Copart Inc (CPRT) 2006 Q4 法說會逐字稿

Good day, everyone. Welcome to the Copart Incorporated fourth quarter fiscal 2006 earnings call. Just as a reminder, today's conference is being recorded.

At this time for opening remarks, I would like to turn the conference over to Mr. Jay Adair, President of Copart, Incorporated. Please go ahead, sir.

Thank you, Sara. Good morning, everyone, and welcome to the fiscal year 2006 conference call and the fourth quarter. I've got on the call today Will Franklin, CFO.

We will be going over the results for the calendar year, for the fiscal year, rather, and then Will will be going over the financial results for the fourth quarter. After that we'll turn it over to questions, and I just want to make the point that I am in one different office than Will, so we're not together. And we'll try to respond to your questions the best we can.

So with that I'll turn it over to Will Franklin for a brief disclosure.

Thank you, Jay. Before we begin the conference I need to read the following. During this conference, we will be making forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933, and Section 21-E of the Securities and Exchange Act of 1934.

These forward-looking statements may include projections about our future revenue and earnings growth, which are subject to various 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.

Our results of operations for the most recent four quarters were adversely affected by Hurricanes Katrina and Rita. Our margins in near term periods could continue to be adversely affected as described in our press release. For more discussions of 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'll turn the call back over to you.

Thanks, Will. Fourth quarter revenue was $137.2 million, and net income was $30.8 million. This represents 24% growth in revenue, and a 23% growth in net income. Will Franklin will give you further clarity on the fourth quarter '05 versus the fourth quarter '06, as there were adjustments in both quarters, and we want to make that clear.

EPS was $0.33 versus $0.27 one year ago, and looking at the year, revenue was $528.6 million versus net income of $112.7 million. This represents a growth in revenue of $80.8 million, or 18%, and a growth in income of $10.8 million, or 11%, versus the same period a year ago. Fully diluted EPS for the year was $1.21 versus $1.10, an increase of 10%. This was achieved in a year where Copart handled the single-largest hurricane event in the history of our country. That was Hurricane Katrina, but at the same time, Hurricane Rita.

Looking at the hurricanes from a financial perspective, the processing of hurricane vehicles has and may continue to have a negative impact on gross and operating margin percentages. The Company experienced abnormal expenses due to sub hauling, this is the cost associated with picking the vehicles up, the purchase of equipment, facility expense, as we laid out facilities, and payroll. The total abnormal expenses for the year was $14.1 million, and do not include normal expenses associated with the increased unit volume from the hurricane. Those normal expenses are capitalized, and they'll be shown when we sell the vehicle.

So I often get asked the question, why did the Company absorb so many expenses, and I think the answer is pretty simple. You have to look at the hurricane from a human perspective. Copart proved to be a real business partner this year.

A real business partner to our customers, both our clients and our employees. We relocated the affected employees immediately upon the hurricanes' destruction. We came in, we located those employees, we moved them to locations where they could work, set up residence, and then immediately started shipping employees into the affected areas to pick up the tens of thousands of hurricane cars.

In addition to that, we picked up tens of thousands of regular collision damaged cars. So throughout the whole process, moving trailers, setting up yards, developing up over 400 acres, equipment, moving in trucks, drivers, systems, throughout this whole process, we saw logistics like we have never seen before.

So from a fiscal perspective, the cost was great, but as a real business partner, I think we couldn't afford not to do it. In fact, we think 2006 will be remembered as a year where truly Copart heeded the call. And because of this, and because of the fact that it will be such a historic part of 2006 for Copart, we are dedicating the Annual Report this year, and the letter to shareholders to this great cause.

Now looking at same store sales for the year excluding the catastrophe, for 12 months and three months we increased by 11%. Because of all this growth, we made a decision this year to exit our wholesale auction initiative. At the same time, we made a decision to exit our public auction initiative, or what we have referred to in the past as noncore growth initiatives. By focusing our energies going forward on the core business, and by redeploying those resources on the core business, I think we will be looking at a high growth 2007.

Before I go into that, let's talk about 2006, and the facilities in 2006. Copart increased by 11 new locations this year. Seven acquisitions, two in Nebraska, three in Pennsylvania, one in Maryland, and one in Montana, and four greenfield locations. One in Hawaii, Lansing, Michigan, and two in Florida. We expanded over 15 of our existing locations this year, by adding land, developing that land, fencing it, rocking it, and making room for additional storage. This allows for us to sell more vehicles through those facilities.

In doing that we spent a total capital amount of $117 million. $7 million of that was the purchase of loaders that we later flipped into an operating lease. So the net of that $110 million is broken out in the following way. $22 million of that was lease buyouts. This is because we made acquisitions 10 years ago where we leased property. We are now buying those leases out.

$18 million was the purchase of land. This land will be developed, and will allow for further growth for the Company, as we open additional sites. $22 million was goodwill, the acquisition of businesses, and the remaining $48 million was as I've said, the construction in progress of facilities, the purchase of computers, software, fixtures, equipment buyouts as equipment leases end, and of course, buildings on those facilities.

Looking into 2007, Copart will open 6 to 10 facilities this year. We believe that G&A should be flat to down in the year 2007, and the CapEx budget for the next year will be between 90 and $120 million. This is including the purchase of lease buyouts properties, or facilities that we currently lease that we'll be buying out. But it is excluding any major acquisitions going forward.

In conclusion, we are very excited about the year we have completed. We are proud of our people. I'd like to thank all of our shareholders and all of our employees for the work they have done. And we look forward to a great 2007.

With that I'd like to turn it over to Will Franklin.

Thank you, Jay. In the quarter, we enjoyed another quarter of meaningful revenue growth, as revenue increased by $26.6 million to $137.2 million, an increase of over 24%. Excluding the impact from the hurricanes, which we estimate to have generated an additional $10 million in revenue, growth would have been a healthy 15.1%. The growth was driven primarily by increased unit volume, but was also impacted by an increase in revenue per car.

In addition, we adjusted our revenue recognition policy in Q4 of last year, which had the effect of lowering that quarter's revenue by over $4 million. Same store sales excluding the estimated incremental revenue resulting from the hurricanes increased 11%. Adjusting for the impact of the change in revenue recognition recorded in Q4 of last year, same store sales increased by 8%.

While we continue to provide this measurement, we remind you that the majority of our new yards will draw units away from existing yards, in many situations, relieving existing capacity constraints. This creates a downward pressure in a period over situation in same store sales.

Yard expenses which include $7.3 million of depreciation this quarter, and $5.9 million in Q4 of last year, or $74.2 million, or $14.9 million higher than the same quarter last year. The increase was due primarily to the growth in unit volume, and the abnormal hurricane costs of $2.1 million. Excluding the abnormal hurricane costs, our costs to process each car were lower this quarter than the same quarter last year.

Abnormal hurricane costs for the quarter included the additional payroll, equipment, and facilities expenses directly related to the hurricane response, and will continue. These costs do not include the normal expenses associated with inventory, which are deferred until we sell the vehicles, and are reflected in the vehicle pulling cost. Yard margin was $63 million for the quarter. Excluding the incremental revenue of $10 million, and expenses of $4.8 million associated with the hurricanes, yard margin would have been $57.8 million, or almost 13% higher than the same quarter last year. The 11 yards added in the last 12 months contributed $3.2 million in revenue during the quarter, and they were profitable.

General and administrative costs, which include $1.2 million in depreciation this quarter, and $900,000 in Q4 of last year, were $15.8 million. Excluding depreciation, this is a $1.8 million increase over Q4 of last year. This growth is due primarily to increased labor expenses associated with higher headcount, primarily in the IT area. And the additional FAS 123 costs of approximately $600,000.

Total depreciation expense for the quarter was $8.5 million, or $1.6 million more than the same quarter last year. The growth in depreciation was due primarily to the 11 new yards added during the year, the buyout of 12 leases, and the improvements to several existing locations.

Operating income from continuing operations was $47.2 million, or $9.6 million higher than Q4 of last year. This is an increase of almost 26%. Operating margin was 34.4%, an increase of 40 basis points. Other income included the loss on the disposition of certain assets which totaled $475,000. We recorded equity in losses of investments of $4.4 million reflecting our portion of the startup costs of Lanelogic.

Income tax expense for the period was $14.9 million for an effective rate of 32.6%. This amount reflects revisions to our state tax estimates, based upon favorable results of completed audits. Our overall tax rate was also positively impacted by the amount of tax-exempt interest we generated.

In general, our overall tax rate should be between 37 to 38%, but will vary quarter to quarter as we revise estimates, and encounter discrete tax events. Net income from continuing operations was $30.8 million, and net income margin was 22.4%. We ended the quarter with over $275 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 28% of the incremental salvage vehicles generated by the hurricanes, remain in inventory at the end of the quarter, and will be sold primarily in the next two quarters.

Looking at cash flows, in approximate and general terms during the quarter, our primary source and use of cash were as follows. Cash generated from continuing operations was $49.4 million, and came primarily from net income plus depreciation, amortization, and other noncash expenses of $35.9 million, and the recovery of working capital, associated with the reduction of inventory of $13.5 million. $1.6 million was generated from the proceeds of the exercise of stock options, and the issuance of stock through our employee stock purchase plan.

The primary use of cash was for capital expenditures. In the quarter, $4.7 million was expended for the buyout of certain leases. $10 million was used for the purchase of land, $11.3 million was spent on improvements and expansion. And $3.6 million was consumed in the maintenance, of maintenance CapEx.

And with that, Sara I will turn the call over to you to entertain questions.

[OPERATOR INSTRUCTIONS] We'll go first to Bob Labick of CJS Securities.

Good morning. Congratulations on a strong quarter.

Good morning. Thanks.

First question, you discussed a little bit on the last call, and alluded to it here as well. You have beefed up your IT spending. And I think part of what your goal there was to increase your offerings to your customers, including potentially an ASP-type model for some of your customers. Could you just update us on the progress of new offerings, how they have been received, or where they are in the pipeline, and your thoughts about that for '07?

Yes. With respect to the IT side, we have developed a lot of products in the last couple, three years, that will be utilized, and are currently being utilized for the salvage portion of our business. What we do, what we sell, wrecked cars. And I could give you some examples of that.

One would be counterbidding. Where we've made the process more efficient. So we'll be continuing to do that, Bob, and finishing the development of some of those products, and putting them in, into the, you know, the main business, the VB2 model.

Okay. So is it safe to say from your comments, that SG&A will be flat to down, that the build-up in the IT structure from your end is done, and now you should begin to reap the benefits from that investment?

Well, no. That's not entirely true, simply because we are redeploying those resources today, so that we can work on some projects that are part and parcel, and focused on the core business. But I don't really want to talk about them because they are strategic in nature. So they will be coming out in the future. And we will see how those work.

Okay. Speaking with kind of SG&A and just overall things, you exited the VB2 wholesale operations, or you know, commitment I guess right now during the quarter. Could you give us the impact of that on your SG&A savings, and maybe just by taking a step back, discuss your decision to at least put that on the shelf for the time being?

Yes. Well, I mean really, that's an easy answer because it really boiled down to opportunity. And, you know, we sat there and looked at that industry as being an industry that was going to take years of commitment to, you know, make things really start to move in our direction the way we want them to.

Whereas in the salvage industry we've got enormous scale. And we've got enormous momentum already. So from our perspective it's let's focus on older vehicles and damaged vehicles, you know, insurance companies are the #1 source of cars for us. But we sell an enormous amount of cars that are not damaged for repo companies, for finance companies, retired fleets. So we want to keep focusing on that effort, because we see the growth and the ability to grow our business in that market. You know, to be a much stronger opportunity.

And with respect to SG&A, I said it will be flat to down. You would expect SG&A to increase every year, I am not talking as a percentage, I am talking about as a whole dollar. So you expect every year for it to go up, just as costs go up, so the fact that we're going to be flat to down, means that we are cut something costs out of the SG&A line. And, you know, I don't want to quantify the actual amount. By saying flat to down I think is enough for now. We will see where we end up.

Okay. Great. Now going to the hurricane cars, you have obviously quantified the incremental costs I guess, you know, the $14 million, and $2 million in the quarter. When, you know, when we started the process a year ago, your goal, I think, was to you know, break even on this, and to gain some goodwill from the operations, that you know, hopefully more business in the future, obviously. Could you just clarify the $2 million in the quarter, and the 14.

Is that more of a loss profit versus normal sale? In other words, are you going to be breakeven on this, or are you actually losing $14 million by having done this?

No, Bob. This is Will. We have enough history now to be very confident that we won't lose money on the event as a whole. On a quarterly basis, because we have to break it up, we did take some hits in Qs 1, 2, and 3. But when we finally sell the last of the vehicles, we should be positive on the impact on our net income.

It's so tight, Bob, that it could end up a little negative or a little positive. It's about like we said, breakeven. So those are what we call abnormal costs, meaning that we wouldn't normally have though costs associated with selling vehicles. And so, you know, hence we've got enormous work and over a year's time period in commitment for, you know, basically no profit.

Got it. But obviously the goodwill that you generated and hopefully new business --

I think that's enormous. I think without a doubt I've already talked to, I'm on the road right now to talk to some clients last night, in fact. There's just no question that we're being recognized for, you know, a) the ability to do it, because I don't think anyone else could have handled something of that magnitude. And, you know, b) the commitment and the willingness to do it, so that in the future if there's an issue they know they can rely on Copart.

Yes, I think the goodwill, no question, it's there. How you put a number on it, who knows. But it's definitely there. The value is there.

Great. Then my last question, I'll get back in queue. I'm sure this will start a line of additional questions. But could you just I guess talk further about the Lanelogic opportunity. Obviously the investment you made this quarter was significantly more than the prior quarter. Does that suggest, you know, an increased ramp-up on your part, or how do you see the Lanelogic investment going into next year? Will you need to invest more money and, therefore, consolidate it onto your income statement? You know, as much color as you can, give us a little more color on your thoughts towards '07?

Will, you want to go ahead and explain that?

Sure, actually we didn't make any more investment this quarter. The investment was made previously. All we did is we recognized our portion of the startup costs, or the losses incurred by Lanelogic. And yes, they were slightly more than we had anticipated. And Lanelogic's a new model. And they're working through the process of defining how that should operate.

With respect to commitment for future funding, we don't have any commitments to provide future funding. However, it is a possibility that would be addressed by our Board of Directors at the appropriate time.

Great. Well, congratulations on a good quarter. I will get back in queue. Thank you.

Thanks, Bob.

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

Good morning guys. Did I hear you correctly about you referring to the VB2 licensing in to the wholesale market, you are totally getting out that, or are referring to the [Magness] -- ?

No, I'm referring to both of them. We are completely, we've made a decision looking, you know our fiscal year starts August, so we are in the end of the first quarter. We made a decision looking at fiscal 2007 to be completely out of noncore initiatives.

There's just too much opportunity, we feel, in going after other sources of vehicles in the core business. And not focusing on, you know, trying to change an industry, which you know, clearly we think it will occur. And we think it will happen over time. I just think we don't have the desire to hang in there for the time it's going to take to do it, to recognize the return when we have got such opportunity in the core business.

Okay. And going back to Lanelogic, could you once again just quantify what your initial investment in this is, and also maybe just take a step back and just give a quick Reader's Digest version, of exactly how you guys see this evolving, or in helping your business model?

Well, the original investment was $9 million. And our position is, we are simply an investor in Lanelogic. We don't anticipate it having a significant impact on our business, our standalone salvage business. Does that answer your question?

Yes, it does. And just a last question. Will, you had referred to seeing returns for vehicle up, as well as volume, helping your comps this quarter. Could you maybe further quantify that a little bit? The --

You know we don't quantify that, other than to say, and it was revenue per vehicle was up.

Okay. All right. That's all I have, thank you.

You're welcome.

We'll go next to Tom Bacon of Lehman Brothers.

Good morning.

Good morning, Tom.

I was just curious in terms of the hurricane vehicles that you sold in the quarter versus what you sold last quarter, I mean, it looks like the yields on those vehicles, and maybe I'm looking at the numbers a little bit wrong, but it seems like the yields on those vehicles were better than what you got in the prior quarter. I mean, is that true, or is it a mix issue, or is it -- ?

No, the yields were about the same.

Okay.

The yields were fairly close.

Okay. So and you had said I believe it was $10 million, was that in the quarter?

Yes. Total revenue, yes.

Okay. From those vehicles.

Correct.

Okay. And then in terms of the, I mean obviously if you sort of backed out the costs of the abnormal hurricane costs, your margins were a lot better, or up a percent or two versus last year. And is that, I mean, is that just because of the volumes of these additional cars that you're sort of leveraging your G&A, or you know, what's going on there? Is that cost reduction on initiatives on your part, or how should we think about that?

Well, I think when you look at the, you know, the costs on a you know, on the Company, I guess if you're going to look on a per car on the company basis, as we pump more cars through the business, it's a fixed cost business. Yes, we're going to get some leverage.

I don't think G&A has been leveraged. In fact, I think it's quite the opposite. We've been making some pretty significant investments on the G&A side for the future. So I would say that we've been able to leverage the field, and not at the G&A level. And overall it's turned out to be, you know, 2 points.

Okay. And then maybe just to go back to Lanelogic a little bit. In terms of development there, I know they had plans to roll out some new markets in the summer.

And I was just wondering if that indeed did happen, and you know, have they rolled out a lot of new networks, besides what they had done in Oklahoma and Texas earlier in the year?

No, they have been fairly stagnant in the rollouts, while they are trying to refine their model, and work out all the bugs in their operations. And the thought is, when that is completed, then they would take the next steps.

They did roll the midwest, so I'm not sure if your question was focused on that. They went up to-

Texas and Oklahoma, I think there was Kansas City, and a few other midwestern markets. So those markets have been rolled out?

Yes. They have rolled all the way up to Minnesota.

and Wisconsin.

But as far as additional rollouts, they are kind of in a holding pattern at this point time?

Correct.

Okay. And. There an instance that you would, I know you said your Board of Directors would have to look at additional investment there, but is there an instance in which you would be obligated to put up further financing?

No.

No. There's no legal obligation.

Okay. Great. That's it for me. Thank you.

Okay. Thanks, Tom.

We'll go next to Matt Nemer of Thomas Weisel Partners.

First question is on the sales side. Your core comps at 11% seem strong versus what we're hearing that claim frequencies are down, and we know that total loss percentages I think are down 50 basis points in the first half. So can you help us understand, is that just share gains, or any major changes in pricing that we should be aware of?

Yes, it's primarily focused on really two components. One is the increased market share that we have had on a nationwide basis. We have been fairly fortunate in the last year with gaining new business.

The other thing is we are looking at, you know, kind of, I shouldn't say nonhistorical, because we have always received business from rental car companies, from fleets or from banks, financial institutions, but we've had greater penetration in those markets in the last year. I think that's a combination of, you know, VB2 is now three years old. It's becoming more mature. We have got more historical data. That data has been going up every single year. The returns are up every single year.

So I think we're able to now go in and show some pretty compelling evidence, as to why rental car companies, as to why fleets, banks, financial institutions, you know, repos and things like that, why those types of cars should come in, whether it be retired fleet, or it be a repossessed vehicle, or it be a damaged rental car. Why those vehicles should come in, whether they're damaged or not damaged.

We are selling a fair amount of nondamaged vehicles today. These are vehicles that are just older vehicles, and we find that, you know, Copart I don't think is competitive necessarily when it comes to one or two-year-old cars, compared to the wholesale dealer auction network. But when it comes to 10-year-old vehicles, I don't think we can be beat. We're finding now that if you've got a 1996 vehicle that you want to sell, Copart is a real powerful method of disposing that vehicle, of liquidating that vehicle. So I really think it's those two areas. It's a combination of both.

And then a followup to that. It seems like you have moved into some specialty sales. And I notice that you are running a weekly sale for heavy trucks and heavy equipment. Is that, how should we think about that? Is that big enough to move the needle from an ASP standpoint? It seems like your fees would be a lot higher on those sales.

Yes. Again, it's not an ASP model. This is a process where we pick up, we will actually have them deliver the tractor, or deliver the trailer, or we'll pick it up, and it comes to our facility, where we'll then liquidate the vehicle on VB2. So it is the same model we use for damaged vehicles in that marketplace.

It just boils down to, when you're bringing in a vehicle with a million miles on it, you're bringing in a tractor rig with a million miles on it, or you're bringing in a 15-year-old trailer, Copart just has an enormous buyer base. And there's so many buyers out there that would use that trailer, or potentially recycle that trailer, or they would use that tractor rig, or again, you know, over 25% of what we're selling now is going out of the country. So often you'll see these tractors where they may not have a whole lot of value in this market. They have significant value in Russia, or in Mexico, or in other markets.

Got it. And moving to expenses, you mentioned the G&A should be flat to down in '07 on a dollar basis. Does that mean that, if you look out farther, can we get back to G&A percentages of, you know, a few years ago in the 7%, 8% range?

I don't know that that's going to happen because we, you know, back when we rolled from the live auction model to VB2, we had to put enormous infrastructure in for, you know, for our systems. And so you saw back then where the margins became healthier at the yard level, but the price to pay for that was increased cost of G&A. We've moved some costs out of the yard and fleet, and we've kind of moved them out and made them disappear, but replaced them in essence with technology.

So where we were selling vehicles with live auctioneers without the cost of the auctioneer, but we have got significantly higher costs now in the technology it takes to sell those vehicles. Now not that I want to avoid the question, but, you know, part of the difficulty in answering the question is, what happens as Copart goes from 120 to 130 to 140 to 150 locations? As we add those locations it is totally leverageable because now the costs are in place.

And every additional location we add just helps to, you know, offset that cost. So that's part of the reason that we started looking into, you know, other avenues for VB2. Because once you have got the machine there, you know, every additional facility is, you just turn it on. It is basically available. So it's very scalable which is nice. But it's got a pretty significant up-front cost. The good part is it's in place.

So now as we go forward, if we can kind of hold G&A, you know, this year, then maybe the next year, then maybe the next year, I don't know if that's a possibility or not, but if it is, and we keep adding facilities, then we will get further down. I don't know if we're going to get to 7% or 8% again, but we will definitely push it down as a percent.

Is the VB2 wholesale shutdown a big piece, or is that just a small piece of the puzzle?

Well, we're in the process of still shutting it down. We're still managing it, and maintaining it today. As that comes off line, we'll get some more efficiencies.

Okay. Then a question on Lanelogic. It sounds like there was originally a connection with a Copart model, and that you would be able to help dispose of fresh trades. But maybe that's not --

That is true when we were looking at being in that, you know, that wholesale marketplace with our technology. Now that we're pulling back completely, and focusing on our core competency, then I think, you know, there is really very little synergy if any.

And what do you think, what is your total appetite for losses here? I mean, it seems like this was more of a one-time issue with startup. And if we slow down that will get better in the near term.

Is the Board and management prepared for significant additional losses?

No, not at this time. I don't think so. I think we have got an investment in the business. We are expecting the business to become profitable. And I think they're doing the right thing. They are being prudent, and they have rolled out a fairly extensive market. The whole midwest basically.

And you know, they have got a lot of market penetration, they can focus on in that market, and they can focus on getting the product fine-tuned to where it is, you know, closer to perfect. And as you start to go down that path, then you become profitable, and then you can start rolling out to California, Florida, and New York. But in the interim I think he is doing it just the way you should do it. And a lot of the losses that you see don't exist today. There was a lot of cost associated with rolling it out, where they were purchasing vehicles.

They don't have near that kind of cost structure in place today. So I don't know if another investment will need to be made. If it does need to be made, it's a great business. It has got a lot of ability to change the marketplace.

So I think we have got more options than Copart investing. I think we could go out and pull investors from the outside into it if we need to do that. We've got other options. I'm not so sure today it's going to need further investment.

And do you have right of first refusal? If they do raise additional capital, do they have to come to you first, or can you just give us a little color on that?

We do, Matt. We have the right of first refusal.

One housekeeping question to finish up. Was there something specific that drove the interest income much higher? It seems like you guys, either you are running a hedge fund, or doing a much better job with your cash?

There's just more cash and then higher rates. Basically we are invested in option rate securities. The yield is just up.

So no change. Okay. Great. Thanks for the additional disclosure this quarter.

You are welcome.

You bet.

We'll go next to Craig Kennison of Robert W. Baird.

Good morning.

Good morning.

Robert.

First question, on your cash $275 million is a lot of money. What are your priorities for that?

Well, Craig, you know the answer to that. We've got a lot of cash, and the intent is the same as it has been for the last year. We will use that cash either for major acquisitions, as they become available, or we will use that cash to buy back stock. And it's basically, you know, sitting on our balance sheet right now for opportunity.

Is there anything significant in the acquisition pipeline, that could eat up that kind of balance sheet?

Yes, there is, but I'm not going to get into the details of that.

Okay. And then with respect to your overseas sales, do you have any way of gauging how much you're benefiting from a weaker dollar?

No, I really don't. And I guess I could leave it at that. Because I really have no way of understanding what the benefit is from a weaker dollar. But, you know, quite frankly I know that these buyers didn't exist, and I think one would make the argument that, you know, five years ago, even with a stronger dollar that would have been involved in the market, I think we have brought new buyers to the company in the last three years. I mean, we were, you know, I think three years ago maybe high teens maybe. And today we're talking 25, 26, what did you say it was again, Will, for the call?

I didn't say. It is almost 26%, actually it is almost 27%.

27%

For the quarter.

It continues to push up. And, you know, I think that's because we're finding more buyers primarily.

Is that part of the value add when you talked about getting, selling some 10-year old cars, repo cars, et cetera. Is that international component a big part of your value add?

I think it is. I mean, I know when we, I know when we sold some of our trucks back in 2003, we saw a significant amount of those trucks end up in Mexico, and Central America, and other markets. So, you know, where major corporations in this market may not want to deal with a tractor rig with a million miles, a lot of other countries are more than willing to, you know, buy that type of equipment and utilize it. So yes, I think it's a part of it.

At the end of the day, the other piece of it too, is sometimes vehicles get to a point where the value is so low, that it's actually worth more in parts. And it, you know, it's worth more to part that car out, than to say drive it around. So as you start talking about some of the older vehicles, you know, a 10-year-old vehicle, again, I'm not talking about a Lexus, but if you start talking about a 10-year-old Nissan Altima, you talk about a 1996 Toyota pickup, a lot of those vehicles may have really high miles, and may not have the value that one would expect, or one would want on that vehicle, from a nondamage perspective. But when it comes to, you know, parts, there's a lot of value in that car.

Is there --

I think it is both of those pieces.

Would you consider using that platform to allow consumers liquidate a 10-year-old vehicle, or would it be only institutional vehicles?

We would we'd consider it. I don't really want to get into that too much right now. Yes, we would consider it.

And then can you quantify in any way the potential market size of this 10-year-old car market?

No, I can't. I'm not prepared to do that, Craig.

Okay. With respect to the current quarter, you are a good 2/3 through the quarter. Could you give us a sense of the tone of the business so far?

I'm not sure I understand the question.

You have completed two months of the first quarter of your fiscal 2007.

Will I give you a flavor on how the quarter is going?

Yes.

No.

Okay. Listen, congratulations on the quarter. And on your service to the hurricane community.

Okay. Thanks, Craig. Appreciate it.

Okay.

[OPERATOR INSTRUCTIONS] We'll go next to Gary Prestopino from Barrington Research.

Good morning, how you doing?

Good morning, Gary.

A couple of questions. Jay, could you maybe talk about how much growth you've seen in your registered buyer base this year? And over the last maybe couple of years.

Well, it's been very significant. It is over 100,000 buyer today because we have gone out over the last three years, and focused on the wholesale markets, and brought a lot of dealers to the table. We have also at the same time gone out and solicited motorcycle buyers, so that we can bring more folks that are going to be in there to buy the Harleys, and the different motorcycles that we sell.

We have done soliciting and advertising for heavy equipment buyers, that would buy, we sell like over 1,000 heavy equipment pieces a week. We're talking about a lot of tractors, I mean yellow iron tractors, and backhoes, and skiploaders, and then heavy equipment 18-wheeler trucks and that stuff.

So it's a combination of increasing international buyers, international buyers has had a material increase, I don't have the numbers off the top of my head, but it is well over 1,000 additional international buyers there have come on board. And then a combination of bringing in more domestic buyers that are both salvage and rebuilder buyers. And that are both specialty buyers that are focusing on rental cars, this would be dealers, focusing on motorcycles, focusing on heavy equipment, et cetera.

On a percentage basis versus last year at this time, would you say it is up more than 10%?

You know, I don't have the numbers in front of me. So I don't want to speculate.

But the international is where you're really starting to see some lift.

Well, we have seen it for the last three years. I mean, you know, off the top of my head it was in the high teens. And now it is in the high 20's. So it's moved, those are big numbers. I mean, you're talking about, you know, to go from high teens to high 20s for the whole company in a three-year period is, you know, more than material.

When you're saying high teens, high 20s, is that number of buyers or that is your actual sales?

Percentage of units, yes. Number of sales.

Sales, okay. And then what was the [pit] percentage this quarter? Are you still giving that out?

No, we haven't been quoting that percentage. And it hovers around the same area, in the 60s.

Okay. And then lastly, I don't know if you'll give this out either, but you're getting into some, you are talking about doing some older vehicles, nonsalvage kind of vehicles. As a percentage of the vehicles that you do, what is that percentage right now, and where do you think that can go?

Well, you know, I can't blame you for asking, Gary. But I can't give out numbers on the fleet, and in the older vehicles that we are selling today. You know, I can tell you we're real pleased with the increase we've seen. And I expect them to increase. Where they're going to go, and the size of the market, and though kinds of things is I think a little premature.

I don't really want to get going down that path until we see that as, as that becomes, you know, become even more material in the future, then I'll start giving out some guidance on where we think it could head.

Okay. Let me ask this another way then. Versus the traditional wholesale market, like say to a fleet, or a fleet of trucks, a fleet of cars, whatever. What's the value proposition that you can sell in the market, versus what the traditional-?

It's simple. I can lay it out for you very easily. I'm not in there saying send your two-year-old trucks to me, or send your two-year-old cars to me, or your three-year-old cars. The approach that Copart is taking, what we are doing, is going in there and saying, you know, give us your 10-year-old models, give us your 8-year-old models, give us your 12-year-old, you know, products.

Because Copart at the end of the day can sell high mileage, 150,000-mile vehicles, you know, million-mile heavy equipment, you know, 3,000, 4,000 hours on heavy, you know, 3,000 to 4,000 hours on heavy equipment on, you know, yellow iron. So what we're doing is saying, look, you know, we're not in there trying to get the late model stuff. When it comes to stuff that is really old, that you have a hard time selling in the traditional, you know, stream, we're the way to get, to dispose of that product.

So most of what you're saying is, it is not really going to be passenger vehicles in a sense. It's going to be, you know, vans, light trucks, things like that.

Well, it depends. Some companies will keep their fleet vehicles for a long time. If you're keeping a fleet vehicle for six years, seven years, eight years, and you're putting 120,000 miles on it, then we're the #1 source, I believe, to sell that product. If you're keeping your vehicle for two years and cranking 50,000 miles on it, then I don't think that's the case.

Okay. Lastly, you said 27% of your sales are out of the US right now. What percentage of your sales were bought out of state?

Actually this is the first quarter in which less than 50% of our vehicles were intrastate. So more than 50% expressed in units were out of state and out of country.

Okay. Thank you guys.

Thank you, Gary.

We'll move next to [Ari Coll] of Eaton Vance.

Hi, good afternoon, gentlemen. Three questions. One back to the question about high mileage vehicles. It would seem as if just reasonable guess, you know, there are four million, five million vehicles easily out there at eight or 10 years of age with high mileage. I'm just wondering how do you, what are your tactics I guess for raising awareness that your auction sites are places where consumers can go to auction their vehicles, or are just going to limit yourself to businesses, where it's easier to target and they have instead of one vehicle to offer, maybe 20 or 30 in the course of a year?

Yes, we're not open right now to the general public, so it's not a process where we're out advertising and telling people to bring their vehicles into Copart. So right now our focus isn't on that market. Our focus right now is on handling it for, you know, the leasing companies handling it for the banks, the repo vehicles, and that's really, you know, the key for us now.

We're looking at trying to get, you know, fleet turn-ins, repos. I could give you an example. I won't disclose the financial institution, but they're very large. Everyone would know the name. And they've found out that they send the late model stuff over to the dealer auctions, they send the older stuff over to Copart, and they do better. I think that's a trend we're going to see more and more of going forward. And that is where we're focused.

Okay. Secondly on Lanelogic, can you give us an update? You've had a couple of press releases, but an update on how many dealers are active in the Lanelogic system, and maybe how many vehicles they are processing on a monthly basis?

No.

Will, do we have that data?

We haven't disclosed that data.

Because it has been disclosed in prior months through press releases.

Not through us. You can contact Lanelogic for that information.

Okay. Well, thank you again.

Okay, thank you.

We'll move on to [Tom Lan of Wabos Research].

Hello. I don't have a question, just a comment. And that is, fully in favor of the expenses incurred in connection with the hurricanes. Obviously it hasn't prevented us from having a good year and a good quarter. And the goodwill will be around long after that. So well done.

Thank you.

[OPERATOR INSTRUCTIONS] [Terry O'Connor] of Cedar Creek Management.

I noticed in this conference call in particular, it seems like a big increase in the sell side coverage. And that seems to translate into a big increase in questions you can't or won't answer. Wondering if you're doing anything to limit sell coverage, so we could shorten up these conference calls?

[laughter] I don't think we are doing anything about that. No, we are happy to answer the questions. That's why we are here.

Thank you.

Okay, thanks, Terry.

And gentlemen, it appears we have no further questions at this time.

Okay. Well, again, I would like to thank you all for attending the conference call for our fiscal year '06 ending July 31. And we look forward to a great year in '07. We will talk to you next quarter. Bye bye.

That concludes today's conference. We thank you all for joining us.