Copart Inc (CPRT) 2007 Q1 法說會逐字稿

Good day, everyone. Welcome to the Copart Incorporated First Quarter Fiscal 2007 Earnings Call. [OPERATOR INSTRUCTIONS]Today's call is being recorded. For opening remarks and introductions I'd like the turn the conference over to Mr. Jay Adair, President of Copart Incorporated. Please go ahead, sir.

Thank you, Amber. Good morning, everyone. Welcome to the first quarter conference call for Copart. Before we start it is my pleasure to introduce to you Will Franklin, Chief Financial Officer for Copart for some brief remarks, and then we'll get the show on the road.

Thank you, Jay. During this conference 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 out future revenue and earnings growth but are subject to various risk including weather conditions that are adverse to our business, our ability to increase market share in competitive market and our ability to secure beneficial supply agreements with the suppliers of salvage vehicles.

In addition we face risk arising from our increased dependence on proprietary technologies to conduct our options which include risks arising from intellectual property litigation. For more discussions of these and other risk that could affect our business please review the management's discussion analysis and the factors affecting future results contained in our 10-K and other SEC filings. With that, Jay, I will turn the call back to you.

Thank you, Will. Again, good morning, everyone. I think you can see from the results of the quarter we're starting off the year the way we like to start off the year in a good way. Looking at the call, I am going to be probably briefer than I have ever been simply because I think more of the information that Will has on financials and then following that question and answer session is probably more important to everyone at this time.

Just a quick run-through looking at the income statement we generated 132.1 million in revenues and on that we generated operating income of 46.9 million. Looking at income before tax, we finished about 48.4 million, and net income of 30.3 million. This generated about $0.32 a share.

Finished the quarter with cash of about $313.7 million, and as I stated in the fourth quarter call, we were going to be working towards returning margins to prior levels, so you'll see that this is our second consecutive quarter where we've reduced G&A finishing the quarter at $15 million compared to the third quarter at 16.1 million. So really as I said it is the same story. It is just a new quarter, and it is a new year, and we're doing a great job. Everyone in the Company is working hard towards the goals. We're seeing a lot of improvement with clients. We've got 27% sale rate or 27% of the vehicles are going to international buyers. We have a more mature model, returns are up, units are up.

That affects revenues obviously so revenues are up. We have no new facilities in Q1 as I stated in Q4 we have 6 to 10 new stores planned in the pipeline, and I will be discussing those in Q2, Q3 and Q4. With that, I will turn it over to Will, and he'll hit on any other points that you have, and we'll open it up for question and answer.

Thank you, Jay. Once again, we are pleased with our results for the first quarter of fiscal 2007. We continue to enjoy meaningful revenue growth as it grew by 15.4 million dollars to $132.1 million, an increase of over 13%. Residual hurricane revenue was estimated to be $3.5 million.

In addition, Q1 of last year included $1.6 million of public auction or MAG revenue, a business that we exited last fiscal year. Adjusting for the non-continuing hurricane in MAG revenues, revenue growth would have been almost 12%. Revenue growth was driven by increased unit volume as well as increased revenue per car.

During the quarter expressed in gross proceeds sales to international buyers reached a record level of over 27% of cars sold and intrastate sales, cars sold to buyers within the state in which the car was located reached a new low of 37%. Demonstrating the efficiency of our selling platform, BB2, same-store sales grew by 11% excluding the estimated residual hurricane revenue, same-store sales increased by 8%. Yard expenses increased by $1 million over the same quarter last year. Excluding depreciation which grew by $1.2 million, yard expenses actually declined by $200,000.

As growth in unit volume was more than offset by a $4.2 million decline in abnormal hurricane costs. Excluding the abnormal hurricane costs, our cost to process each car was lower this quarter than the same quarter last year. Yard margin was $61.9 million for the quarter. Yard margin percent was 46.8. It marks the return to a more normal gross margin as the additional costs associated with hurricane response began to disappear.

They yards added in the last twelve months contributed $2.9 million in revenue during the quarter and they were profitable. General and administrative costs of $15 million were $1.5 million higher than Q1 of last year. Excluding depreciation, the increase was $1.3 million was driven by increased labor expense associated with higher head count, higher cost per employee, and increased cost for professional services.

Nevertheless this is the second successive sequential quarter of reduced general and administrative costs and demonstrates our commitment to controlling these costs and creating operational leverage. Total depreciation expense for the quarter was $8.7 million or $1.4 million more than the same quarter last year. The growth in depreciation was due primarily to the eight new yards, the buyout of sixteen leases and the improvement of several existing locations during last twelve months.

We recorded equity and losses of investments of $2.2 million reflecting our recognizable portion of operating loss of Lane Logic and represents the remainder of our original investment of $9 million. Income tax expense for the period was $18 million for an effective tax rate of 37.3%. This rate reflects revision to say our state estimates based on results of recently completed audits and the large amount of tax exhibited interest income we generate. Our overall tax rate should be between 37 and 38% but will vary quarter to quarter as we revise estimates and account for discreet tax events. We ended the quarter with over $313 million in cash and short-term investments.

During the quarter vehicle pulling costs and deferred revenue declined as we reduced inventory. Consistent with seasonal trend. Income taxes payable increased due to the timing of estimated tax payments within the quarters. After tax return on equity on a trailing twelve-month basis was 15.2%. During the quarter our primary sources and uses of cash were as follows, cash generated from continuing operations was $54.6 million and came primarily from net income plus depreciation, amortization, and other non-cash expenses of $40.5 million.

And from the movement in the balance sheet primarily due to the timing of quarterly tax payments, $1.6 million was generated from the proceeds from the exercise of stock options. The primary use of cash was $21.2 million for capital expenditures of which $10.6 million was expended for the buyout of certain facility and computer leases. We estimate maintenance CapEx for the quarter to be $3.9 million. With that I have concluded my remarks and I'll turn the call over to you Amber for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question will come from Bob Labick, CJS Securities.

Good morning. Congratulations on a strong quarter.

Thanks, Bob.

First question you obviously left it out there for discussion in Q&A. Could you give us further update on Lane Logic, explain what your options are now, where the joint ventures stands and a little about how the accounting will work going forward as well in terms of if the venture itself is losing money, how is that accounted for or not accounted for on your book and is we can go on from there?

I will comment, Bob, on the business in general just our involvement and I will turn it over to Will for kind of the accounting aspect of it, but really if you look at the Lane Logic model, they're rolled out into two markets. They are seeing increased penetration in those markets. They're very excited about the kind of volume that they're doing because they're doing some significant volume. We're 50% owners in the business, and we are completely outside of that business. We don't get involved one bit, zero, in the operating of the Company.

It was simply an investment, so I can't from a operational standpoint, like I do Copart, I can't give you any kind of background on that. From an accounting stand point, Will, do you want to talk about how that would act?

As we said, our initial investment has been exhausted through operations. Currently there being working capitals being provided through debt. We're in the process of securing additional equity in fusion, but we can't comment on the -- that process as it rolls forward.

Okay. I understand. Actually I don't entirely understand. If they're using debt for working capital and then they record a loss, you own 50%, wouldn't that still be recorded as an equity investment for you.

No. Under equity investment our loss is limited to the amount of our investment which was $9 million.

Okay. Great. If there is additional equity investment as you just referred to, you would either be diluted or participate?

Yes. Either one.

Okay. You'll make that announcement when you decide what you're going to do.

We will.

From a business standpoint Lane Logic is a continuing entity, and we'll find out how your participation will be in the future.

Correct.

Great. Switching gears a little bit, obviously with the hurricane cars running through the balance sheet as well, the typical receivables and vehicle pooling cost indicators are a little more difficult to track your inventory through. Could you give us a sense of volume, first off and second just from an outsider perspective, can you give us an idea this year what we can look at and how we can gauge your volumes and industry volumes if probably the best indicator has been those items I mentioned and that probably won't be as accurate this year?

I can comment on the hurricane volumes, Bob. We're down to about 10% of the cars. The incremental cars we estimate were generated by the hurricanes, and the revenue that we're realizing on those cars is declining. It could be several quarters before those are completely sold through. The impact it would have on our financials would be immaterial. That's why we're not commenting on that. With respect to the market I will let Jay take that.

When you look at the Company as we sit in the first quarter, I think it is evident in the earnings for the quarter we're very excited about how we're seeing the trends as far as the average selling price of the car, returns as a percentage, the inventory builds, so I can't sit here on the call and give you estimates, but we feel good about how things are looking so far, and I think it is reflected in the financials.

Did I hear you correctly when you said both average selling price is up and your volume of cars was up?

Absolutely.

Last question and I am sure there will be tons more in this regard. Could you I guess it will go through your use of cash but can you discuss the international opportunities out there for you and maybe just even more not what you will buy but just tell us more about the international markets, are there similar markets operating for the U.S. market, what's the overall size internationally?

I don't really want to talk about that on a conference call. I consider that information to be information that's we hold close to our chest, and so if we made decisions on moving outside of the U.S., for me to sit here and tell the world what I am going to do I don't think makes sense in that regard. There is opportunity out there. If there wasn't, I would probably talk really openly about it on the call. There is opportunity out there. We'll see what develops in the future with respect to that. I think it was a two-part question, wasn't it, Bob?

It was kind of as it related to uses of cash. You're not going to obviously answer that one.

Right, right.

It was just sides of international market or is there an opportunity out there or is it a moot point?

It is. The market exists, and the free world so to speak, and so when you look at markets, countries where they've got insurance, and the same kind of model in the U.S., then the same kind of business tends to exist, and when you get into markets where people can't afford insurance, it really does. It is kind of that simplistic really, but, yes, it is just something that from that standpoint of sourcing cars, I am not comfortable.

From a standpoint of global selling of automobiles, that's why we're up to 27% now which again it stuns me every time I see an increase in it because I keep thinking that it is going to mature, and that it will stop increasing at that rate, but here we are again in another quarter with a higher number. We're just a very global company. We're selling to I think it is nearly 60 countries now, and thousands of buyers outside of the U.S.

So you really when you're listing product on VB2 and Copart you're listing it to a global audience, and we think that's a very important aspect of what we offer.

Great. Congratulations on the quarter and thank you very much. We'll talk to you again soon.

Thanks, Bob.

We'll now take a question from Scott Stember, Sidoti & Company.

Good morning.

Good morning, Scott.

Will, you mentioned a million change in revenues last year from MAG, that was discontinued ops so that will not be in the number that you reported for last year in the press release?

That's correct. No, no, let me make myself clear. There were six yards that we discontinued. We kept the asset -- six yards. We kept the assets of three of those yards. Because we kept those yards, we have to continue to report that revenue in our continuing operations. So that $1.6 million is in our prior quarter's numbers.

Okay. One more time on the Lane Logic, I want to make sure I understand. At this point barring any future investment by you guys into the Company, we will not see any more equity losses being booked on the income statement until that point.

Yes. Unless there is a change in the capitalization that we participate in, we're we account for it under the equity method and that limits our losses to our original investment.

Will, do you have the amount of depreciation and amortization that is in the pooling line and also in the SG&A line?

Yes. Actually it is put on the release this quarter.

It is? Okay. Sorry about that.

That's all right.

And, Jay, can you talk about last quarter you were discussing getting cars from outside sources that are drivable and not necessarily salvaged? I guess for maybe some of the used car dealer and is maybe new car dealers? Can you talk about that and how that's going?

Boy, I think I got hit with that question on the last call. I tried not to really elaborate on it too much simply because it is not something we're really, doing so to speak in a big way yet. It is something we're looking at. We believe without a doubt that we are the number one source to sell older products. I am not saying that bring your five or six-year-old vehicle to us, but if you bring your 11, 12, 13 year old vehicle to us, I think we can generate the highest return.

On a per car basis. From that standpoint it is something we're looking at, and if it grows to become something material for the Company, then I will for sure discuss it in the calls, but I think give me a little time before we start getting into any kind of details on it.

Okay. Last question. You guys obviously did a great effort for the insurance companies during the hurricanes. Have you could you make comment on some general trends with related to goodwill from these insurance companies and new business wins and things like that?

Well, there is two sides I guess to that question. One is from a goodwill perspective I think without a doubt we've been recognized as a Company you can rely on, and to the extent that we dedicated our annual report this year to the Katrina effort and what happened there and the role the Copart played in that. I think from that aspect insurance companies clearly see us as a Company that if there is an issue they can rely on us. They know that we'll get it done, and that goodwill is hard to measure. I guess to use a very unquantified term, it is GINORMOUS. I believe. I think you're talking about something we've done that is really big. When you look at growth, we have signed up a number of accounts just in the last quarter.

That's something that happens every quarter, some quarters more than others. I have never gotten into a practice of releasing the Companies we signed up in the quarter or the volumes that we've signed up, so I don't want to start that. I can simply say we're happy about the trends we're seeing, and we're happy about the business that we've seen come on board in the last 90 days, and so things look good.

All right. That's all I have. Thank you.

Thanks, Scott.

We'll now take a question from Matthew Nemer, Thomas Weisel Partners.

Good morning, everyone.

Good morning.

Congratulations. Great quarter. First question if we look at the core 8% same-store sales excluding the hurricane volume, can you give us any color on the breakdown between units and price per unit in terms of the drivers of that number?

No. No. We don't go there.

Okay. Next question. Your new facilities or acquisition guidance is 6 to 10 for the year. Just wondering if you could provide any guidance on how that might layout during the year, is it front-end loaded or back-end loaded and generally are any of these much bigger than normal?

I think they're all average sized facilities. We typically today try to open about a 30-acre location. They are -- we opened up Baltimore in Q2. They will be coming -- we're literally -- if not all of them are going to be Greenfield locations. I don't know that we'll make, quite frankly I don't know if we'll make any acquisition this is year. We may, and we may not. Right flow or focus, what's in the pipeline is the Greenfield Facilities. We're investing in developing those just like we've been investing in Baltimore for a couple of years now, so some of these -- you're not going to open a facility in a year.

Some take two, some take five years to get open. Based on where we're at today with zoning and with developing of the yard, we think that that's why we say we think we'll open 6 to 10 in the year.

Okay. Actually can you give us an update on the mom and pops in the industry? Are any of them closing? Any new openings out there? What are you seeing on the competitive front from the smaller players?

There has been some acquisitions in the last twelve months by Copart in others in the industry. There is just not a lot of independence left, so I just don't anticipate there being any real material or significant acquisition of independence out there simply because there is so few left in the industry today. There is really three primary players in the market, Copart being the largest, and I would imagine that over time we'll see some additional acquisitions that occur of independence, but as it sits today, there is just not enough. I didn't say we won't do acquisitions. I just don't anticipate it. We may do some, but it is not a big part of the growth going forward.

Okay. And then this may have been asked already and I apologize if it has but in terms of the new revenue opportunities in ancillary segments such as heavy truck, is there any updated that you can provide on how that's going? It seems like looking at advertising that it is going pretty well.

I think it is going very well. Our non-insurance related business comes from today, auto dealers, fleets, i.e., roadway company's that run large fleets of trucks, et cetera, rental car companies, i.e. , enterprise rent-a-car, banks, so we handle banks, financial institutions, what we call buy-here, pay-here lots, lots that do their own financing at their locations for their customers. We handle -- it is significant. It is not immaterial if you combine all of those together. There was a question earlier about some of the new things we're looking at in the industry. I don't want to get into that because I am going to talk about what we're doing today kind of guy and not about what we're going to do two or three years hence, but in the future, but when you think about that existing business today, it is a significant number of units, and it has been growing and it has been growing at a nice rate, and I think it is going to continue to grow. I think we'll continue to see product coming in from all of those different segments.

We are -- the key here is we are being recognized in the industry, and I am going to back up on you a little bit. I think about 15 years ago we were selling the majority of our product to the dismantling industry and we were recognized as a place to sell a wrecked car. Today that is not necessarily the case any more. We are selling a very material amount of our product to exporters. They are interested in 15-year-old cars, 10-year-old cars, no damage, light damage, high mileage, low mileage. They're interested in cars, and they're interested in moving them into other markets, and so now we are being recognized as a company where if you have got a repossessed vehicle with little or no damage we're going to get a great return. If you have a repossessed vehicle that's, say, got a bad transmission in it and the owner of the vehicle stopped making payments on it because they didn't have the money to fix the transmission, and the vehicle gets repo'd and we're talking about subprime paper, and that vehicle ends up being brought into Copart.

We're obviously the place to sell that kind of car. We're not going to fix the transmission. We're going to list it as a bad transmission and sell the vehicle the way it sits. Our buyers are going to look at that car as a rebuild vehicle or parts car. Some of the vehicles we run through the auction get bought by dismantler simply because of the age of the vehicle and it is worth more in parts than it is in its current condition, so I think that's a big growth area for Copart. That's something that we're going to continue focusing on, and that's something that I think you're going to see. You will see us reporting on that more as it evolves and as it develops in the future.

Just to follow up on that, given your volume to exporters, what's the sensitivity to currency exchange? I think the dollar is off like 10% against the Euro in the last two months, and I am wondering how quickly does that move the needle in terms of some of your buyers in the region that decide to step up and buy your inventory 10% off?

I don't even look at it. Okay. I don't even think it is a material issue to us. We analyzed it back in '03 and '04. We could not track where we presented this at a client conference, and quite frankly we could not track where currency conversion was relevant to the kind of growth that we were seeing across the Company, and so quite frankly I think there is so many other factors that are involved besides that. The number one being that it has a salvage title, and I think when you're looking at a salvage title vehicle, it is a different market segment out there.

When you talk about buying a car and rebuilding that car and selling that car with a branded title and disclosing that, and we disclose that information so if you were to run a vehicle history on it, you're going to see that the vehicle was or does have a branded title on it, and when do you that you're talking about typically a 20 or 30% differentiation in the price of that car if it didn't have a branded title, and I think that's the real play. The fact that you can buy that car new for -- or not new but used with a clean title for 20 grand and with a branded title it may be a $14,000 car, it is appealing to a different segment of the population, people that are looking for that deal that's out there, and based on that I don't think that I haven't been able to see where currency is making a difference in the game.

Last question for Will. Is it fair to assume that given that you've Lane Logic exhausted its funds we'll see an announcement on that in the very near future?

Well, I have already said that we're in the process of securing additional financing through Equity Infusion, so, yes, when that's done there will be an 8-K on it.

Thanks so much.

You bet.

You're welcome.

We'll now take a question from Tom Bacon at Lehman Brothers.

Good morning.

Good morning, Tom.

I was just curious in terms of the obviously the last call you talked about driving your or leveraging your yard costs, and obviously you've done that in the quarter, and I was just kind of wondering how far do you think you can go or maybe if you can give us an idea of what sort of leverage there is there, if your volumes are up, I don't know, 5%? Can that go down another 5 percentage points?

The difficulty in giving you think kind of numbers on that quite frankly is that it is timing, and as we are building locations, we may not -- we open new locations in the quarter, but we may in one quarter open five new locations, and the timing at which these locations come on board and especially new locations because they tend to cannibalize existing locations, and so, the timing at which we do that and then the timing at which we get new business to come in, if you look back historically over the last ten years you will see margins I think as over the overall trend tend to improve, but they have these periods of ups and downs as the businesses operating. It is hard to say margins are going to continue to improve, and then we open up a number of new locations and if I tell you that margins may not improve and then we get a lot of new business, does that make sense to you?

I see what you're saying, sure.

I think the overall trend is going to be we'll see margin improvement as a Company.

Okay. And obviously it sounds like in terms of penetrating the market for these older vehicles, be they repos or what have you, that it is kind of still in the developmental stages, but is that -- is that something -- is that a market you can go out and try to exploit without a lot of additional investment? Do you need more sales people or different sales people than you have to approach those kind of accounts?

If we can convince that market segment of our ability to generate a superior return on a per car vehicle, then the cost of doing that is almost immaterial. At the end of the day the advertising and the marketing of that is nothing. It is not even worth worrying about. The big issue, the big concern I have, my worries are being able to effectively articulate our ability to do just that, generate a higher return to the market segment. As long as we can do that, once you start to get business which quite frankly we have, we have started to get business in that market segment, and once we do that, then presenting at conferences, having the ability to do the word of mouth, to me it is the Copart story. What took Copart from 10,000 car to say over a million cars wasn't a mass advertising campaign.

It was the ability to go out and say call this person, they'll tell you how we're doing, and that word of mouth that I always tell our team the most powerful form of advertising in the world is referral, and there is just nothing better. If we can do this effectively and convince a small segment that far population of our abilities, then the word of mouth in the referrals is what is going to spread this.

Okay. Okay. One other quick thing, and I noticed on your website you're start to go offer some wireless capabilities. Is that just the branch that or Wi-Fi at the branch that allows you to people to use the laptops and go to your website while they're at the site looking at the cars kind of thing?

You got it. That's it.

Okay.

You know, we always got to improve the services and the things we do, and we got drinking fountains and rest rooms as well, and you probably wouldn't see that on the internet. We have Wi-Fi at the yards now. We put that out so buyers can look at vehicle and is use their laptop and is things of that nature.

Okay. Great. Thanks very much.

Thanks, Tom.

We'll now take a question from Craig Kennison, Robert W. Baird.

Hey, guys, it is actually Ryan. First off, Jay, what opportunities remain on the domestic salvage front, if you can talk about how big a market has to be and how penetrated you are within the U.S.?

Yes. I can give you kind of general terms I think we think there is about 3, 3.5 million units. We think that we're 35% of the market roughly give or take. We have 123 locations. I have said in the past that I think maybe five years ago that I could see at the time when we had 70 or 80 we needed 125. I can see with 123 locations today we're probably going to need 150 locations by the time we get there, we'll probably need more. It is a process of opening new locations for additional capacity, A, and B, being closer to the cars so we can reduce the transportation costs and C, so that we can reduce the pick up times.

The faster you pick the car up, the less storage associated with cars. Those are the logistical dynamics of the business, and then well, I guess that really -- I think that really answers your question because the units then play out if you look at the total number of 35%, 3, 3.5 million cars, how big can we get, who knows. I think it is fair to say we can become 50% of the market. That's the insurance business. Then you've got as we talked about repossessed vehicles and bank cars and fleet cars and dealer cars and everything else that we handle, so that's another segment we're looking at. I will simply say it is large enough now we're looking at it as a product that needs to be marketed differently than we market. Walking in and explaining the benefits of Copart to an insurer are different than walking in and explaining the benefits of Copart to a dealer or to a bank or finance company. With a rental car company it is about the same. They have vehicles. They're damaged. We want to recoup. With the others they don't normally have damaged vehicles. They're often selling older cars to Copart.

Fair enough. You talked a little bit about the independence in the salvage market. Can you talk about what you're seeing from a competitive standpoint from the other big guys, [inaudible] and insurance auto option?

Really can't. It is the same competitive landscape that it has been for the last couple of years, and, I try not to talk about my competition. My mother always told me if you can't say anything nice, don't say anything at all.

All right. How about from an industry standpoint? Can you talk about anything you're seeing from the supply front and pricing?

From an industry standpoint what are we seeing with supply and pricing? I think it is pretty much -- we're seeing an increase in volume coming to us. I think from a pricing perspective it is about the same as it has been for the last couple of years. I don't think any of that has really changed from a competitive landscape.

All right. Here is a question for Will. On Lane Logic I know that a dead horse at this point, but do you see any scenario where Copart would go above 50% ownership and have to consolidate?

Well, sure, that would be a Board decision, and it is something that wouldn't be done lightly, but it would have a significant impact as you're alluding to on the financials because we would have to consolidate the numbers with ours which would have a detrimental impact on our margins, and that's one of the reasons that it would be discussed in depth before we took that step.

Great. Thanks a lot, guys.

Thank you.

Thank you.

We'll now hear from Gary Prestopino, Barrington Research.

Good morning.

Good morning, Gary.

Hey, Will, that same-store sales number of 8% without the hurricane vehicles, does that include factoring out the MAG revenue from last year?

No.

So the same-store sales if you factor out the MAG revenue would be higher, somewhere around 9%, 10%.

Yes.

Okay. Just some housekeeping questions. Can you give me the percentage of cars that were sold on [TIF]? that changed much?

No. It is still hovering around 60%.

Great. And then was there any fee increase put in for your services over the last three months, six months?

Well, I really wouldn't comment about anything of that nature on a call simply because it is competitive, Gary.

Okay. That's fine. Then in this -- what you're doing in the non-salvage side as far as these cars ten years or older, are you doing anything in the person to person market and if not, would you contemplate that?

The answer really is no and yes.

Okay. You feel it is applicable, you just haven't explored that opportunity yet?

The reason I hesitate a little bit is the answer is no, but we tend to sell them for employees and friends of family and things of that kind of scenario, so we do sell vehicles. There is a demand out there for people that learn about Copart to say can you sell my car for me, and so we end up doing it.

Right.

With that said we've never opened ourselves up to the market to allow that. It is something that we would contemplate, yes.

Okay. That's the largest part of the used car market right there.

Right.

And then another question, Lane Logic, can you comment on, are the losses there really being generated by start-up expenses related to getting this thing rolling or the business model in and of itself where Lane Logic buys the car and tries to sell it? Are they taking a hit on the fact that used car pricing has come down here and possibly they -- the model may not be working as well as it should?

I think the to answer that question is probably both from the standpoint they have taken some inventory of vehicles, and then they've also got the cost of not only inventing a new idea and building it but when you invent any new idea, it needs to be changed immediately, so you're tweaking it in changing and trying to improve the model from the day you rolled it out. This is a company that hasn't even existed for 12 months. It is a very young company, and so, yes, they have taken inventory risk yes they're spending money to improve the model, and we believe as we sit here today that it is a model that is viable and that it is a model that can be rolled out, so we haven't lost faith in the concept now that it's actually gone to market. From that standpoint clearly it is going to need more working capital. I think that goes without saying.

Thanks.

Sure.

We'll now hear from Edward Hemmelgan, Shaker Investments.

Actually my questions have been answered.

Okay. Thank you. We'll move to Justin Boisseau Gates Capital.

It is actually Jeff Gates. A couple questions. First, can you talk about how you view the industry volume, at what rate it's growing number one, and number two with respect to salvage vehicles. Secondly, can you refresh our memory what the Lane Logic business model is and how much equity they're trying to raise to and over what time period that will carry their operations?

Yes, Jeff, the industry grows about 3 to 5%.

A year?

In units. That's based on more people on the roads driving, the type of vehicles that are being produced, they're safer vehicles. Very have higher costs to repair all that far population, all of that takes place in that estimate, so it is about 3 to 5% a year. With respect to Lane Logic, it is a product this sources vehicles to dealers. I would refer to you check out their website at Lane Logic.com, and I really can't get into any details as far as capitalization, how much, and that kind of information.

You put 9 million in, right, for half of it and you've exhausted that at the end of this quarter, right?

That's correct.

And that's been in for about less than a year, right?

Yes.

Okay. And as far as capital allocation, you've done a wonderful job generating a lot of cash. What do you expect to do with all of that?

Well, this seems to be a common theme in these calls. The Board and the management of this Company believes that truly great companies have strong balance believes that truly great companies have strong balance sheets, and we have a balance sheet of a lot of cash and no debt, and as we see opportunity, whether it be investment in our Company, buying our own stock back, whether it be investment in opening up new locations or acquisitions of others in the market, then that is the primary use or that will become the primary use of our cash.

Okay. Thank you.

You're welcome.

We'll now hear from Karen Colter.

You answered all my questions. Thank you.

We'll now hear from Bob La tell. [inaudible]

A moment ago in talking about the non-insurance related business referred to that is currently not immaterial since it is not immaterial can you give us an idea how to how big it is in terms of dollars or in termes of percent of sales?

Yes. Held on one second, please.

Okay.

That is probably the first time I have ever put someone on hold on a conference call. In fact, I know it is the first time. I am usually really quick in my responses, and you caused me to have to think about that and want to talk to the team here. It is in excess of 15%, so today the insurance industry represents less than 75% of our volume, I am sorry, 85% of our volume.

Just as a follow-up, looking at the growth rates relative degree of penetration you have in the two markets, this 15% presumably can grow faster than the 85%, and due to what level might it go in the next two or three years?

I think that's the question we would all like to know, Bob.

Okay. No speculation from you.

Laugh.

Thank you. That's all I have.

You're welcome.

We'll take a question from Tom Bacon, Lehman Brothers.

Just quickly I wanted to touch on this, the market for these older vehicles. As far as the bank repo and is the older fleet vehicles, where are those vehicles going now?

They are going to auction. They are being sold through contract. There is another -- there is a method of ways they're disposing of those vehicles today.

And again sort of as a follow-up to that, I would think that you guys would have a pretty compelling offer in that it is one phone call and we'll take all the car and is sell them for you and versus calling a bunch of different outlets, and I guess what's the biggest objection that you come up against with these customers as far as getting their business?

Not really -- I am not really coming up a lot to a lot of objections. I think it would be similar to the business that we're in today. They're hot spots or issues they're going to be looking at is ease of doing business, why should I change, I have a relationship, reeling ships something that's big in this industry, how much is it going to cost me, price is something people look at. I would say it is the same factors we dealt with our whole life.

Okay. It is not really anything operational or --

No. We've got that down. If there is an issue with you want the car picked up within 24 hours anywhere in the United States of America we can do it.

Okay. Great. Thank you.

Thank you.

There are no further questions.

I am surprised. (laughter). Okay. Thank you, everyone, for attending the Q1 call. We look forward to reporting on the second quarter. Goodbye.

That does conclude today's conference. Everyone have a great afternoon.