Copart Inc (CPRT) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for your patience in holding, and welcome to the Copart Inc. third-quarter fiscal 2006 earnings call. As a reminder, today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Jay Adair, President of Copart Inc. Please go ahead, sir.

Thank you, April. Good morning, everyone, and welcome to the third-quarter conference call for Copart fiscal 2006. Before I start, I will turn it over to Will Franklin for some brief remarks, and then we will give you an update on the quarter.

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 & 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 risks arising from our increased dependence on proprietary technologies to conduct our auctions, including risks arising from intellectual property litigation. These results of operations for the most recent quarters are 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 discussions on these and other risks that could affect our business, please review the management's discussion and analysis and the factors affecting future results contained in our 10-K and other SEC filings.

Now, Jay, I will turn the call back to you.

Thank you. Good morning, again. For the quarter Copart had revenues of 149 million and about 33 million in net income. Also for the quarter that translated to $0.36 in earnings compared to $0.33 prior.

Looking at the nine months, Copart generated 391 million in revenue and 82 million in net income. Looking at new stores for the year, we have added a total of 13 new stores year-to-date, five greenfield locations and eight acquisitions. In this quarter we only had the opening of one new location that was in Billings, Montana. So that now brings our total up to about 120 locations.

At the same time, we announced in the last quarter that we were exiting the motors auction group business, the public auctions that we have, and we have done that as of today's date. We have converted or sold all six of those locations, so we are completely out of that business and moving forward.

Looking at the hurricane and the effect of the hurricane, you know, I would like to start this by saying that what we have seen down in New Orleans and basically from New Orleans all the way across the Gulf through Alabama and all the way into Florida is unlike anything we have ever seen in the past. And so where in the past we have had hurricaned vehicles from a catastrophe and been able to sell those off in the next quarter or two, we are still in the process of liquidating these vehicles.

I believe the majority of the vehicles should be sold by October of calendar year '06, which would be the end of our first fiscal quarter in fiscal '07. If you sit back and you just analyze what has occurred here, the tens of thousands of vehicles that we have picked up, the investment that we have made in handling those and the commitment that I think we have shown and the people that work for Copart have shown to our external customers, to our sellers, and the sheer response and the way that we have been able to go about this. As you saw in the press release, we broke out some details just showing you the logistics that occurred, and I really don't know if people can appreciate it until you fly into that market and see what occurred, but the (technical difficulty)-- over 400 employees into those markets, and then the constant turning in and out of employees from as far away as Alaska with Copart to refresh the existing folks that are there so they are not there constantly.

As we sit today, we are still occupying over 400 acres of property that we have either acquired or leased and then had to develop to allow us to store the sheer number of vehicles, and then the financial investment that we have made has been substantial. But I think part of what you don't see in the hurricane expenses is some of the brain damage or the intellectual commitment and the work on that front with our folks in the talent from processing work at all the different locations across the country to doing it here at the home office. And if you look in the quarry, you will see G&A had a significant increase, and a lot of that is because of hurricane support. A lot of that is gearing up and being able to staff for the hurricane. But that is not all of the increase in G&A. Some of the increase has been associated with legal. As we have discussed in prior quarters, we are in the middle of a suit that we are defending against Manheim, and we are also in the middle of a suit with Manheim. So we have got some significant legal expenses there that we are incurring, and as well as that, we have got a significant investment in the non-core development of our business. These would be areas focused on lanelogic, a new venture that we have invested in, and as well as that, some of the VB2 auctions that are not for the Copart salvage but for the non-core Auto Auctions and some other potential avenues that we think we can go down in that area as well.

So as a company we are focused on non-core investment, and then we are focused on core investment. We have increased staffing, and we have increased again the number of folks that work at the home office to try to build better systems and better technology that will improve the overall experience when you are bidding online at Copart through that VB2 technology.

So we've got some products -- one I will give you an example on is counterbidding -- that are coming out this quarter that we are in now, and this will allow where in the past the buyer may have bid $4000 and insurance company may have wanted 5000 for that vehicle, and they gave the buyer the option of either paying up what the insurance company wanted or not. This new product will allow the insurer to offer a counter and allow the buyer to offer a counter. So the buyer may say, well, I'm not going to pay 5, but I will go 42. And the seller may say, well, I'm not going to go 42, but I well accept 48. And once that occurs, they can do it again. So the buyer can come back and say, well, I will go 43, and the seller can say I will go 47 and so on and so on. It really ends at the point that one of them decides they don't want to counter again or at the point that they meet in the middle.

So some of those types of technologies that we are investing in I think we will continue to enhance the existing product that we have got and some of the applications that we have developed in there, and we are looking at better ways of reporting and improving the customer experience for both buyers and sellers within the Company.

I will get into more of that. I can talk more about that in the Q&A. We usually get some great questions. So rather than me go on and on and on, I will stick with what is pretty common for us. We are pretty brief in the opening remarks, and then we will get into some pretty long Q&A.

So with that, I will turn it over to Will.

Thank you, Jay. We are pleased with the revenue growth we enjoyed this quarter. The quarter revenue was $149.5 million, an increase of $21.7 million or more than 17% higher in Q3 of last year. The growth was driven primarily by unit volume increases. However, we also saw an uplift in revenue per car driven by growth in gross proceeds per car and also return percentages, both of which were at the highest level ever. Salvage same-store sales, sales from stores owned or opened for more than 12 months increased by 12% over Q3 of last year.

Once again, we caution you that this measurement will continue to be thus meaningful as our facilities network becomes more dense and new yards cannibalize units from existing yards. In fact, of the 13 yards added in the last 12 months, nine yards drew units away from existing facilities, in many situations relieving capacity constraints at those yards. Yard expenses, which includes $7 million of depreciation this quarter, had $7.8 million in Q3 of last year or $80 million or $11.2 million higher than the same quarter last year. This increase was due primarily to the growth in unit volume and the abnormal cost associated with the hurricane of $2.6 million. Abnormal hurricane costs include the additional subhauling payroll equipment facilities expense directly related to hurricane response and will continue. These costs do not include normal expenses associated with increased inventory which are deferred until the sale of the vehicle and are reflected in the vehicle pulling cost.

Excluding the abnormal cost, our cost to process each car were lower each quarter than the same quarter last year. This was accomplished despite an increase in subhauling costs per car and points to the operational leverage of our model. Yard margin was $69.5 million for the quarter. Excluding the abnormal costs associated with hurricane, yard margin would have been $72 million or 22% higher than the same quarter of last year. The 13 yards added in the last 12 months contributed $6.1 million in revenue during the quarter and were profitable. General and administrative costs, which include $1.1 million in depreciation this quarter and $1 million in depreciation same quarter last year, were $16.1 million. Excluding depreciation, this is a $4.5 million increase over Q3 of last year.

During the quarter we made significant additions to our IP and development resources that added $1.5 million to our G&A cost. Further, we incurred an additional $700,000 in FAS 123 costs and an additional $800,000 in legal costs, primarily driven by the increase in recent lawsuits; increases in audit, audit-related and consulting expenses of approximately $800,000 and an additional costs associated with the general expansion in our continued centralization of accounting and administrative function. The Company has made a decision to increase our investment in software and systems development at this time to allow us to introduce new features and products at a faster pace, but more importantly to enhance our ability to partner with our insurance customers through systems integration.

While historically we have defined ourselves as a sales agent, putting sellers of salvage vehicles in front of our over 100,000 registered buyers and a real estate company renting a small piece of land to our insurance customers to store their car for a period of 60 to 75 days, we are increasingly defining ourselves as an application service provider to the insurance industry. We offer, implicit in our seller fees, access to comprehensive salvage management systems. We're developing systems that take us from helping our insurance customers track and report the systems that actually enhance their work flow, including improving the process of clearing cars for pickup, resolving titling issues and managing their direct repair programs. In fact, at a recent conference, we recently sponsored with the insurance industry one executive commented that he observed that at one of his offices 14 of the 16 people that were online were actually on the Copart system.

Getting back to the income statement, operating income was $53.4 million and operating margin was 35.7%. Excluding abnormal cost associated with the hurricanes, operating income would have been $55.9 million or 37.4%. This is almost 18% higher than Q3 of last year. Other income included a loss on the abandonment of a lease of approximately $350,000. The loss is a result of the relocation of our salvage operations in Mount Morris, Pennsylvania to a site formally utilized by our MAG operations in Pittsburgh. We reported equity and losses of investment of $1.6 million, reflecting our portion of the startup cost of lanelogic.

Income tax expense for the period was $20.5 million for an effective tax rate of 38.2%. Income from continuing operations was $33.2 million, and net income percentage was 22.2%.

Referring to the balance sheet, Copart ended the quarter with almost $252 million in cash and short-term investments. During the quarter, Accounts Receivable, vehicle pulling costs and deferred revenue declined as inventory consistent with seasonal trends decreased. We estimate that approximately 64% of the increased salvage vehicles generated by the hurricanes remain in inventory at the end of the quarter and will be sold primarily in the following three quarters.

Looking at cash flow, looking at that in approximate and general terms, during the quarter our primary sources and uses of cash were as follows. We generated cash from operations of $60.1 million, and this came primarily from net income plus depreciation of $44.6 million and the recovery of working capital associated with the reduction of inventory of $14.3 million.

In addition, we generated $1.6 million from the proceeds from the exercise of options and issuance of stock through our employee stock purchase plan. The primary uses of cash for the quarter were capital expenditures in nature -- 5.6 for the buyout of certain leases -- $5.6 million, excuse me; $3.8 million for the purchase of plan, $6.7 million on improvement and general expansion and another $2.5 million on maintenance.

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

(OPERATOR INSTRUCTIONS). Bob Labick, CJS Securities.

You guys have obviously spent a little time catching us up on the changes from the hurricane report and the investments you have made. With this upcoming hurricane season, could you tell us if there has been any change from the insurers towards companies such as yours with disaster recovery plans?

In other words, you have invested a lot of money to respond to the past hurricane. Is there any way to quantify the insurers, the way they look at you? Are you gaining any share from this? Is there any payback on this investment that you can quantify?

Yes, I mean it is a great question because the company has made not only an enormous financial investment, but we have made a human investment that is in some ways hard to measure. I am not going to say it is a distraction, but it is a very enormous undertaking, and it kind of pulls you away from the normal things that you do within your business to try to manage something of this magnitude.

Clearly we have never seen anything like this. I don't know if we will ever see anything like this again simply because of the unique nature and the way that it occurred. But we have done everything from setting up 30, 40, 50 different trailers for living and shipping out six, seven, eight generators and modular trailers for people to work out, providing office space for all of the sellers to work out of. The sheer logistics of bringing in tends of thousands of vehicles and then setting those vehicles for sale and then shipping those vehicles back out and working with local officials in the various governments that you have got to work with them and some cases working against literally because you're trying to get things done during a time like this. The agencies were not prepared for this, and they did not know how to deal with it. They were not sure if they wanted to let the cars go. So there was a lot that ran on.

One thing I can tell you is that we have gained business, and that is a good thing. We have got some commitments from some major suppliers, top 10 suppliers, for the company and top 10 insurers for the U.S. that have committed long-term to continue doing business with Copart now and not just in this hurricane type situation.

One of the things that Copart has done, quite frankly, is if we handle your business in a catastrophe, then we are going to be there for you just like we were in this case. We are going to be committed, and we are going to make the investment, and we are going to handle your cars. But if we don't have your business in a hurricane, we're not going to step up and handle them because it is too big of an undertaking. This is just a prime example of we keep talking Katrina, and we I think lose sight of the fact that there were four hurricane that hit Florida and that it was like one wave after another of picking vehicles up in Florida, and we have got just enormous volumes in Alabama, Mississippi. It is not just Louisiana.

So when you sit back and you look at all of that, we have gained business, we have strengthened our relationships with our existing business, and we have learned from this to be quite honest with you. Bob, I can tell you we learned enough. We don't want to take on this kind of volume unless we have got a commitment in the future because it is just an enormous undertaking. We have got to make sure that when things like this occur that we handle them for our existing business, and we don't drop the ball. We did not in this case and we handled it. But I will tell you, if we were not Copart today, if we were Copart 10 years ago and I was here 10 years ago, we could not have handled this deal. I can tell you that right now. I did not have the sheer working capital to float the inventory. I did not have the people to handle the logistical nightmare like this.

So it's a unique situation, and I don't know who else could have handled it. The sheer volume that we did and everything from the legal department allowing us to acquire land and lease land to the operations department to the property department setting this up. We invested, I can say hundreds of thousands, I think it is over $1 million just in rock work at these facilities in getting them stabilized. Because in some cases like Mississippi, we took farmland and had to lease that to put cars on it. You know it is all soft, so we had to go in and rock and put drainage in and everything else.

So I just can't even imagine how we would attack something like this 10 years ago. I don't know if we could have attacked it five years ago. So it was a unique situation. I think without a doubt, I feel without a doubt our sellers have recognized what we're done. Our customers see what we have done. Without VB2, I do not know how the buyers would have been able to bid on this product -- I mean the sheer numbers again. You know, Gulfport is selling 1500 cars a week. Livingston is selling 600 cars a week. We're having weeks where we sell in a week 3000 cars in that affected area. It is big, big volume.

Because of that, we are going to sell an enormous amount off in Q4, and I think as I said the majority will be sold off by the end of Q1 in the new fiscal year.

Great. Switching gears a little bit, I noticed that the options for land purchases have picked up on the balance sheet, and obviously I am going to think it is great when you guys can purchase land. Can you speak to that? Is there a significant -- more opportunity for that to come online?

Purchasing our existing facilities?

Yes, the land --

Yes. A lot of that is because the Company went through -- the Company went public in '94. There was significant growth in '94, '95, '96 through acquisition. And the greenfields going off my memory here kicked in probably '98, '99, 2000. Prior to that, it was a lot more acquisition.

So in a typical acquisition back in the '90s, you would acquire the business and lease the land with an option. Now those options are coming due. And as those options come due, we feel it is in the best interests of the Company to either extend the lease or to acquire the land, and we look at those options and in many cases the sellers or the owners of the land become sellers of the land, and they feel that they have leased it long enough and they would like to sell the property. If that is the case, then we are definitely going to buy it simply because of the zoning and some of the other requirements on the property.

Bob, this is Will. Let me point something out to you. The reason for the increase on the item on the balance sheet is not because of additional options. It carries a note that we put back on the sale of one of our MAG yards.

Okay.

And that is the primary reason for that $6 million increase.

Got it. Now just the second part of that question, as it relates to your current capital structure, obviously no debt, and it is safe to say tons of cash. Is there any change in your thinking about how the capital structure will be, and with these leases coming due, how much cash do you need to buy them in? Just tell us what your thinking is on capital structure?

Well, I built those capital needs into the estimates that we gave at the beginning of the fiscal year, and so none of that really changes. Then going into fiscal '07, we will look at what options are coming up, and if we think we are going to be acquiring or leasing, we will look at what growth we think we will have, and we will put all that together, and then we will give new capital requirements for '07 as well.

Got it. And as it relates to the balance sheet, so obviously you have room then if you wanted to to continue your share repurchase or anything along those lines?

Right.

Any change in thoughts on that?

Any change in thoughts on the share repurchase?

Yes.

I don't think so. We will look at it. We look at it on a regular basis, and if we feel it makes sense to acquire the stock end versus utilizing our capital for other needs, then we will do that.

Scott Stember, Sidoti & Co.

Could you just maybe loosely just discuss the hurricane vehicles, maybe just compare the returns that you're seeing on them versus a typical car that is coming in and also maybe just talk about some of the end markets that these cars are winding up in?

Well, can you give me a little bit of specifics so I understand what you mean when you say returns?

A bit of the kind of pricing that you're seeing on these. On the last conference call, you indicated that these cars have been sitting on the shelves for awhile, and obviously that could be impairing the value of them. I'm just trying to circle back to that.

It is nothing like what a normal catastrophe vehicle would be worth. You think about a vehicle that has in many cases like a flood vehicle has no physical damage in the sense of being in a wreck, in an accident, but it has been flooded underwater. So you have got a lot of usable parts -- the engine, the running gear and all of the sheet metal parts.

So normally we would expect to be seeing a lot higher returns. But those cars normally bring a lot more than salvage does. And so since these are heavily flooded vehicles, they tend to be bringing in kind of the same return that salvage would bring. That makes sense to me because I think the vast majority of these cars are being bought for scrap. I think they are being acquired for the sheet metal parts and all the other parts that are on the vehicle. When you talk about -- what was your second questions? Where the vehicles ended up?

Yes, I guess you answered that when you said that about the scrap market.

Yes, exactly.

And maybe you could just touch on lanelogic? We saw the first, I guess, investment hit the numbers this quarter. What can we expect to see in coming quarters do you think and maybe just talk about a little bit further of where you see this investment leading down the road?

I think there is a couple of things. One, Will could comment on that because we actually had some expense in Q2 as well I believe. It was not just this quarter.

We did. Actually this quarter we actually generated our first revenue at lanelogic, but it is certainly too soon to make any kind of prediction about the acceptance rate in that industry. We obviously feel comfortable with that investment but --

I was back there about a week and a half ago, maybe two weeks ago in Dallas, and again I think everyone on the call is pretty familiar that I try to focus on core operations with Copart, and Willis focuses on a lot of the lanelogic and new development operations. And so where Willis had spent a lot of time in this and knew it, I really had not. It was my first time to see it. So I went back and look at the finished product and watched them submit bids for dealerships, and I was very impressed simply because if you think about the process today of bringing a vehicle in and getting a trade-in done and trying to buy a new vehicle, often people feel as though they are not getting a fair bid, and often they feel like okay, I'm happy with the purchase price on the new car, I'm not happy with the amount you're giving me for the trade-in. Lanelogic is a third party and someone who is going to be offering a price that is really -- if you think about that, separate from the dealership. I think there is some value there in that ability, A).

B), I think there's enormous value in how fast they can return the bid. I looked at their systems and the model and the way that they review so many different factors before they submit a bid on that vehicle. And when they do submit the bid, it is coming back in I would say about five minutes is what I saw. It was very quick for a dealership to be able to submit a bid and get a bid back in five minutes and not have to go through the wholesale desk and not have to kind of mess around with this process.

And then third, to be able to get a strong bid, because lanelogic is using inventory from all the other dealerships that they do business with. So if you are a Ford dealer and somebody brings in a Toyota and they want to buy a new Ford, you're looking at I got to take that vehicle to auction and sell it. Whereas lanelogic is saying, well, I have got a Toyota dealer down the road, and they would love that vehicle, and here's what they are getting for that vehicle. So they in essence sourced that vehicle to that dealership.

So I think there is kind of -- I think there is an arbitrage there that exists or as I have been kidding the guys here at work there is kind of a carbitrage that exists in the ability to generate a higher return that that dealer would not have been able to submit. So that dealer may have given that owner $5000 for the car. Maybe lanelogic can give 5500 for the car, and it is a third party. It is a party that is not saying, look, we're submitting the bid, and we plan to resell it. Often I think people trading in cars feel like, here I am trading in the car they are going to get me on the car I buy and they are going to get me on the car I trade in. They are going to make money on me on both hands. So I think all those put together it is a lot of value.

The big wild-card for me when I looked at it is, that lanelogic is saying you know here is the amount and the dealership has the option of saying, okay, we will go with it or no, we want. They can always acquire the car themselves. And so lanelogic is submitting strong bids, and we are seeing some what I would call very good penetration in the amount of bids that are being accepted. But we don't want to lose money on those cars, right, we want to buy them or we want to source them and allow either ourselves or either lanelogic or we want to allow the dealer that is being sourced to make money on that vehicle.

That is going to be the magic in the whole process. But at this point, as Will said, there is revenue. There is nothing material to really report on, but it is an impressive product. And as I have said to people on the call before, if there is an interest in lanelogic, feel free to give Bruce Thomson a call. He is the CEO of lanelogic, and I think he can describe the product and explain how the product works. As we see return coming in, as we see material revenue, we're going to report it for the street. We're going to talk about it.

Okay. And my last question is on your licensing of your VB2 into the wholesale market. Can you just maybe talk about any traction you have seen there?

It has been slow. I mean I will say that, and we have got 40 -- roughly 40 auctions are doing it today. I would have like to have seen -- I know Willis would have like to have seen a lot more talk traction in that market. But it is a product that continues to sell cars, continues to generate revenue. Hopefully over time we will see that increase and expend, and in the interim it has given us a lot more buyers that we can utilize for everything from the Copart side of the business to lanelogic as an example to allow them to buy cars. So we look at it is a positive, Scott.

Good enough. Thank you.

Craig Kennison, Robert Baird.

This is actually Ryan Kelly for Craig. Just a couple of questions. First off, can you talk about the non-hurricane competitive environment out there, and if you are seeing anything specifically that has an impact in terms of Auto Auctions or Manheim salvage pursuit?

Sure. When you look at the salvage arena and who is out there, I don't think the competitive landscape has changed too much. All three companies -- the two you mentioned and Copart -- have acquired independents in the last year. I would anticipate that that would continue, and I would anticipate that the three auctions would end up processing more of the market and that independents would end up processing less of the market.

The competitive landscape I think is the same. Copart offers a completely different product, a completely unique product from the rest of the market. I can say that my average selling price is higher today than it was a year ago, and it is higher today materially than it was a year ago. That continues to be the case. When I look at where it was before VB2, it is absolutely stunning, the increase in the average selling price that Copart is seeing for the last three years. So I anticipate that as we mature in that product, I don't see -- when I look back in '98, we launched the very first Internet bidding application. In '99 we were the first to take pictures of cars and put them on the Web. 2001, the first to offer a virtual bidding technology. 2003, the first to offer VB2. There was a lot of change in that five-year period.

As I sit here three years later, it is still VB2. So I don't anticipate a year from now or two years from now that we will be going with VB3 so to speak. I think what we have got is the right model. The results are much more impressive than we ever saw between '98 and 2003. So I think as this product matures and we see more and more results, I think more and more sellers will continue to switch to Copart.

It is without a doubt in my mind, I have done the hybrid; I have done the live auction and the Internet. You cannot compare the live auction and the Internet to the virtual environment. It is much better, and VB2 is a much better application than when Copart was on a virtual auction enhanced with Internet. I believe that will continue to be the case as we have been on it, and the longer we have been on it, I think the more comfortable buyers get and the more buyers use it.

It has allowed us to really expand. We have just brought so many buyers in from other countries, so many buyers in from other industries, and that has allowed us to really increase who we sell cars for. We're not just selling cars for insurance companies today, and that is the case three years ago. We were selling them to other industries as well like consignment vehicles or rental car companies or fleet banks, etc. But I think more and more of that is happening today. More and more Copart is being recognized as a better alternative for selling, let's say, your low-end repos as an example.

Low-end repos for banks today, do you sell those at a dealer auction, or do you sell those at Copart? I think clearly we're saying that more of the banks are saying, hey, I'm getting better returns selling these low-end vehicles at Copart than I am at a dealer auction. I'm not talking in $8000 or $9000 car, I'm talking about $1000 car. And that is great.

At the end of the day, we want more product to sell, and we're going to continue to go out there and compete. I don't think when you look at other factors in the competitive landscape, say pricing as an example, I don't think that has really changed over the last year. I think it is about the same as it has been. So I hope that answers your question.

Yes.

Yes, in that answer, you mentioned acquisitions. You really have not made any acquisitions recently or more so towards the beginning of the year. Is that a function or just a deemphasis on acquisitions and more greenfields or (multiple speakers) --?

No, acquisitions don't -- they are not really something where greenfield are kind of in the pipeline. If I want to open up a location today in Baltimore, I have got to start looking three -- I have got to look today. I may not open it for three years. So I start the process of looking (indiscernible). Then I have got to get zoning. Then I have got to acquire it. Then I have got to develop it. Then I have got to open it.

A greenfield has a very long lag versus if you look at an acquisition. You make a phone call today, you speak with an owner, I don't want to sell. Next quarter you call again, they may say, sure, I would like to sell some things have changed. 90 days later you own it. So it is really just a factor of kind of who is wanting to sell and when they want to sell. Copart is a buyer, and Copart will acquire companies as long as it is favorable. I think that will continue. I don't see that trend changing.

Have their prices gotten out of whack with Adesa in the market more so?

Prices with want? Do you mean --?

Sellers of auction.

I don't think so. I don't think it is any different. I don't think they are much different than what we're doing or what insurance auto auction is doing. You have got to look at it market by market, and I think it just depends on the market and where they are at.

And then final question. Fuel costs have got to be hurting you. Can you quantify the impact of fuel and if you're doing anything differently, perhaps a fuel surcharge or anything like that?

Fuel prices are hurting, and I cannot quantify on the call how much per car fuel costs are up, and I really don't want to do that and get into how much the transportation expense is up per se. But it is up, and it is something we struggle with. It is actually we sat down at that conference that Will was talking about this year, and I felt that was my number one challenge. When I look at the industry, what is the number one industry challenge? I think it is transportation, fuel and those expenses.

We feel that at this time the right thing to do is to not surcharge sellers for that and to wait and to see what is going to happen. I don't know what is going to happen. We will see. Maybe fuel will come down, and maybe we will all be driving corn mobiles. I don't know. But we will see what happens, and as the market kind of fluctuates and changes, then we will have to make decisions. I would hope that it is not going to go over $4 a gallon obviously like everyone else in the U.S. would hope. But if it rises, then we're going to have to look at it. But if it decreases, then it won't be an issue.

All right. And then finally one last question, just a follow-up on the lanelogic. You guys have to absorb some of the losses there. Do you have any expectation for when those will go away or if they are going to get worse from this kind of run-rate in this quarter?

Certainly we deal with projections all the time. I don't think it is anything that we're comfortable with disclosing at this time obviously. We are confident in the long-term of the viability of lanelogic, but I'm not going to discuss our projections at this point.

(OPERATOR INSTRUCTIONS). Matt Nemer, Thomas Weisel Partners.

This is [Kate Macmerin] for Matt Nemer. I just had a couple of questions. First, I was wondering if you could run through what is in the discontinued ops? Is that the two MAG facilities that were up for sale during the last quarter, or is that something else?

It is three MAG facilities. On a historical basis, it is the result for the three MAG facilities that are held for sale. For this quarter, it is the actual sale of one of those yards in which we had realized a gain over what we had written it down to.

Okay. Because I believe you had sold one last quarter, correct, and then you had two up for sale. So you have sold through one more and then your (multiple speakers)

Sold one more and we have one as of the end of the quarter. We had one, but that has actually been consummated at this point. So all of our MAG yards have been sold as of this date.

Okay, and then you are converting the other three, correct?

Yes.

They are converted.

Okay. Great. So then just on that kind of leads into on the facility count, I noticed it went down from 124 to 120 and you added a new facility. Can you just walk me through how those numbers work out?

It is probably timing I would guess. I mean you know -- I cannot do the numbers with you, I have got to do the name. Detroit was sold. Chesapeake MAG was sold. Delaware was sold. The Mason-Dixon facility in PA was sold. The Pittsburgh facility was converted, and the Richmond, Virginia facility was converted to Copart facilities.

Yes, I think perhaps maybe we can take this issue off-line, and we will reference all your numbers.

Okay. Great. And this just on some margin question, so you had abnormal expenses of 2.6 million in the quarter and you expect this to continue. Should we expect that this will eventually go away, or is there some component of these costs that are sticky?

No, at some point they will disappear.

Okay. Great. And then I just had one housekeeping question. What percent of revenue went to out-of-state and out of country buyers in the quarter?

Actually the out-of-state buyers jumped significantly. It is almost 27%. This is expressed in units, not revenue obviously. In gross proceeds, it is higher. International remained right around 23%. So about half the units are going out-of-state.

Stan Manne, Brawny Investments.

Gentlemen, can you start expressing your EBITDA in your quarterly report? Could you tell me what EBITDA and depreciation was in the quarter?

Sure. We don't disclose that on our corp because it is a non-GAAP number, and we typically don't try to reconcile it back to a GAAP number. I gave you the depreciation numbers.

I did not catch it.

Let me give it to you again then. This quarter depreciation was $8.2 million.

8.2. Okay. Do you expect it to continue moving up year-to-year by the way? And I have one more question after that.

No, it will stay fairly consistent. You know right around $30 million a year, perhaps between 30 and $32 million.

Last question and you may have answered it. Is there an open stock buyback plan that the board has approved?

There is. We have almost 5 million shares remaining in that approval.

And it is ongoing? I mean it is not a fixed period?

No, it is Evergreen.

Okay. Thank you. Very good job, gentlemen.

(OPERATOR INSTRUCTIONS). Jeff Gates, Gates Capital Management.

I guess I missed the total CapEx number that you gave earlier, and plus can you tell us what you expect CapEx to be for the year?

And then with regards to the competitive environment, can you talk about -- would you ever consider more aggressively going into the used auction market, other than I know you are picking up some customers through the Internet? But would you ever, for example, buy a used auction facility and get into that market?

I cannot really comment on that to the extent of telling you yes or no. We are in the market today virtually through our auction technologies, and we are working in the used car and used vehicle industry. If I say yes, you are going to expect it, and if I say no, then you would be surprised if I did. So I cannot really say yes or no as to whether I'm going to do it, but we always look at our options.

With respect to your CapEx question, this quarter it was $18.6 million, and at the beginning of the year, we gave guidance of a range of 90 to 115 million. There is nothing that would suggest we need to change that.

Right. And lastly if I can, how many cars of the six -- of the incremental hurricane vehicles that you have, how many of those cars came from new customers versus your so-called committed customer base?

I don't know that number. I don't have that off the top of my head.

Is it a large number of those?

I have no idea. I mean literally we went in, and we handled ungodly amounts of cars for existing business. When we do that, there is times where we may handle 50% of a supplier's cars and our competitor handles the other 50%, and they say, we would like you to handle 100% of the catastrophe. And my point is, we did that, and in the future we are going to be saying, look, we will handle the 50% we have got. But if you want us to handle 100% of the catastrophe business, we have got to have a commitment long-term. Simply because it is just too big of a task to take on.

Are you able to get pricing recovery on the -- assuming it stayed at 50% of that supplier's cars. Can you say look, if I'm going to do the hurricane recovery next time, then I want a higher price today (multiple speakers) --?

I suppose in the future you could say that anything is an option. We have not done that in the past. We have chosen in the past to absorb those costs and to do it as a goodwill statement or gesture. And my simple point to this is that it is such an undertaking, it is such an enormous challenge that we just don't even one go down that.

Quite frankly, it is not about making additional revenue. The brain damage is more than the increased revenue or the increased profits if you could give that. In the past we have not gotten that, so we have gotten kind of a double whammy where we don't make money on this, and to boot there is enormous challenge that you are faced with.

So my point would be, look, I'm your guy. I'm your man so to speak, and I will handle your cars, and I'm going to be there for you, and Copart what is going to do what Copart is going to do. The people that are out there are going to make this happen, and it is going to be great.

But we don't want to get into handling volumes that are not committed to us simply because it allows us to drop the ball, so to speak. It creates a situation where, quite frankly, we got it done handling well over 50,000 catastrophe cars. We got it done. But who knows in the future, there could be some kind of cataclysmic event like this, some kind of crazy situation, and I don't want to be in a situation where we do drop the ball. I want to make sure that we handle it for our clients that commit to us first.

So should we expect these costs to last two quarters or three quarters? I think on the call you said three quarters; in the press release, you said two more quarters.

The abnormal cost?

Yes.

I would expect them to continue on into the second quarter of next year at a very marginal amount.

Yes and the reason for that is we will sell those vehicles off, and after we have sold the majority of the vehicles off, there will be some stragglers that have to be moved. There is property that has got to be repaired and disposed of. It is not as simple as it may look to people. There is a process that you have to go through. When you have ramped up like this, there's time it takes to ramp down again.

Okay. Thank you. Nice quarter.

Gil Alexander, Darphil Associates.

Can you at this point estimate what your abnormal costs will be for the year?

You know, we don't give any kind of projections. We always say that it has been 12 million so far, and you can see if you track it that it is declining significantly each quarter.

Sure. The second question, I just got confused, on the hurricane vehicles, you mentioned that the profitability is not the same as your regular vehicles. But then afterwards you said you were getting the same type of returns. I just was not clear.

Well, the revenue is similar. The profit is not the same because there is all these abnormal expenses.

Right, but the abnormal expense, is that because of a lower selling price on the car or just the --?

Well, the selling price has nothing to do with the expense side. That is all revenue side. The expense side is associated with all the subhauling and the transportation expense of picking that vehicle up and all the cost of developing yards that -- if I bring in an extra 1000 cars and I can run them through my existing facilities so they become incremental. But if I have to open up brand-new facilities and rock them and develop them and move people in and pay over time and cap pay and I have all these costs associated with shipping in offices, trailers, living space, you name it. There's just so many costs associated with that that there is no profit.

I thank you very much.

Gentlemen, currently there are no further questions remaining in the queue. Mr. Adair, I would like to turn the conference back to you for any additional or closing comments.

Okay. Thank you, April. Well, again, we are excited about how the quarter came out, and we look forward to meeting with you all again in the next quarter and reporting on the results for the year and giving you some guidance on where we think the Company will be going with respect to capital spending and some of our goals for 2007. Thanks again for attending the call. Bye-bye.

That will conclude today's conference.