the U.S. marketplace, it would be small. But it is truly a global marketplace and we're selling to over 55 other countries and the U.S. And so at the end of the day, putting in -- it's less than 100,000 units. So putting in less than 100,000 units in the market that's as large as it is, it's not going to flood the market in the sense of there being not enough buyers for the product. I think the issue about getting the right return will be the quality of the product.

So, obviously the sooner we sell vehicles the better off we're going to be from a couple of factors. One, from just the depreciation standpoint on vehicles. And the second one is that usable parts when you think about recycling these vehicles and selling off the usable parts on those cars, the running gear, y motor, transmission, et cetera. The sooner we sell that product the better off we're going to be. We don't want to sell product six, nine, 12 months afterwards, it's just going to end up being scrapped is my concern.

Great. Thank you for that explanation. Just shifting gears here, you mentioned -- you are exiting the MAG yards and -- because you have better opportunities to focus on internally. I was hoping that you just could elaborate on those including; obviously, VB2 into the whole sales. Can you get us up-to-date on what changes you've made since the initial roll-out and inception and how that's going? And then also on international possibilities and off-site sales, if you could just update us on those opportunities?

Sure. Those are a number of things. If you look at the business, we really kind of break out the business as a core and none core items that we're working on. So, the core function of the business, meaning the salvage auctions for the Company. Core R&D or core developed products within our business development would be VIX, is an example of our off-site sales that we're looking at making some modifications to for the core. The non-core items that we're investing in and looking and working with our VB2 for dealer auctions; the VB2 for the marketplace and doing sale of vehicles, the investment that we've made in lanelogic.

And what we believe is that the non -- I would say the core items that we've got -- I don't think any of the core items we've got are something that's going to be bigger than Copart, so to speak. But they're all items that enhance the product that we've got today within the insurance industry. So it allows us to offer another service literally to all the different products that we offer today. When you think about non-core items, those investments that we're making in the non-core, really are looking at -- we're looking at those investments as potential big growth avenues for the Company. Now obviously, much riskier investments because they tend to be new avenues, new inventions, so to speak. So, they may or may not make it. But if they do make it the return we anticipate will be significantly higher.

Great. Then just a little more maybe on the -- obviously non-core, VB2, to the dealer auctions. Any -- I know you've made modifications along the way, any new progress you can give us on that?

There's not a lot to report on. If -- obviously if the revenues and the earnings from that business became material, I'd have to break it out and I'd talk about it. As long as it doesn't become a material impact to net income on the Company, it's very -- it's tough to break things out. It's a product that is selling cars every day, it is a product that is generating revenue. And the next step really is to get that product to grow.

Now, with the investment in lanelogic, that's going to provide investment vehicles that could potentially be sold through VB2. So, we're doing a number of things, Bob, that are -- they're really not cannibalizing each other, they're doing the opposite. They're really cross-pollinating the different marketplaces. So, it allows us to -- we've got a VB2 auction over here. If we end up being successful in our investment in our investment lanelogic, that's a great move. But incidentally it will produce cars that could be sold through VB2 and that assists that product as well.

So, there's not a lot to report on a breakout per se. There's just, at the end of the day we've got a lot of things going on there. We're excited about it. It is great. And if we hit a home run, we'll definitely be reporting it.

Terrific. Thanks very much. I'll get back in queue.

We'll take our next question from Scott Stember from Sidoti & Company.

Good morning, guys. Could you maybe touch on the legislation that was passed in New Orleans and basically the cars that had to be crushed because of water damage? Could you comment on the status of that and how that might impact you guys, whether you've seen a lot of those coming through your yard?

Sure. I commented on this last quarter and not a whole lot has changed, HB11 requires that vehicles after a certain date have to be marked as non-repairable vehicles and so those vehicles that fall within that, we will be marking as non-repairable HB11 vehicles. All the other vehicles will be processed under either Florida or Louisiana or Alabama, it just depends on what hurricane we're talking about, and where the damage took place. Under those salvage States' laws and being marked as flood or Katrina vehicles. So, it's not uncommon for a lot of states to have non-repairable, Florida has one as an example, non-repairable status for title. And all they've done is said that if there's a major catastrophe event like this that they need to be marked as non-repairable.

Okay. And can maybe comment on -- we've had some mild weather early part of this -- or late part of this winter, heading into the early part of this year. And maybe just comment on traffic that you guys are seeing at the auctions?

I guess it depends where you live, I was just telling Will when is it going to stop raining in California. I can't tell you how the weather is affecting every state and how it is affecting traffic. I can tell you that we've got report inventories right now, we've had record sales and so things look good.

Okay. And then lastly, Will, can you break out the depreciation number, the amount that comes out of yard and the amount that comes out of G&A?

Sure. The -- for the six month period it would be $6.5 million in yard and $1.2 million in G&A.

Okay. That's all I got. Thanks.

Okay. Thank, Scott.

Thank you. And next we'll hear from Matthew Nemer from Thomas Weisel Partners.

Good morning, everyone.

Good morning, Matt.

Just a couple of questions, first on the hurricane vehicles, does that -- do the 10% of vehicles that you've sold, does that flow into your comp sales number or how do you treat that?

It does.

It does, okay?

So excluding those, it would be something less than that obviously.

And then -- and I think Jay mentioned the number 100,000 units -- or less than 100,000 units, is that for the total market? Or is that --?

No, I was just talking about Copart.

Just Copart? Okay. And then just to drill down on the expenses for the hurricane, of the 4.9 million, how much of that sort of continues for the next three quarters as you start to sell through that volume? Or does it all go away? Can you give us a little more color on that?

You want to talk about it or --?

Sure. The majority of that number that we threw out there was additional costs to haul the cars in. We had to bring in subhaulers from all over that region to handle the volume. And that's coming down significantly. The types of costs that we will have continuing are the extra costs associated with maintaining the two temporary yards. And that will continue for probably two, three, four more quarters.

Right.

So, the costs will come down significantly. The vast majority of costs was towing and then employees associated with putting cars away, marking cars, none of that is being done anymore.

Okay. But then there's also a deferred piece that will flow from the balance sheet back into the income statement?

That's correct. And that's the normal cost. And that's based on pre-hurricane numbers.

Okay.

For those yards.

Got it. That makes sense. And then on MAG, if I'm doing my math right, it seems like the facilities that you have up for sale, or have already sold, were profitable in pulling those out, has sort of a minor negative number on the P&L. Is that true or am I just looking at this the wrong way?

No, you're right. But the profit is very, very small.

Okay. Is it -- can you help me understand --?

And that -- and you're looking at it historical.

Okay.

The trend has been down.

Okay. Got it. That's helpful. And what's -- is there something going on there in that market that just makes it less viable going forward?

It's a number of things. One, it's -- we try to focus our resources. As I've commented in other calls before, the most valuable resource we have in the Company is our human resource. And so we try to focus those talents where we think we can get the biggest bang, so to speak. And we did that in the late '90s and 2001, 2002 period with MAG, thinking that that could be a business we could really develop and grow. And There's been hurdles involved in -- there's been some difficulties involved in trying to grow that business.

So today, we -- a couple of things happened. One, we don't think the ability for us to go out and grow it through a national footprint is there, A. B) The need for used for used vehicles is enormously strong today. The dealers are out there really fighting to be able to buy fresh trades and vehicles that they can run through their auctions -- through their dealerships. And when we got into MAG, it was kind of a reverse trend where there was a lot more product sold at auctions, trade-ins were brought in. That is where MAG gets a lot of its product, is the actual trade-ins brought in from dealers. And so things have changed but at the end of the day the biggest factor was, it is a small piece of our business and if we don't believe we can grow it and give it a national footprint, there is no sense being in it. We need to focus on where we can get the biggest bang for our buck.

Okay. And then lastly I was just hope that we could get an update on lanelogic. One technical question, is there G&A expense related to lanelogic in this -- in the quarter?

No. You see -- they're not consolidated.

Okay, okay. That's what I thought. Okay.

There's one line below operating income.

Okay. And then on -- and then just to follow up on that, could you give us an update on your progress there? And when -- it sounds like you've signed up a lot of dealers. When do you think the product will launch in Texas?

Well, we're very excited about what they are doing there. But I've got to start by saying that we haven't really done a lot there. But lanelogic has done a lot there. They are a company that we've invested in. It is a separate company, run by a separate CEO and we're excited about the things that are happening there. We're one of seven different folks that will be involved in that process. There will be a need to sell cars. There will be a need to collect data. There will be a need to fund purchases and sales. And so there's a number of folks that will be involved in that -- at the end of the day, we think it's a more efficient marketplace.

Our CEO, Willis Johnson, when he was on the road working with VB2, because he really focuses on the R&D side of the business -- I mean the non-core R&D. And when he was out on the road he ran into Bruce Thompson who was a founder of AAX, which has recently been purchased by JM Family. So, he got out of that business. And talked to Willis about this concept of lanelogic and Willis loved it and said; "let me look at it". And so we brought it to the Board and made the decision to invest in that company. So, it's looking really good. We're excited about it. But, again, it's a separate business.

Got it. Okay. That's all I have. Thank you.

Okay. Thanks, Matt.

Thank you. We'll now move on to Craig Kennison of Robert W Baird.

Hi, guys it's actually Ryan for Craig. Just a couple of questions. You mentioned having processed10% of your inventory as hurricane related vehicles, with the remaining 90% to go. Does that imply that you aren't getting any additional hurricane vehicles at this point? You just have to process your existing inventory?

Yes. The volume coming in is very, very light. There's not a lot of cars coming in.

Yes, Ryan, those figures I gave you are relative to the numbers at the end of the quarter.

Okay.

And so we've -- looking at inventories based on what came in at the end of the quarter is the 10%. But the volume coming in, going forward, we are picking up hurricane vehicles still because there's vehicles being recovered now and found. But just so you understand it's a very small amount. It wouldn't be something -- if we didn't have those vehicles in inventory, we wouldn't even be talking about it right now, it's a very immaterial amount.

Okay. And then can you talk about what's driving the further investment in the G&A line?

Sure. Again as a Company we've taken approach over the last couple, three years to look at opportunities for VB2, to look at opportunities in other non-core segments. So we have been hiring employees to could everything from managing that growth on the operations to building systems on the IT side. So, there's been a significant investment in trying to get the right talent on board to be able to expand into some of those other marketplaces.

Yes, Ryan. But let me point out one thing, if you look at the last three quarters you have not seen the continued -- the growth rates come down tremendously. We had a huge bump up in Q4 of last year but we've been fairly flat since then.

Okay. And then final question today, when you say that revenue is not material yet with the VB2 partnering, with the 40 facilities; can you just give us qualitatively how that is going? Is it -- the progress there, is it more so since you have to sign up more dealers or is it -- do you have to kind of person that's a VB2 product more? So, that market -- if you could maybe talk a little bit more about that?

Yes. I think it's -- for right now that what we've done is kind of leveled out and we haven't seen enormous double digit growth quarter-to-quarter to quarter, so to speak, in expanding that business. But again, it's new territory. It's something that we're doing that that's very different in the existing marketplace. And it is very complimentary because now we've built this enormous buyer base and we've got the buyers out there as we go into other marketplaces where we sell vehicles directly maybe at dealerships rather than bringing them into a auction or as we go into the idea of having a fresh trade sale like with lanelogic.

Okay. Great, thank you.

Okay, thanks.

Thank you. Next we'll hear from Terry O'Connor of Cedar Creek.

Hi, guys, a couple questions. Will you made the comment that same store sales becoming less important or valuable number because of reassignments. Can you give us any idea of you know what the impact of that has been? You opened 16 yards year-over-year, that's a pretty big increase. How many of those affected same store sales in a meaningful way?

Yes it's hard to quantify. But in general terms, like I said, as our network becomes more dense, obviously we're looking to reduce our towing costs. So, we'll start cannibalizing assignments that would have gone to existing yards as we open these new yards.

Like Lansing.

Like Lansing.

Lansing will directly affect Detroit.

Got it, okay. All right, Jay maybe you can comment on the VIX product and if you've got an improvement in sell-through rates there? How's that going?

Yes, VIX has gone really well. I definitely expect that product to grow, Terry. We will be making some modifications and changes to it in this month, actually, that I think will improve the product. It's a great concept. We're running on average probably about 50 cars a day through the product. And what does that translate to? I don't know. About -- maybe about 12,000 cars a year that are going through VIX now. So, it's only been out less than a year and it's a process of getting more and more of our clients to see that they've got an alternative.

I think one of the improvements that we could make to VIX would be to automate some of the assignment process. So today, a claims rep would have to take pictures of the vehicle and assign that vehicle. We'd like them to be able to push a button and that data just gets transferred. Instead of having to attach the images and input the data. I think as we build some of those interfaces and improvements, you'll see even more clients using it.

But at the end of the day, it is the best way out there to get a real amount on a owner retention, it's not an average, it's not a historical number. It's a real bid from a buyer. And I can't think of a better product to use from a fair claims practice.

Can you generalize about whether the bids you're getting are higher than the average payment amounts that the insurers would have made? In other words, there must be a benefit to them in doing this.

Yes. When I originally built the product, or when Copart originally put the product out there and built it and got it done; I think the thinking on our part was that we were building a product that would allow buyers to see the vehicles. And if they could see them they would submit strong bids and they'd get better bids than they're currently getting, which is the case. But as I go, we are seeing a higher return on vehicles. And so, I think that's great.

But as we go out across the country and talk to our clients about it, I think the biggest concern that I've heard is, more so than the return, because they're willing to try it. It is, like; "look we'll try it and see if we can get a better return and if we don't we won't use it." And it has had continuous growth month after month as we've rolled it out. But I think the big benefit, Terry, is the ability to know that it is a real number and that they can hang their hat on that. That there is a real buyer behind every bid. It isn't some historical average or some 20% of ACV kind of number.

Got it, okay. Could you -- I don't know if you've ever publicly described what it is that lanelogic does. Maybe take two seconds to review that?

Yes. lanelogic is, in a nutshell, a more efficient marketplace. So, it takes data from car dealers, their existing sales inventory and looks at what they have sold used vehicles for. And it sources those vehicles. So, it takes all of that data, puts it together. And when a buyer comes in to buy a new vehicle, that buyer would go to the dealer. The dealer would take images of their vehicle, put it into -- put that information into lanelogic and lanelogic would serve up an amount that that vehicle is worth from a trade-in perspective. And so there -- and it's a real number. lanelogic stands behind that trade-in amount saying, "this is what we think that vehicle is worth. This is what you should off for a trade-in."

And not only do they stand behind the amount but they will then if that dealer ends up taking that -- serving that number up and the buyer buys the new vehicle and trades in their vehicle; lanelogic will then pick that vehicle up and source it to the dealer that has that historical type of average selling price. So, it's really about a more efficient marketplace and sourcing vehicles. It allows dealers who are out there every day looking for new product and trying to buy more used vehicles, when you take the CarMax's of the world or you take AutoNation, these dealerships are out there everyday trying to acquire and trying to get more used vehicles, the idea behind lanelogic is to start placing vehicles in their inventory for them.

And then if they do not sell the vehicle within a set number of days, lanelogic will actually move the vehicle out and place it with another dealer or move the vehicle out and place it at auction and sell it.

Interesting. So you're moving vehicles from places where they might not sell as well to places where they can sell better, so the guy can offer a better price on trade.

Well, say you drive a Cadillac in to buy yourself a new Mercedes, the Mercedes dealer might not want that Cadillac but the Cadillac dealer down the road would love that used Cadillac to sell. So, it is about placing the vehicle in the dealer that's going to get the highest return, which today the typical produce would be; they'd pull out the NADA guide, book the car and say I'm going to give you this low-book number. And a lot of times deals are not done at a new car store simply because the person trading in the vehicle feels they are not getting the fair amount for their vehicle.

And this is a way of getting the right amount for the vehicle and not putting that dealer, that Mercedes dealer in our example, wouldn't be on the hook, it would be the Cadillac dealer on the hook for that car. Mercedes gets their new car sale made, the Cadillac dealer gets a potential vehicle to sell through their used car program.

One final question, if you look at the number of yards that you have, your density here in the United States, what do you think is left in terms of runways, is there room for 30, 40 more yards?

I think we could do do that, yes.

Okay. Thank you.

You bet.

And moving on to Dan [Rudder] of WHB Investment Council.

Yes, good morning.

Good morning, Dan.

Hi. Could you talk about the other CapEx and if that was kind of extraordinary in nature? And also what your expectations are for the upcoming year on CapEx total?

Sure. Our other CapEx is generally built out of new yards and existing yards. And it's not extraordinary. And we gave guidance for CapEx this year of between 90 and 115 million and it looks like that's a good number.

Okay. Great. Quick follow-up. Can you talk a little bit about your expectations for what normalized long term same store sales growth will be for the core?

No. We've been fairly consistent, that last probably four quarters have been between 9% and 10%. We don't give guidance, we don't give projections, I can't -- I can point you to that. I can also point you to the comments I made earlier, about the way we measure same store sales is going to be diluted going forward as new stores have cannibalized existing stores' assignments and that's all I can give you on that issue.

Okay, thank you much.

Okay, thanks, Dan.

Thank you. We'll now move on to Bob [Latel] of MD Sass Investor Services.

Yes, thank you. In the past you've given us -- in additional to the number that you gave us for out of country sales, you'd give us a percent for of out of state. Do you have that for the quarter?

Sure. One sec.

Sure.

Out of state was a 24.5%.

Okay.

Out of country was 23.4%. And in-state was 52%.

Great. And little bit more on lanelogic. Did I understand you to say that there was a $6 million investment in lanelogic during the quarter?

There was. The total investment was 9 million. We had made3 the prior quarter.

Okay. So the total was nine. And that's it, you've made your $15 million investment. That's it?

Not 15.

No. 9 million.

9 including.

We made 3 the prior quarter and 6 this quarter.

Okay. And is that your obligation?

Yes.

Okay. Now, looking at your quarterly income statement it looks like $849,000 was the equity loss in the quarter. Where would that be going?

General start-up costs for lanelogic.

No, no, no. Will that be a recurring 850,000 per quarter for the next couple of quarters, larger, smaller?

Well, we don't give guidance. But obviously, it will be some time before they generate revenue. So, yes, we would expect continued losses.

Continued, okay. Can you give us a rough idea as to what you think the potential for this business is? What the contribution will be? Will it always be teeny, tiny or are you going into this thinking; "no, it could represent 5% of revenues or 10% of revenues down the road"?

I think the best way to respond to that, Bob, is just to have you call lanelogic directly. You can check them out at lanelogic.com and get --

See what their plan are.

Yes. And you can get a hold of Bruce Thompson directly. It's an investment for us, so I don't really want to give guidance on something that we're not operating.

Sure. Okay. Fine, that's all I have.

Okay, thanks.

[OPERATOR INSTRUCTIONS] We'll now move to Edward Hemmelgarn of Shaker Investments.

Yes. Just had one question. Is the delay in really getting the cars from Katrina and Rita available for sale, is it primarily an inability to get title transfers?

That's exactly it. It's an inability to get salvage title back from the states. We've got tens of thousands of titles from our clients, from the insurance industry.

Right.

Now it's a process of getting the states to be able to get those salvage certs. back to us. And as you can imagine, they're not used to processing this kind of volume. And they've got a couple of other issues they are working on, I sure, besides trying to process salvage search. So in the interim, we sell the cars as we get the salvage certs. in.

Have you seen any increase in flow of salvage titles from the states?

There is some increase, yes. I would expect that -- we're in Q3 now, I would expect in Q3 and Q4 we'll start selling off a lot larger number of the vehicles and we'll report that to you as we do that.

Well, what I'm getting at is, is it now at a rate that you think is going to allow you to get rid of these vehicles over the next three quarters?

Well, that's exactly what we said. We think we'll sell the majority of the vehicles over the next three quarters.

Okay. Thanks.

You bet.

Thank you. Moving on to [Dax Glassett] of Dayton Capital Management.

Hi, Dax.

The MAG business, was there was a structural issue? It seems that there was some sort of a structural issue within the market trying to compete with the other companies? Or was it that when you thought about rolling out nationally that you did not think that you could get the footprint that you wanted? Or was it that you could get the footprint but the competition was just going to be too severe to grow that business? I'm trying to understand a little bit.

Sure.

Maybe if you could just give a little bit more details around d the decision making process?

It is a fixed cost business, similar to Copart, in the sense that once you've got a building and you've got land and you've got people in place and you sell one car, you don't make any money. Once you sell so many cars you just cover your costs. And then everything after that is you know bottom line profit basically. It's very incremental going forward. And it's similar to our business, once we cross that limit, we start making money. Before that, you just incur a lot of losses. And in that business you've got to handle enough vehicles to not only cover your costs but then make money.

And one of the difficulties we saw going out, was the companies that were out there to acquire were doing such a small amount of volume that we thought; "if we were to buy this company and we were to integrate this company, there wouldn't be enough profit in this. And then we've got to go out and try to grow that business." And the growth sector for the public auction business is typically the older vehicles that are trade-in vehicles. These are 10-year-old vehicles with 100,000 miles on them.

And what we've seen over the last three years has just been a real competition in the used car marketplace for those kinds of vehicles. And so we've not only seen profits erode in that business over the last few years but we've seen the opportunity to grow the business kind of dry up. And we said; Why do we want to be in a business that is taking time and resource that we can't grow, we can't give?" If we can't do it nationally, if we can't make this a business that can be substantial; then we should exit the business.

Right. And then on - VB2, I think you've talked about other potential uses for it. Can you kind of just list what they are so I can get my arms around exactly what you're talking about for the opportunities for VB2 outside the normal channels?

Yes. Right now we're looking at a couple different marketplaces. One is automotive, selling vehicles that are at dealer auctions. Another one is automotive related, selling vehicles that are at physical locations, ie. dealerships, etcetera but not necessarily at an auction. Another one is non-automotive, looking at selling product that is anything from, you name it, computers or anything else, through the VB2 auction model, rather than maybe the typical method that they're using today. Another one is what we call a 15-minute auction, where we're putting vehicles up and we're selling them very quickly, so that we can get bids back, and that's a complimentary product that we've developed for lanelogic.

So, there's a lot of things we're doing. And there's a lot of time and investment that we're making in it. And it is one of those things where I think if you throw enough stuff at the wall, something sticks. But until we see something that's really material, it's hard for me to report back and give people numbers when there's not a lot of income being generated by it. Right. And most of the initial testing is being done in the automotive, with the dealer auctions, that type of business? Correct.

Okay. And that's still just a -- you said that -- is that what you were referring to when you were talking about the growth kind of stagnating, for lack of a better word?

Yes, I do not know if it is stagnating but it is not growing at some exponential rate. And f it were, then I would be at a point where I've got to start reporting on it. And since it's kind of flat but it is providing a lot of other benefits like the dealer base in that, and it allows us to look at cross pollinating some of borrowers into other marketplaces and doing some other things. We consider it complimentary, it's just that there's not a lot to report on. There's not a lot of revenue generation.

So, that would be business that you would take away from, say like one of the auction type of businesses, because you do it online and it's dealer inventory?

Some of it would be vehicles that we would be selling for auctions. Just offering another method for them to sell vehicles, rather than a live auctioneer. And then some of it would be that you would be going out and selling vehicles through dealers, so they don't have to take them to auction. And that would just be providing a more efficient marketplace. So, they don't have the costs associated with taking it to a dealer auction.

Okay. I understand. Thank you.

You bet.

Thank you. Next we'll hear from Thomas Haynes of Imperical Capital.

Hi, yes. Congratulations. I just had a couple of questions. Could you tell me if you have an idea of of roughly how many cars were totaled due to the hurricane marketwide or industrywide?

Yes. I would say, from an insurance standpoint, when you say "totaled" meaning there was payoffs on them; I'm going to throw out a wild guess here but I would say somewhere around 100,000 units, completely when you look at Katrina on the insurance side. When you look at vehicles that were destroyed, ruined or flooded, there were a lot of vehicles that did not have insurance on them, a lot of liability vehicles or a lot of just completely uninsured vehicles. Those numbers could be -- including those could be 200,000 or more vehicles.

Okay. And then the other quick question I had was roughly could you tell me how many cars -- or how many vehicles you all auctioned in the quarter versus -- and versus last quarter and then what that average or the median revenue per quarter is?

Yes, we don't -- I'll just -- we don't report units.

You don't report units.

No. We don't disclose units.

What about the median or average revenue per vehicle?

We don't report revenue per vehicle because obviously we report revenue and if I gave you revenue per vehicle you'd know units.

Can't blame a guy for trying.

We can both do the math here but -- you bet. Thanks.

Thank you. We'll next here from John [Christensen] of Cane, Anderson, Rudnick Investment Management.

Would you talk about why you've opened and acquired new yards within reach of your existing yards? Is it a market saturation?

Sure. I'll give you a couple of examples. One would be capacity. We may be at capacity. We opened up a facility in Atlanta in last year, simply because the existing Atlanta facility was completely at capacity. And I use Atlanta again, because we put it on the other side of town. And by putting a facility on the east side of town and one on the west side of town, it keeps us from having to tow those vehicles completely across the city. And so it decreases towing costs and it allows for additional capacity.

Is it a reflection of market saturation?

Well, no. It's a reflection of market growth. And as we continue to take business in the market and run out of space, we've got to make additional room. If we hit a point where we're saturated then I think we wouldn't be adding any facilities.

Thank you.

Sure.

Thank you. Next we'll hear from Tom [Lam] of [Waybasatch] Research.

Good morning, gentlemen.

Good morning, Tom.

Just a simple question. I'm confused about selling Katrina or hurricane-damaged vehicles, wasn't the legislation, and you mentioned the word "non-repairable"; are you -- I thought the hurricane-damaged vehicles were supposed to be crushed or dismantled? In other words my impression was not to be sold?

No. They'll be sold, they just won't be put back on the road. So, they'd go to -- they can be sold to dismantlers who then would recycle parts and crush the vehicle.

Okay, fair enough, thanks.

Or international buyers.

Okay. Got it, thank you.

[OPERATOR INSTRUCTIONS] We'll now take a follow-up question from Bob Labick of CJS Securities.

Hi, I just wanted a little more clarity, obviously you bought back some shares during the quarter. Could you maybe give us a little more insight into your intentions into your intentions with the share repurchase? This was a small but meaningful start since you hadn't been doing this in the recent pass. Is there any larger plan you can share with us?

Not really. We have an authorization from the Board to buy back stock. And quarterly, during our window, we look at it on a pretty regular basis. And if we think that the opportunity to buy stock is there and we should do it, then we go into the market and buy back shares. But yes, I can't report out to you that we're going to buy X number or what our range is or anything like that.

Okay. And how big is the authorization?

You know that number?

Yes. Now it's slightly under 5 million remaining.

$5 million or shares?

Shares.

Great, thank you.

You're welcome.

I think it appears we have no further questions at this time. I'd like to turn the call back over to Jay Adair for any additional or closing remarks.

Thanks. Well again, thanks for attending our conference call for the second quarter. And we look forward to having a great Q3 and I'll report back to you in the next quarter. Bye-bye.

This will conclude today's conference call. We'd like to thank you all again for your participation and wish you a great day.