Copart Inc (CPRT) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Copart, Inc. second quarter fiscal 2007 earnings conference call. As a reminder, today's call is being recorded.

For opening remarks and introductions I would like to turn the call over to Mr. Jay Adair, President of Copart, Inc. Please go ahead, sir.

Thank you, [Audra]. Good morning and welcome to the second quarter conference call for Copart. We've got some information to give you regarding the Company, financially and operationally, and then after that, we'll open it up for questions.

So with that, it's my pleasure to turn it over to Will Franklin, CFO, for a brief disclosure statement.

Thank you, Jay. During this conference call, we will make 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 the suppliers of salvaged vehicles. In addition, we face risks arising from our increased dependence on proprietary technologies to conduct our auctions. For more discussions of these and other risks that could effect our business, please review the Management's discussion and analysis and the factors effecting future results contained in our 10-K and other SEC filings.

Now I'll turn the call back over to you, Jay, to begin our discussion.

Thanks, Will. Again, good morning, everyone. As you saw, we had a good quarter. Revenues for the quarter were 128.9 million and net income was 30.4 million. This is a growth in revenue of 3.8 million, or 3%.

We believe the reason for 3% growth for the quarter right now is due to a late winter. As many of you know, November, December, January were pretty mild climate months and Copart is a company that is effected by weather and some seasonality within our business. As you can see from February, it's been pretty much the opposite of that, I think. So February seems to be coming on pretty strong with respect to weather and it wouldn't surprise us if some of the lack of volume coming in in the second quarter will be pushed over to the third quarter for the Company.

Looking at net income from operations, we had 4.3 million in net income, or 16% for the quarter, and looking at EPS, it was $0.32 versus $0.28, or an increase of 14%. Looking at the six-month period, the Company had 261 million in revenue, 60.7 million in net income. Revenue growth of 8% for the six-month period, and net income growth of 25%. Looking at EPS, we had $0.65 in the quarter compared to 50-- I'm sorry, in the six-month period, compared to $0.53 in the six-month period. and this is an increase of 23%. This is due primarily to the abnormal hurricane costs that we had a year ago handling those hurricane vehicles.

Looking at the Company and looking at our products in general, we're now in our fourth year since the launch of VB2. We have seen a continued increase in gross selling prices year after year after year. I think those gross selling prices are starting to mature within the industry and within our company. So we'll look forward to seeing how it trends, looking at gross proceeds internationally, what gross proceeds are going out of country, we finished the quarter at 29%. That is very similar to prior quarters, and so I think all those trends right now are starting to show a much more mature result.

Looking at new facilities for the quarter, the Company opened a facility in Baltimore, Maryland. This market was previously serviced by our Washington, DC facility, and so, logistically this allows us to reduce some costs associated with towing those vehicles in for our customers. And at the same time it will give us some more capacity in that market. Obviously a high population market. We opened the second facility in south Portland, and that facility, or that market, rather, was previously serviced by our facility that we have in northern Portland up by the airport.

There's been, I guess it's been a pretty interesting quarter with respect to information that we've seen out there on the competitive front. There's been a lot of questions and comments, not only in the press, but directed to the company regarding the IAA and the Adesa merger. Really at this time, we don't want to get into commenting or responding on how we look at the valuation or how we look at the deal. I'm just going to start by saying in the opening remarks here that we really have no comment at this time regarding that deal.

And then lastly, before I turn it over to Will, we finished the quarter with $320 million in cash on our balance sheet. We have no debt, and we believe that there will be a lot of opportunity in the future and we look forward to utilizing that cash for those opportunities as they arise.

With that, I'll turn it over to Will.

Thank you, Jay. For the quarter, revenue grew by $3.8 million to $128.9 million, an increase of 3%. Excluding the impact of the incremental hurricane revenues and the revenue in the prior period from our public auction business, which we exited last year, revenue growth would have been 5%. Salvage same-store sales grew by 3%, excluding the impact of the incremental hurricane revenues, same-store sales increased by 4%. Yard expenses excluding depreciation were $60.7 million, an increase of $7.3 million over the same quarter last year. Excuse me, a decrease. The decline was driven primarily by the absence of abnormal hurricane costs incurred in the same quarter last year, as well as a continuation of the downward trend in normal car processing costs.

Depreciation grew by $1.3 million to $7.8 million. Yard margin was $60.4 million for the quarter. Yard margin percentage was 46.8%, the same as the prior quarter and continues the trend of what we consider to be more normal gross margins. The 5 yards added in the last 12 months contributed $1.5 million in revenue during the quarter and were profitable.

General and administrative costs, excluding depreciation were $14 million, an increase of $1.6 million. The growth was driven by increased labor expenses associated with higher headcount, higher costs per employee, and increased costs for professional services. G&A depreciation grew by $100,000 to $1.2 million. Total depreciation expense for the quarter was $9.1 million, an increase of $1.4 million. The growth was due primarily to the 5 new yards, the buyout of 14 leases, and the improvement of several existing locations during the last 12 months.

Operating income from continuing operations was $45.2 million and operating margin was 35%. Income tax expense for the period was $18.3 million for an effective tax rate of 37.6%. Our overall tax rate should remain between 37 and 38%, but will vary quarter to quarter as we revise estimates and account for discrete tax events. Net income from continuing operations was $30.4 million and net income percentage was 23.6%.

We ended the quarter with almost $320 million in cash and short-term investments. During the quarter, accounts receivable, vehicle pulling costs and deferred revenue increased as revenue grew. Income taxes payable decreased due to the timing of estimated tax payments within the quarters. After tax return on equity on a trailing 12-month basis was 15%. Cash generated from continuing operations was $7.6 million, as cash generated by net income and depreciation of $39.2 million was offset by the consumption of working capital through increased accounts receivable, vehicle pulling costs and the payment of estimated taxes. $8.5 million was generated from the proceeds from the exercise of the stock options and shares purchased through our employee stock purchase plan. Capital expenditures for the quarter were $16.3 million. We estimate maintenance CapEx for the quarter to be $2.8 million.

With that, Audra, I'll turn the call back over to you for Q&A.

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Bob Labick at CJS Securities.

Good morning.

Good morning, Bob.

Hi. Couple questions. First, I wanted to ask if you could give us an update. We spoke about it on the last call a little, on the non-insurance-based growth, the cars, older cars, fleet programs, just an update on progress gaining traction in that area?

Yes, sure. I mean it hasn't changed really since the last quarter. We tend to look at things on a much longer horizon than quarter to quarter, and I would anticipate our success in some of those, non, or continued success in some of those non-insurance-related markets to improve in '08, '09 and going out years. Right now we're about 85% of our volume is insurance-related, 15% is non--insurance related. That's about the same as it was last quarter.

Got it. I know you don't want to discuss certain aspects of Adesa. IAA, I was wondering if you could--

I appreciate that.

So I want to ask, just on a competitive basis, does this-- not about the deal itself, but on a competitive basis, does this change anything in your mind on the competitive landscape? And is there an opportunity for pricing for Copart to either buyers or sellers just independent of this deal or as a result of it?

I don't think so. I think at this time it's a very competitive market, I think it continues to be a competitive market and we'll be out there swinging.

Got it. Just modeling wise, I guess, probably two quarters ago you had mentioned G&A for the year could be flat to down, I think was your guidance, if that's a term, guess you don't use guidance.

That's our goal, yes.

Yes. Has anything changed since that? Is there-- how is G&A looking for the back half of the year? You would have to actually cut it down from current levels.

The numbers are out there. You can look at them yourself. You can see how we've done in Q1 and Q2. And you can see where G&A was at in fiscal '05 and '06. We had some significant growth in fiscals '04, '05 and '06. I think things have really started to trend down or really started to kind of slow with respect to growth. I think we're doing a good job. It's something we're really focused on and will continue to be focused on it.

Got it. I guess specifically, are there areas for you to cut? If you stick to the same earnings from this quarter you would actually be up a couple percentage year-over-year?

We're working on it. You don't get instant gratification, so to speak, when you start to address something like G&A expense. So yes, I can't tell you that there's areas to cut. All I can tell you is it's something that we have been reducing. We'll continue to try to reduce it going forward.

Great. Last question and I'll get back in queue. With all the hurricane cars moving in and out of the [inaudible] kind of balance sheet over the last year, it's difficult to gauge your, quote, inventory levels on vehicle pooling and accounts receivable. Can you speak to inventories, at least quantitatively in terms of cars? Are they up or down? And trends there?

Yes, Bob. This is Will. It is difficult to derive that information from the balance sheet because the composition of the inventory changes quarter over. But we can say that the number of units in inventory this quarter are less than the number of units in the same quarter last year.

Okay. I will get back in queue. Thanks.

Okay. Thanks.

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

Good morning.

Good morning, Scott.

Jay, it sounds like, at least returns per vehicle, like you said, are kind of maturing. So I assume that pretty much flat with a year ago, that assumes that volume was up modestly in the quarter, if you can say?

Yes. I'm not saying that they were flat compared to a year ago. I'm simply saying that looking at first quarter and second quarter, we can definitely see a trend that returns are starting to mature on a per car basis. We are starting-- you can't-- we've seen, literally seen growth year after year after year since the launch of VB2. I would have expected this to have matured earlier than this so far. But just-- I think it speaks to the power of VB2 and the much more efficient marketplace the VB2 provides than traditional methods. So, it is starting to-- we are starting to see a trend. Then I really can't get into volume. As you know we don't disclose it, so I'm going to have to pass on that part of the question.

Okay, and as far as all the work that you guys did for the insurance company, as far as good will that you've built up, I know it was kind of hard maybe this quarter to see, given the weather issues, but in general, are you seeing any evidence that you're starting to see some-- some good will payoff for the expenses and the heavy lifting you did?

Scott, I don't really-- I'm not upset about the weather. I don't look at the Company on a quarter to quarter basis. If we have one year with no weather, so be it. You got to look at it from a long-term perspective. I think what we did in Katrina made-- made a statement to all of our clients across the country, literally, because major insurers can't handle the volume of a CAT like that, the same way we couldn't with local folks, so they sent people in from all across the country to assist, and Copart was the company there that was handling lion's share of that whole situation, and all those vehicles. I think it has paid off already. I think it will continue to pay off, and I think we'll be recognized as a company that you can count on when there's a problem, if there are hurricanes in the future.

Okay, and last question, have you guys made any changes or anything you could comment as far as stock buyback, particularly with all this cash that you guys are building up?

No, I mean we haven't changed our position. We'll continue to look at that as an option for use of funds. And we don't we don't give guidance. We don't let everyone know what our number is, so to speak. We look at it on a regular basis and if we see that there's an opportunity to buy in shares, we'll do it.

Okay. Thank you.

Next we'll go to Craig Kennison at Robert W. Baird.

Good morning, guys. This is actually Ryan for Craig. Couple questions. Can you talk about the opportunities and challenges you're seeing just to grow the base business? Do you need to enter more markets, more facilities, or is it new relationships with insurers? And then--

It's, it's the same as it's always been. I mean we've got the relationships out there and we've got the facilities. We'll continue to try to improve relationships or improve the knowledge of what we have to offer in the marketplace. We'll continue to expand our footprint, as we did opening two stores in the quarter. And I think what it boils down to is it's a, it becomes a larger company every year, and we all know the law of large numbers. And so that-- I think that's something we'll face going forward, but we're run better today than we've ever been run. We're a better company, got better people than we've ever been. So as far as we're concerned, life's good.

Fair enough. You also referenced weather as hampering results. Can you talk about the cycle time from when a car is wrecked to when it is actually auctioned and if that has changed over time?

Yes, it's decreased a little bit over time. From an accident, there's a determination, obviously there's an accident, it's towed in, but then there's determination over whether or not that vehicle should be repaired or totaled, and then from there, we pick it up. There's a storage process, while the claim is settled. There's a title delay in receiving title, sending it to the state. So all of that averages 60 to 90 days, and it has decreased over the years, but it's-- it's still in the 60 to 90-day range.

To the extent that there's bad weather in Q3, it kind of helps Q4?

Well, there-- you never sell the cars. The bulk of the vehicles you bring in one quarter get sold in the next quarter, right? So if we have volume coming in Q3, it tends to get sold in Q4. We don't sell much of it in the actual quarter that the cars came in.

Okay. And then looking just at new facilities over the next year, do you think it will be kind of half and half completely new geographies versus cannibalizing, perhaps, existing stores?

I think if you look at just like the last two that we opened up, they are-- Baltimore is a different market than DC, as everyone on the call knows, but those vehicles were going to the DC market. So we did cannibalize that current location. I would expect that that will happen going forward. It probably will happen the majority of the time because Copart handles the whole U.S. already. There isn't a market out there today that we don't pick cars up. There isn't a market that we can't handle. So, any time we open a new facility, we're going to look at now that new store is closer to the cars than some of the old cars and we're going to move the lines and push the cars into that location. And how many will be acquisitions is always an unknown. All I can do is say that it is something we look at, and if we make acquisitions, we'll report on it.

Fair enough. Final question, on lanelogic, I know they got additional investors. Can you just give us an update on your strategic and financial relationship at this point?

Yes, there really isn't a strategic position. I mean we looked a at the business model, liked it, invested, the same as our two other partners have done. We think that they are forging forward. We do not get involved in the operations of the business, but we're excited about the opportunity, and they have continued to expand and continued to grow and we think things look good. So we're excited about what they are doing and we'll see how it goes.

Great. Thanks a lot, Jay.

You bet. Thanks, Ryan.

And next we'll move to Tom Bacon at Lehman Brothers.

Good morning.

Good morning, Tom.

I was just curious if you could talk, about, it seems some people view the fact that you pulled VB2 out of some of the independent wholesale auctions as maybe a lack of success. But it seems as though in the past few months you may have shown an interest in entering that market. And I was just wondering if you could maybe talk a little bit about whether you think that there is an opportunity for you within wholesale? And if you do think that there is an opportunity, I mean where do you think that you could add value to the process?

Yes, well, we saw a tremendous opportunity with VB2 due to the success in our own business. And rather than go out and buy auctions and get into that business, get into the wholesale markets, we thought we would offer that product to those existing auctions that are out there. That's difficult and I could get into all the reasons why that's difficult. Some of them are very competitive reasons, where existing auctions don't want to deal with Copart because they view us as a competitor. But there's a number of reasons why that was a difficult uphill battle, and we chose to say, look, unless we're going to go out there and acquire auctions, it probably doesn't make sense. I guess that's my segue into that point, which is, we really have no desire to acquire wholesale auctions and get into that business.

And then lastly, when you talk about are we in the wholesale business, are we going into the wholesale business, I don't think we are. What we see today is that there are, the average life of a vehicle continues to get older. If you go back 50 years ago, financing was shorter. The life of a vehicle was shorter. When you look today versus 10 years ago, it's longer today than it was 10 years ago. They keep making cars better, they last longer and it's not uncommon for people to trade in an '80-something vehicle when they go to buy a new car. We do very, very well with older model stuff. We do extremely well with older model product.

And so this is something we're looking at right now, with respect to franchise dealers and non-franchise dealers across the country, in saying a lot of those vehicles are wholesale today, they don't even go to auction, and so we're saying, maybe this is something you ought to look at. We're trying it. We're seeing some success out the gate, and I'm not going to report on it till it becomes something that's material. But as we sit today, we think there's an opportunity there for us to sell a 300, 400 or $500 car that in the past was just kind of wholesaled out the back because the dealer can't sell it. It's too old. The dealers not interested in it, and the dealer may be better off running it to Copart, per say, than to wholesale it. But, that's kind of-- I don't want people to get kind of misled. We're not-- we don't view ourselves as going out and getting in the wholesale auction business, so to speak.

Is-- I mean if you kind of look at the types of cars that, that independents and buy here/pay here dealers are buying, I mean those are cars that are older than six years old or more, I guess closer to being a commodity than a value-added product. I mean is that, is that kind of an area of the market that you think you could penetrate with VB2?

Well, we have already. The buy here/pay here market has already in the last year become a significant little market for us and we're going to continue to push it. There's no question in my mind already with respect to buy here/pay here that they are the right client for us and we are the right auction for them. The types of product that they have got that they want to dispose of sells well at our location, but I think we can push that even further into just a lot of the franchise dealerships. I think there's a lot of folks out there.

A friend of mine owns a Ford dealer and the reality is, he gets a lot of 15, 20-year-old cars that get traded in and those are great cars for us. We already sell a lot of low, if almost no damage 15, 20-year-old cars from the insurance industry, because you take a $2500 car, you dent the fender, it's totalled. And so a lot of these cars that have coverage that get into a slight fender bender in the parking lot 3 mile-an-hour, somebody backs into the door, it's totaled. And we sell a lot of that today and that's a lot of what our international buyer base buys. Lot of those types of cars, I think people understand, go straight on down to Mexico. And so, for us to kind of expand and offer our buyers more of that product, we think it just fits.

I mean are you doing anything in terms of the buy here/pay here market to sort of target those dealers and try to sign more of them up?

Yes, I thought I said that, but, yes, we definitely are, Tom.

Okay. And then in terms of the uses of your cash, I mean, obviously you've said on numerous occasions that you would like to use that for acquisitions. I mean, if an opportunity arose where you needed more resources than you have, would you be willing to lever up the Company to make that happen if it was something that was worthwhile?

I can't really, I can't really comment on that today. I mean I can't tell you whether we would or not because I don't have all the facts in front of me. But faced with an opportunity, we would look at that at that time and we would make a decision. I'm not going say that we wouldn't lever up the Company.

Okay. And maybe just in terms of the environment, I mean, obviously you said that the weather had an impact and I would imagine that the lack of hurricane season was also, had somewhat of an impact. I mean is that-- was the weakness kind of isolated to certain regions of the country? So in other words, maybe your sort of regular markets that aren't so much weather effected were up 5%, and these other markets were actually down? I mean can you give us any kind of flavor there?

No, not really. I don't like to comment on a facility or market by market. If you look at the whole country, which is really how we look at it, it's down a little bit. It is the way it is, and we'll see how it turns out in Q3.

Okay, and just one last thing, in terms of your, your rollout of new facilities, I think you were targeting 6 to 10 year, but I think most of them were going to be greenfield operations.

Yes.

Do you think you'll still meet that target or that goal?

Yes, I think so. We'll see how it ends up, but I think we will.

Okay, great. That's it for me. Thank you.

Okay, thanks, Tom.

Next we'll go to Matt Nemer with Thomas Weisel.

Good morning, everyone. First question is, Jay, if you could just talk about the market, overall growth in the marketplace. Obviously there's been some weather impact, but what, what's sort of your outlook for industry growth or unit growth for the industry for the year?

Yes. Weather is just a phenomenon of the different seasons we're in. I don't-- it's every year or it isn't every year, but it's kind of just an onward trend. We look at the market simply based on units in the market, total vehicles that are insured, population growth, and you put all that together, we kind of look at the market as a 3 to 5% growth rate, and then our goal is to go out there and try to get new business and grow beyond that.

There's no change in the percentage loss situation over the last couple of quarters?

Well, there has been some change over the last year with respect to severity, and with respect to frequency, but at the end of the day, that is what that is. So, regardless, looking at putting frequency, severity, population, all those things together, we kind of look at the market as a 3 to 5% growth rate.

Okay, and then secondly, in your initial comments, you mentioned the significant cash balance and you said that you'll utilize that for opportunities, is it fair to assume that more of that opportunity would be growth investment versus kind of returning that to shareholders, or how should we think about the balance of the use of that cash between those two buckets?

That felt like a direct quote when you said that. [laughter]

I'm taking good notes here.

Yes. I would think that, I would think that the majority of that cash would be for growth related, but, look, if the opportunities don't exist, then we always have the opportunity to send it back to shareholders. So we'll just-- we'll see how things turn out.

Okay, and then on the margins, I was curious, or I was interested to see that your comps were the lowest they have been, I think, in history during the second quarter, but your operating margins were the highest. In terms of margin potential, what should we be thinking kind of going out the next year or two? Is there still another 100, 200, 300 basis points left? Or do you think we're running at close to peak margins?

Yes, I think we're at peak margins. I don't know that-- I don't want to necessarily give guidance obviously, but I don't know that people should be baking in a 2 or 300-basis point improvement in margins. I think margins are good and especially if we go out and open up another 3, 4, 5, 6, 7, 8 facilities in the greenfield, those tend to hurt margins, right? So, versus if we make acquisitions. So I think margins are good and I would kind of like to see them hold where they are at.

But you are sticking with your comments that you still think that SG&A on a dollar basis can be relatively flat for the full year?

It's something we're trying to do. I don't know if I'll achieve it or not. It's something that we are trying to do as a company, as a-- if I can't end up getting it done on a dollar basis, I do expect we'll do it on a percentage basis, simply because we're growing the business and we're making a real strong effort to hold G&A to where it's at.

Okay, and then my last question is ,looking at international opportunities, it sounds like you and Will have been travelling in Asia and looking at opportunities, and I'm just wondering if there's anything that you can report back on new international opportunities or export/redistribution of vehicle opportunities?

No, I really can't comment. I mean I can't comment on if I've been traveling out of country or any of that kind of thing. We'll make a decision to expand outside the U.S. when we feel like doing it, and we'll announce that if we do it.

Thank you very much.

You bet.

We'll go next to Justin Boisseau at Gates Capital Management.

Hi, good morning. I was wondering if you could talk a little bit about your CapEx plans for the year first?

Yes, I believe we gave guidance at the beginning of the year for 90 to 120 million as the CapEx budget. I think we're in about 37, 38 million for the six-month period, and we may end up falling short of that initial budget, but I'm not going to revise it right now simply because I don't know what could happen between now and the end of the fiscal year.

Understood. And what sort of breakdown would you think about on that CapEx number in terms of what's maintenance and what's for new greenfields?

Yes, I think maintenance is about 15, 15 to $20 million. The rest, we kind of categorize CapEx as being maintenance versus investment. So if you think 15, 20, we'll take the high, 20 million, and knock that off 120. So it would be 20 million maintenance, 100 million investment, and we look at investment CapEx as buying companies, buying land, developing leased land that we've got, that kind of thing. Versus maintenance is buying computers, forklifts, stuff that it takes to run the business.

And over time, or looking out over the next few years, where would that kind of maintenance CapEx or total CapEx go over time? Do you think it's going to be relatively consistent, or should it increase over time?

Yes, I don't comment with respect to where CapEx will be in the future. We do, and we have, I believe, for the last two fiscal years for '05 and '06, we do give a guidance number at the end of the year just to let everyone know what we're looking at in terms of the coming fiscal year. The reason we do that, Matt, is I don't know where we're going to be in '09 or '10. Opportunities come along and then you kind of-- you lay out your budget. So with respect to that, those are the numbers for this fiscal year. And at the end of the year, we'll give guidance numbers in '08.

Understood. Can you talk a little bit about the capacity utilization of your current facilities? Do you have a lot of them running at 100% or do you feel like you have excess capacity at most of them?

We've got capacity at, I would say-- I wouldn't say excess capacity. I don't know if I have a lot of excess capacity at any of the locations. We've got capacity at the majority of our locations, ie., if we're asked to handle business, we can do that. But there are locations that we've got that are at peak capacity. I don't get into, for strategic reasons, what locations those are, but that has a lot to do-- [AUDIO DIFFICULTIES]

Please continue to stand by while we try to reconnect our speakers.

Sir, you are back online. Please go ahead.

Audra, are you there?

Yes, I am.

Can you put that-- I forget who it was that was asking the question about capacity before we got disconnected.

Just a moment, here. I believe it was Justin Boisseau with Gates Capital management.

That's right.

Your line is open, sir.

That's right. Can you hear me?

Yes. Great. Okay, we're back.

I think you were saying that you thought some of the locations still had excess capacity. Some did not.

Yes, that's correct. That's what it boils down to. Some of the locations, as we said today, do not have capacity. We don't get into the, into which ones those are for strategic reasons, but at the end of the day you can bet that we are out there looking for additional land, looking to expand and open up additional locations or acquire additional land that's adjacent to our facilities. But as far as capacity goes, we're doing what we've always done, which is stay ahead of the curve and make sure that we've got room for growth and we'll continue to do that.

And then finally, could you talk a little bit about the acquisition marketplace, what it looks like today, are there a lot of opportunities, or there only a few? Give us some color on that?

Yes, there's really not that many anymore. We're pretty much, I think, at the end of that cycle as well. Acquisitions first started in 1990-ish, so what are we, 17 years later, and I think the majority of the auctions at this point have either sold or decided that they want to stay independent. If they, if they come up, we're interested buyers and we'll look at it, but it's not going to be like it was 10 years ago, we were buying 10, 15 locations a year. I would expect a couple 3 locations a year, that kind of volume.

Okay. Actually, this is Dax Vlassis, I was just curious, what is the structure of the international market? Is it similar to the U.S. in how business is done? Can you just give us a little color over what that market looks like? I know you said you might or might not enter it or whatever. But I'm just curious what it actually-- is it similar to your business in the United States? Is it-- is there different issues as far as insurance companies and the relationship with auctions? And-- if you could just kind of help me out with that a little bit.

Yes, I tend to look at the international market as who we are selling to, and we sell a lot of cars internationally, and we want to maintain relationships with that buyer base. When you're talking about sourcing the only market that I talk about is Canada. We're in Canada. We've got one location there. I would anticipate we'll open up another location in Canada in the year, and I just don't get into the specifics of how other countries operate.

Anything else, Mr. Vlassis?

No, thanks.

Thank you. And next we'll move to Gary Prestopinio at Barrington Research.

Good morning.

Good morning, Gary.

Do you have, just some housekeeping, do you have the sales numbers by quarter for Q3 and Q4 that were incremental, related to the hurricanes in your public auction business handy?

I don't think we, I don't think we disclosed that on income, incremental basis. Perhaps we can take that off line, Gary.

Okay. Just to get an idea of where we're going from here--

If we have, I'll give those to you. If not, then I won't be able to.

Okay. In terms of what you're seeing in February, have things become more normalized with the weather being what it was versus where it was in Q2, as far as some of your inventory build?

Have things become more normalized with respect to the weather?

Well, no--

Our inventory build?

Impact of the weather, which was quite dry and warmer for your second quarter, we're seeing a lot more wet weather in--

In February.

In February, and I'm just wondering if you're seeing some-- if you're seeing a normalized flow of cars coming through the auction sites at this point for what you would normally see in February?

Yes, I really can't say-- I can't comment that we're seeing it normalized. I can just tell you that it is up compared to-- volumes are up as compared to the prior quarter just because we're having a late winter.

Okay. All right. Thank you.

You bet. Thanks.

And next we'll move to Jeff [Cardon] at [inaudible].

Hi, guys. I-- all my questions are answered, or I forgot after the, after the delay, but-- Let me ask you just a bad science question. Historically I've noticed there's been an interesting relationship between your receivables level and future growth rates in the business. I don't know if you guys noticed that relationship, and if you look at the last quarter, there's been kind of a rebound in the receivables number. Is that sort of imply that maybe you've had the lowest year to year growth rate that you're going to have and it should accelerate? Do you see what I'm asking?

Sure. I mean we understand that the investment community tends to look at our receivables as an indicator of inventory levels and where inventories are at. I don't know that I can answer the question straight up with you, Jeff, simply because I don't know that I know the answer. I mean we are seeing increased volumes. As we said today, as I just told Gary, and we'll see how Q3 turns out. A lot of the difficulty and the reason I have a difficult time responding to that question, and I think a lot of the difficulty you're going to have in looking at the numbers, is we've got so many hurricane cars involved in those receivables a year ago. So if you--

Right.

When you compare Qs 1, 2, 3 and 4 last year, they are full of hurricane cars, cars getting pulled out of inventory and all that kind of stuff.

Yes.

So it's hard to get a clean gauge.

Exactly, right. And that's why I'm sort of curious about the fact that you drove down those numbers and now they went from 100 to 112 sequentially. So I guess like you said, maybe we'll just see how it plays out.

I think we're going to have to finish a year without the hurricane to get back into kind of a normal cycle that we can look at.

Okay, great. Thanks a lot.

Thanks, Jeff.

Yes.

[OPERATOR INSTRUCTIONS] We'll go next to Bill Armstrong at CL King & Associates.

Hi, good morning. As far as pooling, vehicle pooling costs, that's down year-over-year, and I think you indicated earlier that vehicle units in inventory are less than they were a year ago. Were year-ago levels also perhaps inflated by the abnormal hurricane costs that would have have been included in those pooling costs?

No, those costs were not included in the vehicle pooling costs.

They weren't?

They were not. They were expensed in that period.

I see. Okay. In terms of greenfield expansion, you mentioned that you already served the entire U.S., Baltimore for example. you expect to cannibalize the DC market. Maybe if you could just sort of run through your strategic thinking in terms of expansion, why bother to expand if you're going to cannibalize existing markets? What's to be gained from it, in other words?

Sure. It's really two-fold. Logistically we want to be closer to the cars and pick them up, which reduces costs to our clients, and with respect to storage at the shop, and then by being close to the vehicle, it reduces costs associated with towing, our costs, and that also benefits our clients. So, we pass those costs on to them. So at the end of the day, from a logistics standpoint, it's those two items, and then from a capacity standpoint it's, eventually you run out of room, and you're better off to open up another location that is more strategically located to the vehicles than you are to add another 20 acres to a location and have to continue towing 60 miles.

So we-- I hate to dumb it down, but it's just literally that simple. We will look at the markets and say, okay, are we better off opening another location in Miami, or are we better off opening a location up in Fort Lauderdale or West Palm? And it just boils down to location of the vehicles and capacity.

Is it also a matter of, even if you get some cannibalization, you still end up increasing your overall market share?

Sometimes we do. I mean our goal eventually is to do just that. I mean from the get, go usually you open another store and now you've got more costs, same volume. Then you go out and market yourself as, just for the reasons I just mentioned, the benefits that we bring with respect to towing and costs associated, are another benefit in addition to service and technology with VB2, so it improves the overall product that we're offering and we go in there and try to demonstrate that and gain market share.

Right, and does that also help your return on investment?

I would suppose long-term. Short-term, I would say no, right? Short-term, you've got increased costs. Long-term, [indefinitely].

[We wouldn't do it].

Right.

Okay. One final question, as far as your auction business for older, but drivable cars, with the buy here/pay here people and trade-ins and so on, what competitive advantage would Copart auctions have versus, say, a Adesa or Manheim in that older vehicle segment?

Well, I said don't look at Adesa or a Manheim necessarily as getting the vehicles today, from our research, it appears that the majority of the vehicles don't go to auction today. They are being wholesaled. They don't have marketability at those auctions today. Those are auctions where the average selling price is probably 7, 8, $9000. And we're talking about vehicles with the average sale price is $1000. So a lot of those vehicles, I mean clearly the majority of those vehicles, we believe, are being wholesaled today. And so we're coming in and saying, look, here's another opportunity for you to generate a higher return.

So it sounds like this is sort of an untapped market, then?

We think so, and it's something we're looking at. We've been looking at for the last year, and if it ends up materializing into something worthwhile, we'll talk about it.

Okay, great. Well, good luck. Thanks.

Okay. Thank you.

Next we'll move to Edward Hemmelgarn with Shaker Investments.

Yes, just one question about you-- I'm trying to understand the, I guess the acquisition opportunities that are out there. You indicated on the call when you were talking about cash that you think that there's a lot of good opportunities out there for you that you'll be able to utilize the cash for in the future.

Sure.

But yet you also said that you think that this--

There's not a lot of acquisitions-- [multiple speakers]

-- in the auction and-- [multiple speakers]

Yes, and I don't mean to cut you off. I just know where you're going, so I might as well cut to the chase on that.

Sure.

We don't necessarily look at all the opportunities going forward as being salvage auction related. I think that just simplifies, that gets to the point. If we thought that all the opportunity going forward is buying out salvage auctions, we wouldn't need that kind of cash.

What, I mean-- without obviously getting the specifics, can you just discuss it a little bit, I mean, it's just about what-- when you think about from a strategy standpoint what, what other-- how do you envision the business in the future?

Sure. I mean I can talk simply to the point that we envision adding additional facilities. We've got a little over 125 today. Where will be be at 5 years out, something over 150, I would think, in the U.S. We'll continue to do that. When you get into -- if you're talking about other opportunities--

Right.

outside of salvage, I cannot comment because obviously I would be showing my hand. So I can simply say, it's something we look at and that's why we have the cash.

Okay. Thanks.

Thank you.

And we will go to a follow-up from Bob Labick at CJS Securities.

I just wanted one quick follow-up on lanelogic. Maybe you could just expand and give us a little color. Obviously, there was some incremental investment in the quarter and you guys chose not to participate. Could you tell us if the investors were strategic or financial? And then also, your thoughts on the investment right now, is there likely to be another round of financing, and if so, would you participate?

Yes, I really can't comment whether or not there would be another round of financing, Bob, and I suppose I look at-- it's kind of hard to say whether it's strategic or financial. It's definitely financial investors, but I think they may see lanelogic as having some strategic value. But if I have to pick one, I'll go with the financial investor side.

And how is lanelogic doing? Are they making [inaudible] goals, are they reaching the criteria you set out when you made your investments?

I really can't comment on that for a number of reasons, but all I can tell you is that they are we've got this additional money. They are growing. They are expanding and we look forward to seeing them succeed.

And next we'll move to Dan [Rutter] of [WHB].

Good morning.

Good morning.

I just have a question on the cannibalization issue again, which people seem to keep bringing up, and I think people are worried maybe about the term "cannibalization," because to a lot of us it denotes a deleveraging of your overhead costs. Sounds to me like what you're saying is that, you're cannibalizing facilities, perhaps, but it's more a capture of garnering the market share and having a place to park the car as opposed to really hurting your costs at a pre-existing location. Is that correct?

That's it. You got it.

Okay. Can you talk a little bit about the Washington, DC capacity at the time that you put Baltimore in?

No, only because-- [laughter], and only because I don't get into capacity on a yard by yard basis, but, I mean, obviously, I wouldn't open up Baltimore if we didn't think it made sense.

Yes, okay.

I mean you can do the math on that. We're relatively confident at what we do, and we've had a pretty good run rate since being a public company. And if you look at the numbers-- I mean I kind of tell people if you got faith in the company, you got faith in the management, what we've done, then it's the same team, same gang that's doing it today that did it back in the early '90s. So, we think we'll keep, we think we'll keep doing it right.

Right, okay. Thanks, Jay.

You bet.

You said 126 facilities?

Is that where we're at? 124, okay.

124, okay.

Even I have a hard time keeping track of it. I thought it was just over 125, but, yes, 124.

Okay, great. Has there been much-- I'm not sure if you would divulge the total square footage of the lots, but--

It's 5400 acres.

I'm sorry?

5400 acres.

5400 acres, okay. And has the average size of the, of a facility changed much over time? Yes, I would say it's increased.

Okay. On lanelogic, not that-- I know you don't necessarily want to get into it. There was some talk on the conference call a quarter or two ago, though, about them kind of rejiggering the pricing model a little bit, and maybe not quite being as far along as they had hoped initially regarding launching states.

Yes.

Can you talk at all about how you see that going currently?

My understanding is that they have modified some of their pricing and that they have expanded into some more states.

Okay.

So if that helps you. It's all going to boil down to, obviously, we thought it made sense and made an investment. The recent investor thought it made sense and I think they put another, what, 10 million in?

10.

Yes, put another 10 million in. So, the market tends to believe-- the market meaning the, not the street, but the market, the vehicle market tends to believe that this makes sense and that there's a value in it or they wouldn't be doing business with them. It's just, about, it's about them kind of getting scalability and getting a certain amount of-- getting a certain amount of, I guess it just is scale, getting a certain scale where everything where they can cover the costs. There's a lot of costs to doing what they do and if they can get enough volume then they can cover the costs and they can go at it from there. And we know they are working real hard and they are trying to get it done and we hope they are successful.

Sure, absolutely. Okay. One last one, early in the conference call question there-- or Q&A, there was a gentleman named Tom that was asking about VB2 being pulled out of the wholesale and what kind of opportunities you have in wholesale.

Sure.

Were your answers to that, Jay, a project or something separate from lanelogic?

I'm not sure if I understand the question. Was my answer project separate from lanelogic?

You talked about how well you do with older cars and--

Sure.

-- some of the, some of the wholesalers viewing you, perhaps, as competition, that kind of thing. Was that--

Well, wholesalers I'm sure will view us as competition. My point to Tom was just to say that we don't necessarily view the wholesale auctions as getting these cars today. We think that this may be a marketplace out there that, quite frankly we do think it's a marketplace out there that is being serviced by wholesalers in the different cities that will buy that car, go in and directly buy it from a franchise dealer and then source it to some small lot. And we think that--

Isn't that what lanelogic does though, Jay?

No, lanelogic does it for newer vehicles. We're talking about older vehicles. In fact, lanelogic really doesn't handle the older stuff. Off the top of my head, I don't think 6 or 8 years or10 years, but there's a point where they just really don't have any-- they really don't even get into sourcing those types of cars. They are into sourcing that '05 Corvette or that, or that '06 Acura. They are into sourcing that late model vehicle from a Ford to a Chevy dealer, from a Ford to a Toyota dealer, whereas what we're talking about is 15, 20 year-old cars.

Got you. Okay. Great. Thanks very much.

You bet. You're welcome.

And we have a follow-up from Tom Bacon at Lehman Brothers.

Thanks. Just--

You couldn't handle us talking about you.

I know. I always love an audience. [laughter] I just had a quick question. I mean, as you guys mature, and we try to sort of figure out what, what a core or organic growth rate is, I mean, I know it's kind of tough because volumes certainly have some volatility related to the weather, but I was just wondering if maybe you can't give us an idea of what sort of an increase, normal increase in value that comes over the years just from the increased content of, of the vehicles?

The increased content, meaning that the cars sell for more money?

Yes, I mean just-- you would think as the car-- obviously cars more stuffed with accessories and computers and chips and everything else, and that by the time it gets to the salvage market--

That's a tough question, because if I go back into the '90s, the average price of salvage from about the mid-90s, I'm thinking '94, '95 all the way up to 2003 was pretty much flat, and I think the reason for that was all the money going into the cars was money associated with safety, air bags, things like that and they didn't necessarily have any resell. I think that's part of the issue that existed. What we're seeing today is this, enormous trend, trend up in average selling price. It just makes sense to me that if they keep building cars relatively-- we saw cars change a lot from the '80s to the '90s with respect to safety. If they continue to build cars relatively the same as what they have built them in the next 10 years and cars cost more to make, then obviously the average selling price of the salvage would go up. Specifically I can't give you numbers or anything of that nature, but I mean just from a visceral standpoint it makes sense.

Okay. That's good enough. That was all I had. Thank you.

You bet.

We'll take a follow-up from Bill Armstrong at CL King & Associates.

In terms of greenfield locations, can you talk about the, maybe the barriers, real estate availability, environmental permitting, zoning, et cetera, what sort of obstacles that presents for you? And maybe, more importantly, what it might-- does that present a barrier to entry from potentially new competitors?

Yes, it does. It's pretty-- I think everyone on the call would get it. If you were to go home and tell your family that they are going to open up a 30-acre Copart next to your home, you would probably, you would probably see some shrieks. People just don't want wrecked cars next to them. They understand the need to store wrecked cars. They understand the need to process them. They don't necessarily want them around them. So any time we go into a city and try to get zoning on that type of use, it's going to be a battle. The cost of land continues to go up. I would say that the zoning agility continues to get tougher compared to 10 years ago or 20 years ago. I would anticipate that will continue, and I think it's a barrier within the industry. It's a barrier for Copart, and it will probably just get tougher over time.

You seem to have done a pretty good job in finding locations. You've opened quite a few in the last several years.

Sure. We hope to do that going forward, too.

Are you seeing competition for space? You find a lot and do you find that other auction companies are competing with you to acquire that space?

No. I mean I can't think about the last time that we both were trying to acquire the same location. I don't think that happens too often. They do their thing, we do our thing, and never may the paths cross, right? So we'll continue to try to find property and acquire. Typically our problem with zoning is just literally city council, and people understand that it's industrial property and they don't have a problem with it being utilized for manufacturing or some other use. They just don't necessarily want wrecked cars out there, and we have to go through quite a process of educating that we're not a dismantler. I think the ability to open a recycling facility is probably almost non-existent nowadays. I can't even imagine that. We have to convince them that we're not in the, in that business and that we're in a different part of the business to get zoning. And like you said, I think we're pretty successful at it. I think we've done well in the past and we'll try to do that going forward.

Okay, great. Thanks.

You bet. You're welcome.

At this time, we have no further questions. Mr. Adair, I'll turn the conference back over to you.

Okay. Sorry about the getting disconnected, and we look forward to reporting on Q3. And we'll keep doing what we do. And if you have any other questions you can give us a call off line. Take care and have a great week. Thanks, bye-bye.

That does conclude today's conference. Again, thank you for your participation.