Copart Inc (CPRT) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Copart Incorporated second quarter fiscal earnings conference call. I would like to turn the call to Mr. Jay Adair, President of Copart, Incorporated.

Thank you, Matt. Good morning. Welcome to the third quarter conference call for Copart. On the call this morning with me is Will Franklin, Chief Financial Officer. We are in two different locations this morning doing the call, so I'm going to turn it over to Will for the disclosure and we'll go through a very brief discussion and open it up for questions. Thanks. Will?

Thanks, Jay. During this conference call we will make forward-looking statements within the meaning of federal securities laws. These forward-looking statements may include projections about our future revenue and earnings growth, which are subject to various risk, 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. We face risk arising from our increased dependence on proprietary technologies to conduct our options. Finally, our pending acquisition of Universal Salvage exposes us to new risk relating to international operations. For more discussions of these and other risks that could affect our business, please review the management's discussion and analysis and the factors affecting future results contained in our 10-K and other SEC filings. Jay, I'll return the call back to you.

Thanks, Will. Well, again, good morning. For the quarter, the Company generated $145.7 million in revenue and $38.9 million in net income. This is a decrease in revenue of $3.9 million or 3%, and that is primarily due to the processing of hurricane-related vehicles a year ago and the processing of vehicles through our MAG operations that we sold off that were still operating a year ago. For net income, this represents an increase of 17% or $5.7 million and from an EPS perspective, we generated $0.41 versus $0.36 a year ago or an increase of 14%. Looking at nine months, the Company generated $406.7 million in revenue and $99.7 million in net income or $1.06 as compared to $0.88 a year ago. Will's going to talk about the balance sheet and some of the other financial factors. I'll just quickly update you on some of the capital expenses for the quarter.

CapEx net for the quarter was $11 million. I say net because as an example, we sold in the quarter one of the Company planes that we had purchased. So we had to purchase the plane and then turn around and sell that plane. We sold it for roughly $8 million and so it increases the overall CapEx numbers, but if you net it out, it was $11 million for the quarter. Of that $11 million, we purchased two properties that were leased buy-outs and that represented about $6 million of the $11. Total lease buyouts for the quarter -- I'm sorry, for the year, rather, the year-to-date number was $15.7 million and the year-to-date CapEx number for the nine months is $42.5 million.

We also announced in the quarter that we will be acquiring seven locations in the United Kingdom. Universal Salvage is a publicly-listed company and they are on the London Stock Exchange, so I would refer you to look at any public documents on them as we will not be discussing anything about the Company until the deal closes. The only thing I can tell you until the deal closes is that we service Scotland, Wales, England, and Ireland through these four locations. We will be the largest operator in the U.K. We have received shareholder approval so far, and we are waiting approval by the court. We expect to get that and we expect completion of the deal to our occur on June 15, this month.

Once that happens, we'll do like we've done in the past with acquisitions. We'll go through a best-of-class analysis, we'll go through an integration process and we'll be looking at taking things that are done, processes that are done here in the U.K. and laying over anything that's being done better in the U.S. and vice versa. So we're excited about it. We think there's a lot of opportunity there, and unfortunately due to the rules, I can't really talk about it, but we will so once the deal is done. With that I would like to turn it over to Will Franklin for a financial review.

Thank you, Jay. For the quarter, revenue declined by $3.9 million or 3%. The decline was due primarily to the absence in the current quarter of the revenue from the public auction segment, or MAG, which we exited in 2006 and an estimated incremental revenue from the hurricanes. These amounts were $1.1 and $6.4 million, respectively. Same-store sales were down 4%, driven by the absence in the current quarter of the hurricane and MAG revenues that existed in Q3 of last year and also by the fact that currently most new stores are open to relieve capacity constraints of existing stores, and accordingly cannibalize sales from those existing stores making the same-store sales metric less meaningful going forward. Of the four new stores, Dover, Florida, cannibalized sales from Orlando, Tampa, and Ocala. The Jacksonville East store cannibalized sales from Jacksonville and Orlando. The Baltimore store cannibalized sales from Waldorf, Maryland and York Haven, Pennsylvania. Finally, our most recent store in Woodburn, Oregon cannibalized sales from both Eugene and Portland. These four yards added in the last 12 months, $2.5 million in revenue and were profitable.

Yard expenses excluding depreciation were $65.1 million, a decrease of $7.9 million. The decline was driven primarily by the absence of the abnormal hurricane costs incurred in Q3 of last year estimated to be $2.6 million, the decline in the number of cars processed as Q3 of last year included hurricane and MAG cars and the continuation of the downward trend in normal processing costs on a per-car basis. Depreciation grew by $600,000 to $7.6 million. Yard margin was $73 million or 50.1%.

General and administrative costs, excluding depreciation, were $14.4 million, a decrease of $600,000. The decline was driven primarily by reductions in legal expenses and computer lease expenses. G&A depreciation grew by $200,000 to $1.4 million. Total depreciation expense for the quarter was $8.9 million, an increase of $800,000. The growth was due to the four new yards, the buyout of several real estate and operating leases, and the improvements of several existing locations. Operating income from continuing operations was $57.2 million and operating margin was 39.3%. Income tax expense for the period was $23.2 million for an effective tax rate of 37.3%. Our overall tax rate should remain between 37 and 38%, but will vary quarter to quarter as we revise estimates and account for discreet tax events. Net income from continuing operations was $38.9 million and net income percentage was 26.7%. Our cash and short-term investments declined to $249 million, as almost $128 million became restricted when placed in escrow to fund the U.K. acquisition.

During the quarter, accounts receivable, vehicle pulling cost, and deferred revenue declined as inventory decreased, consistent with seasonal trends. And income taxes, receivables, and payable fluctuated due to the timing of estimated tax payments. After-tax return on equity on a trailing 12-month basis remained at 15%. Cash generated from operations was $65.7 million as cash generated by net income and depreciation was $47.8 million. Movement in the balance sheet primarily decreases and accounts receivable and vehicle pulling costs and increases in accounts and taxes payable provided the balance. $1.4 million was generated from the proceeds from the exercise of stock options. Capital expenditures for the quarter were $21.8 million and included $9.5 million of equipment intended for immediate refinancing or resale. Accordingly, net capital expenditures of the quarter were $12.3 million and included an estimated $900,000 per maintenance of items. With that, Matt, I'll turn the call back over to you for questions and answers.

Thank you very much. (OPERATOR INSTRUCTIONS) Our first question comes from Bob Labick with CJS Securities.

Good morning.

Hi, Bob.

A couple questions. First, one obvious question some people have, you've elaborated on it so far, but could you help just give us a few more details on the disparity in same-store sales from Copart this quarter and IAA, which had a pretty robust quarter. Sounds like hurricane sales, certainly MAG and some cannibalization are responsible for a lot of the difference. Are there any shifts in share or anything else out there that you can discuss to help us understand this as well?

No, I think what we've said is the fact and that's what's caused it. We're up in terms of market share. We've had some nice gains in business and I don't view it as any kind of shift where we've had some fundamental shift away and others have had a fundamental shift inward. So I'd just have to say the major difference just comes from processing so many cars a year ago due to those events.

Got it, okay, terrific. Wanted to understand if there was anything else, it sounds like nothing. In terms of margins, you obviously had terrific operating margins over 39% in the quarter. Other than the acquisition, which has a slightly different model, is there any reason--?

Sure.

-- that with continued volume we shouldn't continue to see leverage and growth in margins? Is there any other drivers there or how should we expect margins to trend, I guess, is really the question there?

Well, if you look at the -- it's hard to break it out, or it's really hard, I should say, to merge U.S. and U.K. together, since we don't have the business yet. So if I just separate that for a minute and say I'm not going to talk about the U.K. and just look at the U.S., the only thing that's going to hurt margins going forward will be opening up of additional locations, which we will do. We talked about opening more locations this year than we've done so far, and that's just a timing issue. We have those locations in the pipeline and we intend to open those locations, they're just not online yet. When they do come online, it will drag margins down a bit. I would anticipate that that will happen as we open locations, but at the same time you can't predict all the market share gain that you're going to have. So if we had greater than normal market share gain, that would improve margins. So those are really the two factors and we'll see how it ends up.

Great. Looking at the current quarter, obviously weather was an issue, at least in our area in November and December, but got bad in February and March, which should help your July quarter. Could you comment on -- just because it's still difficult to look at the balance sheet and get a sense of inventory, can you comment on your inventory excluding hurricane cars year over year?

I can't really comment on inventory. Will, if you want to give the receivable numbers? Do you have those?

Sure. The accounts receivable numbers were $105.7 million, and vehicle pulling costs is $27.9 million. We never have disclosed units in inventory.

I understand. But if you could directionally give us a sense, because obviously last year, $32 million in vehicle pooling included a lot of hurricane cars this year, the 28 doesn't include any. So I'm just trying to get a sense of, if you backed out the hurricane, are your units similar to a year ago or up, down, not--?

It's hard to do it when you had a hurricane in the mix. As everyone I think on the call knows, we had a pretty light winter at the beginning, we got a little more winter towards the end. It's really hard to sit here and predict where inventories are at based on prior years. I think -- I don't really look at the business, and I think everyone's who's heard me talk before, I don't look at the business as a quarter-to-quarter event. So where we sit today, we think we're doing well. We think that market share is up, we think that our -- we're going to have good quarters going forward, but I really can't comment, Bob, on inventory this quarter to next quarter, kind of thing.

Fair enough. Thank you very much. I'll get back in queue.

Thanks.

Next question comes from Scott Stember with Sidoti and Company.

Good morning.

Hello, Scott.

Good morning, Scott.

Can we talk maybe a little bit more about the weather. I think last quarter you guys might have commented that a weaker winter certainly played a role in comps being down a little bit. In general, I just wanted to see how much of an impacted that had in this quarter?

It's hard to tell. I can tell you that the winter was not like we've had in prior years. When you look at the impact of the weather, it was a fairly light winter for the Company. So going -- trying to get into how do we sit this quarter versus quarter of prior year, I just can't get into that. But I can tell you it was a milder year than we've seen in the past.

And I don't know if you've answered this already, but as far as the quarter that we're in right now, in March and April we saw some bad weather across the country. Has that translated into any volume increases that you're seeing right now?

Yes, I really can't comment on it.

Okay. Another question on the income statement, $1.2 million other income, do you disclose what that was?

Sure. Generally we have about 600,000 to $650,000 in other income related to rental of our property. This quarter, we had some gains on the sale of fixed assets. We also had $200,000 for a royalty rights agreement that we entered into, and that would be the composition of the $1.2 million.

Okay. Just circling back to the comp number for a minute, Will. If you were to, back of the envelope, do a calculation where you exed out last year's hurricane revenues and MAG, is it fair to say that sales comps would have been down 2--?

No, you can do the math. Unfortunately, I can't do it for you. I can give you the numbers, but I can't provide you that non-GAAP number. But I've given you everything you need, I've given you the MAG numbers, I've given you the hurricane revenue numbers, and I've given you same-store sales, so you can do everything.

Sounds good. Last question, Jay, you're not talking specifically about the deal with Universal, but could you talk about some of the mark dynamics over there as far as the saturation of players and any similarities to the U.S. market?

The problem -- I guess the dilemma that I got, Scott, is that we're not supposed to comment on any of those issues until the deal closes. It's not U.S. law that I'm concerned with, it's U.K. law right now. So when we complete this deal and we get into the next quarter, I'll be giving quite a lengthy update on the market, the dynamics of the market, and all that kind of good stuff.

That's all I have. Thank you.

Okay. Thanks.

And our next question comes from Craig Kennison with Robert W. Baird.

Hey, guys. It's actually Ryan.

Hi, Craig.

For Craig.

Oh, hi Ryan.

You've spoken before about the opportunity to market older used vehicles to your salvage base. Can you give us an update on any progress you've made there?

That's something as we've talked about in prior quarters, about 85% of our volume is insurance-related, about 15% is non-insurance related, finance companies, dealers, et cetera. We are going down a path of more actively marketing our services to franchise dealers and other dealers that are out there that have older trade-in vehicles. The average model year today is significantly older than it was in prior years or prior decades. And we think that's going to be an attractive sector going forward. It's not material today, it's not something I can really give you any meaningful numbers yet, but it is something we're looking at.

Fair enough. Jay, even after the acquisition of Universal Salvage, you're still going to have about $215 million in cash. Are there other large acquisition opportunities out there, or once this is done, will you look at other things like share repurchases again?

We'll look at both. There are other large acquisitions that could be made, but we've always said and we'll always continue to look at our own stock as a potential investment option. So it's not one or the other. I think it potentially is both.

And then can you remind us how many new facilities you expect to open this year and are all of them in markets that will cannibalize existing Copart facilities?

Yes, I can. Let me just take a look at my notes real quick. The facilities that we will be opening, almost all of them, I think -- yes, all of them will be in a situation where they'll be cannibalizing. And that makes sense, I mean, we handle the whole U.S. market, so pretty much any time we open up a new store, it's going to cannibalize one of the stores. I can't think of a scenario where it wouldn't. Now, with respect to how many will come on, I don't know that we'll be opening any more locations in this year. We do have, as I said, locations in the pipeline, they're just coming on fairly late. We expected them to be zoned and opened and developed by the end of the fiscal year and it looks like that won't be the case. So we're probably done for new locations in this year and then next year we'll be giving out new stats on how many we think we'll open.

Then last question, can you give us the percent of vehicles out of state and out of country?

It really hasn't changed significantly. It remains about the same.

Okay .

Now--.

Ryan? Pardon me.

I do apologize, will the last gentlemen please requeue? Gentlemen, I do apologize, I closed the last phone line down.

That's okay, that's fine. What were you going to say, Will?

I was just going to give the numbers, our interest date sales, the sales within the state still remain less than 50%. More than half the units are going outside the state or outside the country.

Right.

In terms of value, it's right about 63%. It's remained fairly constant for the last three quarters.

Go ahead, Matt.

Our next question comes from Bill Armstrong with C.L. King and Associates.

Good morning. Could you give us, as you have in the past, just trends in the number of units and the revenues per units? Generally, you've commented whether they've increased or decreased. What do you see during the past quarter?

If you're asking for actual unit disclosure and revenue per car disclosure, is that what you're asking for?

No, I know you don't disclose that, but you have in the past frequently commented that revenues were driven by increased dollars per unit, just based on fees and what not, and I was just wondering if any of those trends have changed?

I don't know, Will. I don't have anything in front of me, being that I'm not sitting where you're at.

We see a continuation of the trend. We're generating higher gross proceeds per car, and higher gross proceeds per car generates higher revenue per vehicle. The magnitude of that increase is not what it has been when we first introduced VB2, but we still see that trend continuing.

I think we talked about on the last call that it is maturing.

Okay. Insurance auto auctions, I guess that was touched on a little bit earlier. Same-store sales were up 11%. As far as you know, did you have a bigger impact or bigger influx of hurricane-damaged vehicles last year than your competitors did?

Oh, without a question. Absolutely.

Okay. So they didn't have that -- the same type of comp to go against?

Well, nobody did the volume we did. We handled the vast majority of the market. I mean, well over 50% of the market.

Right. They also commented that weather actually was helpful to them and LKQ, who I believe is your largest customer, also has talked about inclement weather definitely being helpful and seeing more supply in the market. Now, it sounds like you're saying that you're seeing maybe the opposite that, weather was not helpful at all during the--.

No, not saying it wasn't helpful. I'm just saying, when asked the question how it compared to previous years, it wasn't anything out of the ordinary. It wasn't like it was some kind of really heavy weather year, by any stretch.

Okay. That's all I had. Thank you.

You bet.

Now from Thomas Weisel Partners, we will hear from [Kate Messmer].

Hi, there.

Hi, Kate.

I know you can't say much on the U.K., but I was just wondering in terms of the final regulatory approval in mid-June, is this just a formality?

Yes. It does have to occur, but we fully intend it will happen. Shareholders have approved the deal, so at this point we really have no doubt that the final approval process will go through and the date that we've been given for closure is June 15.

Okay, great. That's helpful. Then second, I know in terms of the comp that we can kind of figure out some of the hurricane and the MAG impact. I was just wondering if you can quantify at all the cannibalization impact to comps so we can look at that going forward and incorporate that into our model.

We can do that. That would be based on a number of assumptions, and because it's so inexact, we've chosen not to give that number.

Okay, great. And then finally, can you comment on any other changes in the competitive landscape, such as fees that your competitors, now that both of your -- two of your largest competitors are now private?

No, I can't really comment on any changes. We're competing against a market and a competitor out there that's -- that we look at and we respect and take seriously. So I can't say that the marketplace has really changed in the last six months or the last year. It's is a very competitive market and we believe we have a better product, a superior service, and we'll go out and continue to try to articulate and demonstrate that to potential perspective customers and try to win their business.

Okay, great. Sorry. Then finally, just circling back up on the U.K. again. I was just wondering, will you be holding a separate conference call when that is closed, or will we have to wait for the next quarter's conference call to get--?

No, it will be on the next quarter. It's going to take us some time to figure things out as well. We're going to take advantage of the time and we'll put together an update on what's going on with Universal and we'll do it the next call.

All right, great. Thanks so much.

You bet, Kate.

Now from BB&T Capital Markets, we'll hear from Tony Cristello.

This is actually Allan for Tony.

Hi, Allan.

First question, excluding the average impact from the hurricanes last year, yard and fleet costs, it still looks like expenses were down $4.8 million and adjusted gross margin of about 190 basis points. Just curious to get some idea, what type of run rate do you all need moving forward to kind of leverage these costs? I know you guys have made improvements in logistics and additional facilities so maybe the towing costs are a little bit lower, but just any color that you could provide there would be very helpful?

I don't know that towing costs are lower. When you look at -- when you look at the fact that we opened more locations, we get closer to the car, we can reduce the actual distance that we have to haul the car, and that will lower towing cost, but with fuel and the situation that's out there right now, it's pretty tough on the towing side. To try to give you a feeling or to try to give the Street a feeling of where costs are going to go going forward, it's hard for us to know. We had so many costs that were incurred due to the hurricanes, not just in the affected markets but in other markets, if we sent employees or drivers in from Washington State, we then incurred additional overhead -- or I should say overtime and towing costs in that and those markets. So it's really hard to figure all this out as far as where it will end up. And we said this, we said this a year and a half ago, two years ago or whenever it started. We said that we're going to be incurring a lot of costs, it is going to be difficult to know what the impact will be on the Company. The key for us was to, A, to absorb the costs for our insurance clients and B, basically be able to service them and handle that market and that catastrophe so that it was no impact on them. And we've done that, and in doing that, we've incurred a lot of costs and it shows in the P&L and where it's going to come out, I'm not really sure. That's it in a nutshell. I don't know what to tell you. That's the reality of it.

Okay. Also, I believe that on a previous call you guys had indicated that you expected SG&A possibly on a dollar basis to be flat or even down somewhat year over year. And given your nine months, looks up about 2.5 million, is that still your expectation moving forward or have any incremental costs related to Universal Salvage acquisition kind of creeped into this number?

Yes, well, we made those statements based on a change in strategy and at the time we didn't have Universal in the mix. So I don't know that it's going to decrease going forward. We've been staffing and adding people to do a lot of the IT and a lot of the integrations and systems going forward. So we've got a different direction today, I think, than we had a year ago, clearly and we're excited about that. We're excited about what we can do in the U.K. market and with that there's going to be support coming out of the G&A.

Okay. Last question, I believe there was a press release also issued on Lane Logic and it looks like signing up a great deal more in terms of dealers. Any update there and do you expect any flow through in other income moving forward from that?

I'm out of the office. I don't know, Will, if you have any comment on that?

Sure. Lane Logic is developing. They've opened up hew Northeast and the Southeast regions. Basically they're West of Dallas in the nation. They've increased their dealers, I think they're up to about 500 active dealers now and their transaction base is increasing. In terms of impact on us, we don't -- we're not a supplier or service provider to them, we're an investor. So to the extent they start generating money, then we'll have investment income.

Great. Thank you all very much.

You're welcome.

Next question comes from Tom Bacon with Lehman Brothers.

Good morning. I missed the early part of the call, so I apologize if I'm covering ground that's already been covered, but I was just wondering if you could, looking at the Universal financials, it looks like the market in the U.K. is going from sort of a principal market to an agency market. I was just wondering if you could tell us how much of that market is still a principal market and how much of it is an agency and is that a transition you think is going to happen pretty quickly there?

I can't -- I can tell you that there is a transition that is taking place. I can't tell you how much of the market. The reason for that is I don't know. These are some of the things that you'll find out over time, but it is something that when you look at the market, it is transitioning that direction.

Is that pretty much like the U.S. market was years ago, more or less?

I can't say it was like the U.S., but the U.S. market was like that in terms of if you go back 1995, there was a big chunk of the U.S. market that was principle. For a number of reasons, it's better not to be principle. And so the U.S. market has evolved out of that method and gone with a more open, a more open method that is more visible by our clients so they can see exactly how you're doing and there is a number of reasons why it makes more sense. But, yes, the U.S. at one time was significantly more principle.

Okay. Maybe just in terms of the -- obviously it looks like there's a number of insurers that control a pretty significant portion of the market there. I guess, are those -- obviously, it looks like a lot of those are parts of European insurers that are in other markets in Western Europe. Is that a big opportunity for you to leverage those relationships over time?

I can't really comment on that. The reality is I'll give as much of an update on the U.K. when I can, but now you're kind of getting into strategy and where we're going to head and I just think it would be premature to talk about it right now.

Okay. Maybe just one last question. Obviously, you guys have a lot of international buyers and I'm just wondering -- does the fact that the cars in the U.K. are right-hand drive, does that, you think, make them any less attractive to your buyers for any reason, or not really?

Well, clearly, there's a lot of buyers today that are Eastern European buyers that are buyers of both Universal and Copart. So I would anticipate that those types of buyers are aware of both of us and they'll become more aware of us. Will U.S. buyers be buying U.K. product? I have no idea. These are things -- you guys all know as well as I do these are things we'll find out over time. What we believe is that there's an opportunity to leverage the buyer base, because I'm sure there's buyers that are Eastern European buyers that are buying in the U.K. that maybe are not aware of Copart. We think we'll leverage that buyer base clearly. Whether or not the U.S. will be in that market is just a big unknown.

But it doesn't sound like it's something that you think is a real problem, though?

I'm not worried about it. That wasn't our reason for doing the deal.

I didn't think it was. Okay, great. Thanks for answering my questions.

We have one more question in the queue. (OPERATOR INSTRUCTIONS) This next question comes from Bill Armstrong with C.L. King and Associates.

Just two quick follow-ups for Will. Will, earlier you mentioned that you had, I think it was $200,000 from the sale of royalty rights.

Yes.

Can you just elaborate on that a little bit on that? What was that?

That was a one-time item, so I wouldn't bake it in into any future models that you have. It was a drilling privilege on some of our property that could have mineral rights.

Okay.

Basically, it was an option to any mineral resources that we have on certain properties. Okay.

Would that potentially drive--?

Would that be a source of research going forward?

Yes?

No, I wouldn't ascribe any value to that.

Okay. Then could you just remind us for the fourth quarter of fiscal '06, what were your hurricane or abnormal hurricane-related revenues and MAG revenues? Just so we can model that.

Sure, just give me one second. Q4 revenue was $10 million for the hurricane, and we've previously provided that. And our abnormal hurricane costs were $2.7 million.

Got it. And anything from MAG?

MAG was relatively insignificant. While I don't have the exact number, I would estimate it to be about $900,000.

Okay, great. Thanks a lot.

You have one more question. This comes from Scott Stember with Sidoti and Company.

Just a follow-up, Will. Could you give the PIP versus fixed for the quarter?

Yes. The PIP remains fairly constant, and it has been consistently in the 60% range. And it was again this quarter.

Great. Thanks.

You're welcome.

Gentlemen, at this time we have no further questions in the queue.

Okay. Thanks, Matt. Again, thank you, everyone, for attending the call, and we look forward to reporting on Q4 in the next conference call. Thanks for attending. Bye-bye.

Once again, this does conclude today's call. Thank you for joining us and have a great day.