Copart Inc (CPRT) 2008 Q1 法說會逐字稿

Good day everyone, and welcome to the Copart Incorporated fourth quarter fiscal 2008 earnings 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, Incorporated. Please go ahead, sir.

Welcome to the first quarter conference call for Copart. We have got some good news to report on, and some updates with respect to the Company. You can probably hear that I am a little horse, and so I am going to turn the call over this morning to Will Franklin, who will lead the call, and then I will come back in for questions and answer with Will, but I won't be presenting like I normally do today, just because I am trying to rest my voice until I can get this hoarseness gone.

So with that, it is my pleasure to turn it over to Will.

Thank you, Jay. Before I begin, I need to read the Safe Harbor Statement. During this call we will make forward-looking statements within the meaning of Securities laws.

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 abilities to increase market share in competitive markets, our ability to secure beneficial supply agreements. We face risks arising from our increased dependence on proprietary technologies to conduct our auctions.

Finally, our recent acquisitions in the U.K. expose us to new risks relating to international operations. For more discussions of these and other risks 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, we will begin the comments on the quarter. In our first quarter revenue grew by $51.8 million to $184 million. In North America, revenue grew by $8.1 million to $140.2 million. However, the same quarter last year included approximately $3.6 million in extraordinary revenue associated with Hurricanes Rita and Katrina. Excluding the hurricane revenues, growth was $11.6 million, or 9.1%. Same-store sales in North America grew by 5%. Excluding the hurricane revenues from the prior quarter, same-store sales grew by 7.9%. The growth was driven by increased volume.

We are pleased that we have experienced unit growth in all categories of suppliers, however we note that in North America, units from the insurance companies represent a smaller percentage of the total volume. In the quarter, under 83% of our total volume came from the insurance companies, as we continue to develop new sources of products, in particular, we have seen meaningful growth in volume from other suppliers like charity, banks, and independent sellers.

In addition in North America, we saw what we saw what we call the VB2 effect, as both gross proceeds and return percentages on insurance cars reached their highest quarterly level. Return percentage is calculated by dividing the gross proceeds by the pre-asset value of the car.

During the quarter in North America, sales to registered international buyers represented almost 27% of total units sold, and almost 30% of the total gross proceeds generated. In prior calls, we have discussed our efforts to explore new sources of low end and salvage vehicles, specifically franchise independent dealers and the general public. We are still reviewing these possible sources, however we have no further information to disclose at this point.

During the quarter, we opened one new yard in North America. That yard is located in London Ontario, Canada. In the United Kingdom, revenue for the quarter was $43.8 million, and included the volume resulting from the flooding that occurred in the U.K. last summer, as well as volume resulting from our efforts to liquidate older inventory.

On November 3, we successfully converted seven of our 10 U.K. yards to VB2. We would like to acknowledge our IT and our operations teams on both sides of the ocean, that did a remarkable job in compressing a tremendous amount of work into a short amount of time. Based on initial results, we are pleased with buyer acceptance of the VB2 selling platform, and the impact VB2 is having on return percentages.

Once again, we would like to point out that in North America , we act primarily as an agent for the seller, remarketing the car on his behalf. We are not considered the owner. For cars sold in this manner, we recognize only the service fee and revenue.

In the U.K., we operate primarily as a principle, purchasing the salvaged cars from the insurance companies, and selling them for our own account. When cars are sold in this manner, we recognize the entire amount of the gross proceeds as revenue, and the cost of the car in operating expense. Approximately 2/3 of the vehicles sold in the U.K. in the quarter were purchased cars.

Consolidated operating expense and cost of sales for the quarter were $102.2 million, and include depreciation expense of $7.8 million, of which $600,000 was from the U.K. operations. In North America, operating costs for the quarter were $70.4 million, an increase of $200,000, or 0.3%. The minimal increase reflects better fixed cost absorption due to higher volumes. We expect to see continued increases in transportation costs in future periods, due to the rise in the cost of fuel.

Gross margin percentage for North America was 49.8%. In the United Kingdom, operating costs were $31.8 million, and included $25.5 million in the cost of purchased vehicles, and $600,000 in depreciation. Gross margin for the U.K. operations was 27.4%. Combined gross margin was $81.7 million, or 44.4% of revenue.

Consolidated General and Administrative costs for the quarter were $25.1 million. Included in that number is $3.2 million in depreciation reflecting the upward adjustment in the depreciable value of assets acquired in the U.K. Also included in this quarters G&A costs are expenses associated with the modification of options of retiring Directors, and the costs relating to employee separation. These costs which we consider to be non-recurring totaled $3.2 million.

Total depreciation expense for the quarter was $11 million, of which $2.6 million was from the U.K. operations. Consolidated operating income was $56.6 million, and operating margin was 30.8%. Income tax expense for the period was $22.6 million, for an effective tax rate of 37.5%, and includes the impact of adopting FIN 48. Consolidated net income was $37.6 million, and net income percentage was 20.4%.

On our Balance Sheet we had almost $250 million, Accounts Receivable, vehicle pulling costs, and deferred revenue all grew as inventory increased. We recorded approximately $5.2 million in goodwill, and $900,000 in deferred tax liabilities in connection with the Century acquisition. After-tax return on equity, on a trailing 12-month basis, was 15.8%.

Cash generated from continuing operations was $55.7 million, as cash from net income and depreciation was $49 million. Other movements in current assets and liabilities generated an additional $6.7 million. Capital Expenditures for the quarter were $19.9 million, and included $1.2 million for the buy-out of one lease.

That concludes my comments. Nicole, we will turn the call back over to you to manage the Q&A

Thank you. (OPERATOR INSTRUCTIONS)

Nicole, this is Will, I would like to make one comment for you before the Q&A. I said 3.2 million for the non-recurring cost of G&A, it is actually $2.3 million.

Okay, we will take our first question from Bob Labick from CJS Securities.

Good morning. Congratulations on a very strong quarter!

Thanks, Bob.

First question, just wanted to ask as it relates to the North America adjusted same-store sales of 7.9%, obviously a very strong number. I was hoping you could break it down a little bit more. Last quarter you discussed some competitive wins. Were those still present, and did they account for the strong comps, or was it more the new sources you alluded to on this call, and could you elaborate on the market outlook as it relates to those new sources?

Well no, we don't break it down by category. Everything we mentioned affects the same-store sale number that we gave you. And all we can say is that our efforts will continue to develop those other sources, whether they are charities or financing companies or banks or individuals, all of them are reliable sources, and we will pursue them all.

And how much do you believe those new sources could grow the overall pie, if you will, for you?

We are not going to specify.

It is too early right now, Bob. We are working on it and we are working on our integration in the U.K., and it is just too early to comment on it.

Okay, switching over to the U.K., obviously it was a terrific quarter, and the sales recorded were significantly higher than the combined sales from the prior two firms history. It sounds like the flood had something to do with that. Could you give us a sense of how we should think about this going forward? It sounds like most of these sales obviously were done before the VB2 was instituted. Are there other sales synergies? What should the rest of the year look like?

Bob, all the sales were done prior to the VB2 integration. That was done in November at the beginning of this quarter. No, I mean, obviously, the sales for this quarter, the first quarter reflect some additional volume as a result of the flooding in the U.K. that we would not expect to be recurring, so we are not going to size or estimate what the revenues would be going forward.

We have said that we are happy with the November results thus far, so we have finished the month in the U.K. with seven of our locations integrated of the 10. Century is not integrated yet, those seven locations are on VB2, and we have seen positive results thus far, and as we have said in the past we refer to it as the VB2 effect, and we are seeing that type of effect take place in the U.K. right now as returns are up, so that is good and that is about all we are going to report on until we get more information.

Great. Thanks very much. Look forward to seeing you next week at the conference.

Okay, Bob.

We will take our next question from Tony Cristello with BB&T Capital Markets.

Thanks. Good morning, gentlemen.

Hi, Tony.

I guess from the follow-up just on that last question, the flooding, is it something we should have to think about though as we model out for next year, that it will make it for a much more difficult comp, or is it something that is not nearly as material as what we saw with the flooding that presented sort of a headwind for Katrina in some of North America, that we want to just cycle through?

It is not to the scale of Katrina and Rita, however, it will create difficult comps same quarter next year.

Okay. And then when you talk about the implementation of VB2, seven of the 10 converted, any expenses associated with that process? I am assuming they have been incurred to date, and if we think about as you roll this process out over in the U.K., how should we, you know, do you incur the majority of those expenses up front, and then as quotas progress, you would then get more and more of the leverage? Is that how we should be thinking about it?

Exactly. We have some expenses reflected in G&A and in the operations side associated with the integration. We will continue to incur those expenses for the next few quarters.

The first year is always the year of integration and expense. I mean, we will have our systems and our metrics in place and our controls, but the costs will exist in the first year, as we do an enormous amount of culture training and procedural training, et cetera.

And Tony it is our policy not to capitalize expenses when we kind of avoid it. We try to keep a clean balance sheet, so all of those expenses to the extent we can are flushed through the Income Statement during the period.

Okay, so any margin that we see now that might be taking a hit, I am sure you are not going to quantify what type of expenses you would share with us in terms of what the you are implementing but if I think about it starting, maybe you have had two quarters now where you have put expenses or costs through. Should I think about as the next two or three quarters go by, it won't ramp up higher, or has the greater percentage of those costs already been incurred?

I can't imagine, Tony, that the incremental expenses will be higher going forward.

Okay, and then just one last question. You mentioned the SG&A, the 2.3 million. You had retiring Directors, and there were some modification of options to that. Could you just give maybe a little bit more color on that, I am sorry?

Sure. We had two retiring Directors, and as part of the process of the Comp Committee approved a modification of certain of their options, to extend the period in which they could exercise those options, and because of the modifications, GAAP requires us to recognize an expense, and that expense is reflected in G&A number for this quarter.

Okay, and one last question, the other three facilities to be converted, do you have a timeline on when you would expect those to be converted to the VB2 process?

Yes, right now, we are obviously in the process of, I am trying to think of the right term, but allowing the changes we have made to kind of solidify and change is difficult, and so you have to allow that change to kind of mellow out for a bit, so we are doing that right now and we are in the holidays, with Christmas coming up, et cetera, so it will probably be in the first month of the New Year.

Great. All right, thanks, guys. I appreciate it.

We will take our next question from Scott Stember from Sidoti & Company.

Good morning.

Hi, Scott.

Last conference call, Jay, you had talked about there were some other things related to the integration like changing the culture of the U.K.-based firms that you acquired, as well as improving cycle times, and just general procedures. Could you talk about how that is progressing?

Yes. It is not a U.K./U.S. culture initiative. It is a Copart culture initiative, and any time that Copart acquires a company, we go through cultural training, so I just have to, I have to explain that, because I think often people think of culture as being country culture, and that is not what we are talking about, so we are in the process of talking about the services that we offer, and the products that we offer, and any time you put in completely new systems, you are going to have a period of time where people have to get comfortable with that, and it's typically 60 to 90 days.

And that just means that the internal employees that we have got have to get comfortable with utilizing our screens and our systems, and then our external customers being those buyers, and sellers have to get comfortable with our web-based products, i.e. VB2 and Seller Snapshot and Seller Access, so as they get comfortable with reporting, and getting the information and of course things mature and they mature quickly, this isn't like turning coal into a diamond.

You know, this is more like we implement and 30 days later, major changes have taken place, so we have already seen further improvements as we talked about, with respect to pick up times and with respect to clearing cars and those kind of things, so we have already seen that within this month alone. So that is going to take place for the next 90 days but that is kind of the initial stage.

And then long term, change will take place for the next year or two, and that is normal as we build in that the work we are looking now at adding some locations, some greenfield locations where we can store more vehicles and we pick up, obviously we have talked about before, building a network of 15 to 20 locations, so we will be closer to the cars, we can pick up cars quicker, reduce costs for our clients, and make it easier for buyers to pick those cars up, and store those vehicles, et cetera. So that is kind of where we are at today, Scott, in a nutshell.

Okay, and just you talked about the VB2 effect really taking place over in the U.K. Could you just give some anecdotal comments on some of your customers, any the eye popping comments for them, just giving the increases in the returns?

No, you know, this is how I look at it. We implemented the first week of November. We are now first week of December, so I always look at it as okay, 30 days, your returns could go down, your returns could stay flat, your returns could go up, but it is such a small period of time, even if returns were down, I wouldn't be concerned but they are not, and they are not flat, they are up, and that is a good thing. We are excited about that obviously, but they are only going to get better, because the product matures over time.

Same way that we are sitting here in 2007, four years after we launched VB2, and we are looking at a record quarter, with respect to returns for insurance companies compared to last year, and the year before, and the year before that, and in 2003. So we don't sit here anecdotally and look at one client or one customers comment or one car. It is just not the appropriate, but we look at okay, we sold thousands of cars across-the-board, and we are up as a whole, and we are happy about that, and we are looking forward to seeing how December and January and February finish up, and we will report on that when we finish Q2, we will report on how we look for the three-month period.

Okay, last question on the share count. Did you guys repurchase any shares in the quarter, or what we saw, was that just a result of the averaging through from last quarters repurchases?

Yes, Scott. We didn't purchase anything during the quarter.

Okay. All right that's all I have, thanks.

Our next question comes from Matt Nemer with Thomas Weisel Partners.

Good morning, everyone.

Hello, Matt.

My first question is regarding title processing. It seems like there have been some improvements in certain states, in particular in California, where you have been able to reduce the time to process titles, and I know that you have a DMV office in your headquarters now. Can you give us some detail on kind of what that the can do for cycle times, and potentially the impact that could have on capacity, freeing up capacity in your yards?

Yes, Matt, I don't think it's material. I mean, the DMV office in California has been there for two years now and when you can something like that, you can shave off some days, but it is nothing material enough that we would start reporting on calls. Where we have got DMV offices in-house, and where we see cycle time reducing because of that, so I would just, I would leave you with I guess the words of wisdom here would be, don't worry too much about whether or not we can get DMV offices in or we can't, because it is not going to affect the business that much.

Okay, fair enough. Second question is you mentioned, Will mentioned independent sellers, in terms of a new source of vehicles, and I am just wondering if you can give some more detail on that? Are those individual vehicle owners, and how are you marketing to that group of sellers?

Yes, Matt, that is not a new source. That is a source that we've had for some time. I just mentioned that volume through that source has grown.

We have done that for a few years now, and we have just recently in the last year announced the percentage break out, and I think the first time we announced it, we announced it as 85% insurance and 15% non-insurance, so we are just reporting in the quarter that it is now 83/17, but we don't intend today or in the future, to break out what percentage is coming from where, in the non-insurance base.

There hasn't been any change in your marketing effort towards some of these other sources?

In what period, the last 90 days? (laughter) We have been, we have had the same initiatives going for the last six months, for the last year, really, so we're working a lot of angles, and if they end up being fruitful, we will report on it.

Okay, fair enough and then my next question was now that you have planted a flag in Europe, kind of have you been getting calls from operators in other countries over there, and how quickly would you like to potentially move into new markets?

Well, I mean, we have been in touch with our U.K. friends over there for the last 10 years, and so I think as a Company we are pretty connected globally. I think we are pretty aware of who is out there, and I don't think that's changed a whole lot since we got a physical presence there.

But with respect to the speed or the timing of growth, it is more about a controlled growth, and making sure that we provide the service and the expectations are met or exceeded for our clients, and as we integrate, we can do that, and the next step will be to make another acquisition, and do more growth, but we are not going to go out tomorrow and grow in it some haphazard fashion, the same way we didn't do it in the 90's.

In the 90's we had nice controlled growth with acquisitions, and we are going to do the same thing today, because it is all about making sure that when people do business with Copart, whether they be buyers or sellers or they be employees, that the they feel good about that experience, and we don't want that experience to be something that is negative, and then later on we have to go back and try to deal with that. So right now, we are an integration. I am not going to say things are perfect. They are definitely not, but they are never perfect in an integration, and we are working on that.

We have got our challenges. We are addressing those challenges, and we will come out of that and we'll make, we will be at a position where we are doing everything right, and we have got the right metrics being hit, and things will be great and then we'll look for growth in the future, but we are not going to rush tomorrow to go buy companies by any stretch.

And then my last question for Will is just on the tax rate, should we expect that to go down based on the U.K. profit stream? I was sort of surprised it was relatively flat although I guess there is FIN 48 in there as well.

No, I wouldn't expect it to go down. Tax is an interesting item, because it can change on one Judge's ruling. They have got new issues out there like economic and access that could affect State taxes tremendously, but going forward, I would expect it to be between 37.5 and 38%.

Great. Thanks very much.

I should say that being said, in any one quarter, it could swing because of discrete rulings, or items that normally occur during the quarter.

Okay, thank you.

Our next question comes from Craig Kennison with Robert W. Baird.

Good morning and congratulations, guys.

Thanks, Craig.

First question on the VB2 effect in Europe, or especially in the U.K., in the U.S, part of that success was driven by your ability to sell overseas. Are you seeing that trend materialize at all in the U.K.?

Yes, we are. Hold on one second, Craig. Craig?

Yes.

A little off conference call meeting there, to see if we want to disclose a number or not. I mean, we are very happy right now with what we've seen with respect to international bidding, so we are running at just around 20% in the U.K., and I think Will told you it was 27 in the U.S. in terms of units, and that is a great number in itself, and my guess is it will probably grow over time, but we will see how it does.

And as I understand the model that should lead to better yields, and therefore you can make the case that you could win more market share based on your superior yield?

I have said in the past I don't care if an international buyer buys it, per se. I want to make sure that there are a lot of buyers on a vehicle, and so when there is an international buyer that is the second high bidder and an international buyer that is the high bidder, when there is an out of State buyer that is the second high or the high bidder, I think that just means we are selling to a global audience, or nation audience, instead of a local audience.

And I remember my early days watching local buyers from 60 miles away bidding, and that was kind of where a majority of the cars sold to, you occasionally got someone that came in from the Bay area into Sacramento. Or you occasionally got someone who drove down from Oregon or from Washington to bid in the Vallejo location, so it is all about supply/demand, and we want to increase the amount of demand for the product, and if we do that we generate higher returns. Those are some of the efficiencies.

Obviously VB2 eliminates any collusion. So I can't go over to the auction and look over at my friend and decide what cars he will bid on, and what cars I will bid on, so it is the same story that it was four years ago. The efficiencies, the transparency, all exist with VB2. A lot of times it doesn't exist with a live auction. A live auction allows for colluding, and a live auction allows for inefficiencies that VB2 doesn't, so I don't think it's just the international effect, but I think that in itself, the international effect means that we have got more buyers that are there, and more buyers generates a higher return.

Are the international buyers from your U.K. operations the same buyers that the would buy at your U.S. Auctions, or are they incremental buyers?

I don't know so I can't report. I have not actually gone down the path of trying to figure out if this buyer in the U.K. is the same one that is buying in the U.S.

Okay, just shifting gears to 2008 CapEx plans. Will, have you disclosed or given any thought to that?

No. On the last call we said that the we were not going to disclose that. And so I have nothing to add to that.

Fair enough. What about your capital structure? Have you guys given any thought to your cash balance at 250 million, to changing that capital structure, or are you still happy with where you are?

Do you want to comment on that?

Sure.

Okay, (laughter) It is a little weird having this voice thing right now, Craig. We are happy with our capital structure, and that doesn't mean that we won't increase the amount of cash on the balance sheet, or the corollary of that decreasing the amount of cash on the balance sheet. It is just something that we look at quarter to quarter, and it is a use of cash.

Right now we have got the opportunity to buy property. We have got the opportunity to buy companies, and we have got the opportunity to buy stock, and we will look at all of those opportunities and try to weigh which one is the best use of cash at this time.

Okay, thank you.

Our next question comes from Gary Prestopino from Barrington Research.

Good morning, guys.

Hi, Gary.

Will, I didn't get the total D&A for the quarter. Could you just give me that?

It was 11 million. That is depreciation and amortization.

All right, and then in terms of you said about 66% of what you were doing in the U.K. this quarter was purchased vehicles?

That is correct.

Where did that stand last year at this time? Do you have that metric?

We don't. Last quarter, it was about the same.

All right, but you were working to try and drive that from a purchase to a fee based?

No, no, we are really not. We are trying to service the insurance companies in the U.K..

All right, so however they want it?

Whatever they want, we want them to be happy with our service. We want them to be happy with our returns.

And what was the stock option expense for the quarter, besides that non-recurring number?

Gary, give me one second. I will get back to that before the call is over.

That is fine. You can call me off line too with that, and then I guess the question that I have is that you are basically dealing with U.K. insurers in the U.K. Are you dealing with insurers that also are on the continent as well?

It is both. We are dealing with insurers, Gary, that are only based in the U.K., and we are dealing with insurers that are in U.K., and mainland Europe and Asia, so it is really a mix.

So are a lot of the U.K. insurers that you are dealing with, also writing insurance on the continent?

Yes, I would say in the U.S. That the U.S. insurers are much more U.S. based per se.

Right.

Whereas in the U.K., I would say they are much more global. They may be based in the U.K. They may be based in Germany, but they do business in the U.K., Mainland, Hong Kong and other markets, so it is a much more global environment I would say over in the U.K.

Thanks.

Sure.

Our next question comes from Bill Armstrong with CL King & Associates.

Good morning. On your last conference call, you indicated that you expected to have all 10 of the U.K. operations rolled out to VB2 by December 31st. Are you still on-track to do that, or will the Century units slip out into the second fiscal quarter?

Yes, Century will be integrated, it will be integrated in this quarter, the second quarter but it will be in the new year.

Okay, so like January?

Yes, that is the plan.

Okay, and I was under the impression that you were going to be trying to migrate the U.K. business model more towards an agency versus principal model. Should we not be expecting that then?

No, let me just comment. I was going to interrupt you but you finished, (laughter), and the reason for that the is we believe that the partnership, the business partnership that is best between Copart and its sellers is a fee-based model, a model where it is fully transparent. We show you what the cars are selling for.

We do everything we can to get the most for the car, and I am just having a little voice difficulty, but the point being, we do everything we can to generate as much as we can for the car, and in essence, pass on that gain and that increase to you, and then take a piece of it.

Under a purchase model, we think it puts us in a position where we get the gain. We get the upside. Right now we are saying an increase and that is great, and we are going to get that upside, but we think long term, the right strategy is to sit down with our customers, show them that and say let's move you to a fee-based model. We charge you fee-for-services, and then you get the global benefits of Copart And VB2.

With that said we are never going to tell a customer what the to do obviously, so Will's point was simply, hey we have explained that, we've talked about that already with our customer base, and then it's up to them, they want to leave it the way it is right now, we will leave it the way it is, but we think long term they will probably switch, just because what is the sense in allowing Copart the upside of those vehicles, why not let the insurance company have the upside, and then we get a piece for what we do, and we think again that is the right business relationship to have with the customer base.

When we take an account on in the U.S. And bring them on, we bring the new account on in New Jersey, and we see them have a 2% increase in their gross, we are happy that the they got that upside. We are happy they have seen that. We are happy that they recognize us for doing that because we believe that builds a long term relationship, and they are going to want to do business with us not for years, but for decades.

So that has always been our approach whereas when you are in a purchase model, you are tendering every year, you are looking at returns, you are trying to analyze where they are at, should you pay me more, and of course, you know, the vendors approach is always going to be, well I only have to pay you more than what the competition is willing to pay, when you are in your purchase model, and the insurance companies approach is going to be, well, I want more for my cars, and it is best just to say, look , I will take a percentage of the car or fee, and then you get the upside as we go

As you kind of talk to these insurance companies through that idea, are they receptive to it, or are they kind of maybe stuck with some inertia?

No, no, I think it is been very positive, and I think they are very receptive, and I think as returns go up, they are more receptive to it. (laughter) Obviously if we are buying cars we're certainly making more money on those cars, I think they become more receptive to us sharing together in the profits, rather than us taking the profits, per se.

Okay, but it sounds like in the near term maybe for the balance of this fiscal year anyway, just in modeling this, we probably shouldn't look for that 2/3 of the units being principal to change too much?

Oh, I am sure it will change. I can't report what it will change, but I will be surprised if we end up at 2/3 by the end of the fiscal year, so it is going to change something. I just don't know how much.

Okay, all right thanks for that.

Okay.

Nicole, before we take the next question I would like to respond to a question that Gary Prestopino had, about the 123 R or the stock option expense cost for the quarter, and it was $2 million.

Our next question comes from Philip Volpicelli from Goldman Sachs.

Good morning. I was just wondering if you would comment on pricing, what the competitive nature is out there, and can you raise prices, would you raise prices? If you could give us some color?

I wouldn't comment on it and we don't, and we have said that on previous calls that we think we are very competitive company, and we add a lot of value, and I often say that you can't afford not to do business with Copart, because at the end of the day when you look at results, we generate such an increased return, that it just makes sense to sell your cars in a global platform like VB2, but I wouldn't comment in any given quarter on pricing today, or in the future.

Okay, and with two of your main competitors in the salvage market combining operations, does that prove to be a benefit for you, in that you are gaining share in some of those locations, or is it making it more difficult in those markets where they are combining?

Well I think we are doing real well right now, and I think we have got a great team that is out there, spreading the word, talking about what Copart does, what the benefits are, and we have had some market gains, so I think things are good and I anticipate they will be that way in the future.

Okay, thank you very much.

Sure.

And our next question comes from Jaison Blair with Rochdale.

Good morning, congratulations on the decent results!

Thank you, Jaison.

Can you talk about share buyback during the quarter? Were you in the market buying your stock?

No, we weren't in the quarter.

Okay. Does it make sense at some point to have some leverage on the balance sheet?

Well, Jay answered that question a little earlier. We look at this all the time, what is the best use for the cash, and what provides the most return for our shareholders, and it is not a short-term decision process. I mean, we are looking out not only quarters but sometimes years. But once again, that is something that we talk about frequently. It is a Board topic, and you will see on the balance sheet the results of the current decision.

It seems to me as though timing for other European or non-U.S. market acquisitions, that your decision to make investments outside of the U.K. might be constrained by your management strength, and the bench strength that you have got right now. Can you talk a little bit about how you are developing your management team to deal with growth internationally, and just a higher level of investment in the U.S?

Yes. Sure. We have wonderful team that the is managing the U.K. right now, and that team is primarily U.K.-based, and we are fortunate enough to get them from the acquisition of the Universal Salvage, and some of that team is from the U.S. right now that is assisting.

But the long term strategy for growth in the U.K. and in Mainland Europe, is to have it from the U.K.-based team. It is not the going to be a U.S.-based team that is over there. It doesn't make sense for a number of reasons, and I could go into them but I think most people understand, you have to have a home office in the U.K..

We have that just North of London, and you have to have a U.K. team that leads the charge, not only in maintaining the existing book of business, but growing the Company in the U.K. and over in Mainland Europe, so that is part of what we are going through right now. I could put 400 people on it. It is not going to get done any quicker.

We have an old saying here, that nine women can't have a baby in a month, and basically that doesn't change, so we have got a certain amount of time no matter how many resources we put on to allow people to learn, and to train, people have a learning curve that they have to go through. You can't accelerate it. You can do everything you want.

You can try to stuff more information in people, than they are ready to accept and all you will do is have a meltdown, so we will go through it at a nice controlled pace, and we have got the right amount of people on, and we have got plenty of resources to do it. We are not constrained or taxed by any stretch, and as soon as we are ready to take the next step in growth, then we will do that with respect to acquisition, and like I said we are looking right now at just expanding just some greenfield locations, because we have got plenty of business, and we could use a little better network. We could use a few more facilities just to be closer to the cars.

That is a good answer. Have you talked generally about your capacity utilization in your U.S. Yards, and where that stands relative to the additions that you might need to make in the next 12 to 24 months?

Well we never go yard specific, but we have commented in the past, and it is a pretty standard answer. I wish I could push a button on this one, because it really boils down to some yards don't have space, and we wi'll be adding locations around them, so that we are closer to cars. An example I think I gave on the last call was Baltimore.

We are in DC, we're in South Jersey, and we picked up from Baltimore every day, and took them to DC, and now we have a location in Baltimore, so we have got more capacity and we are closer for the cars. Any time we can do that, we will.

If we cannot do that, then we will add existing land to our facilities that are already there, so if it has got a 30 acre location, that we will expand it to a 40 acre location, so the goal will always be to expand yards that don't have room, and some of our yards in the U.S. are at 50% capacity, have plenty of space, and probably won't have to be expanded for 5 or 10 years. It really is just a yard by yard experience, and we will add locations this year in the U.S, as we have always done, and we will continue to do that going forward.

So we shouldn't expect a major U.S. expansion project, because you are at or near capacity, which would impact your level of profitability for some stated period of time?

I don't know what you would call major. We have always reported that we will add about 6 to 10 locations a year.

In other words you are keeping ahead of it?

Yes, we always have, and you can't just go out and open up an auction or a storage facility in the next year, so we have got some we have been working on four or five years, and you have got to go through zoning, and it takes a long time, so we have got a pipeline and so many will come off every year.

Great, thank you.

We will be reporting on some this next quarter, and as we said we did London, Canada, in the last quarter.

Our next question comes from Darrel Norian with BlackRock.

Hi, I just wanted to understand, in any way do you guys view the currency as impacting the business, as maybe helping with the sales to foreigners or otherwise out of the U.S., or even U.K., the rest of Europe?

Yes. You know, I have been asked that question in the past. I don't really know how to quantify it. I mean, I remember when we first launched VB2 in 2003. We saw an uptick that year, and we have seen one every year, and it has been consistently going up every single year and at some point we tried to track it.

We tried to see if it tracked to the Euro or to some foreign exchange rate, and we couldn't get it to track, so it just depends market by market. I think what has a bigger impact is when buyers become aware of us in a particular market and start to buy. You will see more purchasing and supply demand is a big deal in the world we live, so if we can can increase demand in the market that seems to have more effect.

Our largest importer or I guess exporter in our case, the country we export to the most is Mexico, and they are on the Peso, and I can't really tell you how the Peso has tracked in the last four years, but I know it doesn't track the same way that the Euro has, so that may give you an example of why I am not overly concerned with currency.

Great, thank you.

Okay.

(OPERATOR INSTRUCTIONS) We will take our next question from Mark Cohen, Force Capital.

Hi, Will. Can you break out U.S. D&A and G&A for the quarter?

No, it is impossible to do so. We have so many shared resources and shared expenses at that level. On the revenue side, we have a discrete population of transactions that we can scribe to certain regions, and the same with the cost, and that is why we gave the figures down to the gross margin level, but once you get below that level once again, you have got insurance, and you have got technical support, and it really is impossible to determine exactly which regions those benefit specifically, so therefore we won't do that going forward.

Okay, thanks.

It appears there are no further questions at this time. Mr. Adair, I would like to turn the conference back over to you for any additional or closing remarks.

Okay, thank you, Nicole. Again, we are pleased to report on Q1. We look forward to reporting on our results for the second quarter next year.

Hope you all have a wonderful Holiday! Merry Christmas, and we will see you in the new year. Happy New Year! Bye-bye.

This does conclude today's call. We do appreciate your participation. You may now disconnect.