Copart Inc (CPRT) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Copart Incorporated second quarter fiscal 2008 earnings call. As a reminder, today's call is being recorded. For opening remarks and introductions, I'd now like to turn the call over to Mr. Jay Adair, President of Copart Incorporated. Please go ahead, sir.

Thank you. Good morning everyone and welcome to the second quarter call for Copart. As you can hear, thankfully I got my voice back. We have a lot of information to update you on today with respect to the quarter and things going on with the Company. So I'd like to start that so I'll turn it over to Will Franklin and then do the call and open up for questions. Will?

Thank you Jay. During this call we may make forward-looking statements within the meanings 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 ability to increase market share in a competitive market and our ability to secure beneficial supply agreements. We face risks arising from our increased dependence on internally developed systems to conduct our auctions.

Finally, a recent acquisition from the United Kingdom expose us to new risks relating to International operations. 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. With that, Jay, I'll turn the call to you to begin comments.

All right, thanks Will. Again, good morning everyone. I did break the call or at least break my portion of the discussion out into North American and United Kingdom operations. I''ll start with North America. Looking at North America revenues grew 6.8% to $137.6 million. International sales in the second quarter of '07 were 26%, International sales in the second quarter of this year are 28%. We believe this is due to the fact that we've now got a European headquarters based outside of London that is doing a lot direct marketing. This is marketing in magazines and newspapers, in Poland, Russia, Lithuania, a lot of Eastern European areas.

In addition, we have got a footprint now that covers the U.K. of locations. These are locations that are interacting every day with buyers from the European, Eastern European markets, et cetera. And the last bit that I think is a cause of this is just cross pollination of buyers. We've got buyers that were buying product in the U.S. that are now buying product in the U.K. and we've got buyers that were buyers of product in U.K. that are now bidding on vehicles in the U.S., so we're just seeing an overall penetration there in North America that's increased quite a bit.

We're also seeing record returns in fiscal '08. So as we look at the year, I think from my perspective, since I've seen returns increase every single year since 2003, the launching of VB2, I keep waiting for this to mature and level off. It hasn't been the case. So both in the U.S. and in the U.K., we are seeing returns increase. We are currently sourcing 83% of vehicles from the insurance industry and 17% of our vehicles sales from noninsurance. A lot of growth in the Banks and Financial Institutions, as they see the power of remarketing your vehicle through Copart. Excluding the Hurricane Katrina vehicles, same-store sales for the second quarter were 8.5%.

In the second quarter and up to today's date, we opened four locations. A location in Birmingham, Alabama, Minneapolis, Minnesota, Walton, Kentucky; servicing the Cincinnati, Ohio area and Trenton, New Jersey. We expect in the next 12 months that we will open another eight to ten locations across North America.

Looking at the United Kingdom. Things are going very, very well in that market. We're excited about the fact that we have fully integrated ten locations we'll talk about on the call today how those ten locations are doing and additional growth in that market, some recent acquisitions, but I think the important part here is that our clients have been extremely supportive of what we're doing. They realize the value behind building a network and building that network you want to be closer to the vehicles. That allows for quicker pick-up times, reduced costs associated with picking up those vehicles and at the end of the day, that just means that we can become more competitive and offer more compelling SLAs to our client pay. So we're doing all of that, at the same time we're offering up some of the XML, EDI, EFT interface technologies that we have done in the past to those clients and they're very interested in anything we can do to give them better reporting on salvage and allow them to reduce costs at the same time. So things have gone very, very well there.

Now, if we look at the business from a financial perspective, guys this is all about timing and Copart is not going to run the Company on a quarter-to-quarter business, we're not even going to run the business on a year-to-year business. This is going to be a business that we look at long-term and the short -term impact of that or the short-term effect of that is that we have, what I would call normal integration costs associated with a full integration of an enterprise that is literally larger than 10% of the whole company, of all of Copart. So we've got increased towing costs, we got increased temporary labor associated with training, associated with finding vehicles in the yard and inventorying those vehicles and getting every thing done. At one point, we had over 100 employees from the U.S. that were assisting in the U. K. in this integration. So the fact of the matter is, we are in a position today that we handle an integration of this magnitude but at the same time having an integration of this magnitude is going to have one-time cost and those cost exist in Q2 and they won't exist in Q2 of '09. So we will see that expense.

The other thing is, it would be crazy, silly, and stupid of this Company to go out and start flooding the market in the holidays with vehicles, during the Christmas break, the winter break, the fact that we're bringing in a record number of units and just start selling off those vehicles when you've got buyers that aren't fully trained at that time on VB2 and utilizing of our technology. So as we sit today, we're four months into it. Our buyers know how to use VB2, they understand how to bid, returns are up. In other words, [inked] out vehicles in the second quarter didn't sell the normal volume that you'd normally sell and did that because we wanted to make sure our staff were trained properly, we wanted to make sure customers, both on the sale side and on the buy side were trained properly, and now we're disposing of those vehicles. We had a record month in February, we'll be having a record month in March.

Inventories, we showed in the press release were up over 27%, approximately, so when you look at the fact that we've got this big inventory bill, we're going to be selling those vehicles off in the third quarter. So I guess at the end of the day, it's a timing issue, as I said, the important part here is that buyer acceptance has been very strong, that the U.K. market already had a pretty strong Internet influence and so for us to bring in VB2 and the utilization of that marketplace -- VB2's more efficient. It doesn't allow for collusion, it allows for global buyer base and so it's really about scaling and using the skills that we've got and that has all been-- exceeded our expectations, so I have been very excited about that.

Now, we also announced that we bought two companies; A.G. Watson's and Simpson Brothers in the quarter and outside of the quarter. I'm giving you most up-to-date information as of today, and those five locations; two of them are in Scotland; three of them are in England. We should have all five of those locations fully integrated to the Copart model, to our auction methodology, to VB2 by the fourth quarter. So that gives us 15 locations; that gives us the best logistics network in the U.K. today, but we're not done. We'll be expanding that network and expect by the end of the calendar year to be 20 locations across the U.K.

So, to say that this has been a learning process for us is probably an understatement; this has been a terrific experience; this is something I don't believe we could have done 10 years ago. We've got the right team, the employees in the Company are excited about what we're doing, both in the U.S. and the U.K. The U.S. was more than apt--- we didn't have to twist anybody's arm to go out and help in the U.K. to get this done. People gave up their holidays; some people came during the Christmas break, so that's a lot excitement in the U. S. On the U. K. side they completely and totally get the vision of what were are doing. They're excited about that; they're excited about our culture, the culture at Copart is one that is opportunistic. And we are going to have a culture that is constantly talking about, you may be a customer service rep today, you may be a forklift driver today, but the future is, you could be a branch manager or general manager one day of a location. And I think, that as we refine our approach towards International integrations, we're going to figure out more and more, the same way we did in the U.S. ten years ago. We didn't integrate companies the way we do today.

So we're getting better at it; we're going to leverage those skills and we're going to do that through our U.K. team, because that team really gets our culture, they understand what our goals are, what our vision is, and what we're trying to do. From a capital perspective, we have already invested or committed over $170 million so far in the U.K., and this is over $170 million that have been used for purchasing businesses, land, equipment, fork lifts, et cetera. So we are just upgrading facilities, we're purchasing land, we're securing our position as the leader in the marketplace and building the best logistics network in the U. K., and building the best remarketing model in the U.K., with the use of VB2.

Looking company-wide and I'll save the rest of U.K. for questioning, but looking company-wide we have purchased in the quarter $41 million worth of stock, in a buy back, approximately a 1 million shares, currently have 173 million in cash on the balance sheet. Will Franklin will talk about our credit facility that we just secured for 200 million and I'm very happy to report that we were issued a patent on VB2 in the U.S. this year, recently. So with that, I'll turn it over to Will and then we'll open it up for questions.

Thank you, Jay. In our second quarter consolidated revenue grew by $44.5 million to $173.5 million. In North America revenue grew by $8.7 million to $137.6 million; however, included in the same quarter last year, was approximately $2.6 million in extraordinary revenue associated with Hurricanes' Rita and Katrina, excluding the hurricane revenues growth was $11.4 million or 9%. Same-store sales in North America grew by 6.3%, excluding the hurricane revenue from the prior quarter, same-store sales grew by 8.5%. The growth was driven primarily by increased volume.

We have experienced growth in all categories of suppliers. Units from insurance companies as a percentage of total units was down from the same quarter last year. Remaining at approximately 83%, the same as last quarter.

During the second quarter, gross proceeds and returns were higher than the same quarter last year and sales to International buyers, expressed in units, represented 28% of all North American sales. In United Kingdom revenue for the quarter was $35.8 million. U.K. revenues were adversely impacted by credit card fraud which reduced revenue by $900,000 and by delays in processing certain cars which would have normally been sold during the quarter. The delays were associated with integration and the sales deferred in this quarter will be reflected in our third fiscal quarter.

Each of the facilities that we owned in U.K. at the end of the quarter have been converted to VB2, and we continue to be pleased with buyer acceptance and return percentages. Consolidate operating expense and cost of sales for the quarter was $104.9 million and included depreciation of $7.8 million of which $800,000 was from U.K. operations.

In North America, operating costs for the quarter were $69.5 million, an increase of $900,000 or 1.4%. The minimal increase reflects better fixed cost absorption due to higher volumes. We expect to see transportation costs in future periods to increase due to the rise in fuel, the cost of fuel. The gross margin percentage for North America was 49.5%, a 270-basis point increase over the same quarter last year.

In the U.K., operating costs were $35.4 million, and included $23 million in costs of purchase vehicles as the percentage of purchase cars in terms of units to total units increased to 71%, the increase was due to contract mix. Also included in yard operating costs are the impact of the credit card fraud from the sales of non-purchased vehicles, that amount was $600,000. Also included are the incremental costs associated with the integration, estimated to be approximately $2.2 million and include travel and lodging and other related expenses to deploy approximately 100 people from the United States to U.K. to support the integration and other costs like temporary labor and incremental contract trucking. Gross margin for the U. K. operations was 1.2%.

Combine gross margin was $68.6 million or 39.6% of revenue. Consolidated general and administrative costs for the quarter was $21.4 million and included $3 million in depreciation, of which $1.7 million was from the U.K. operations. Total depreciation expense for the quarter was $10.7 million. Consolidated operating income was $47.2 million and operating margin was 27.2%. Income tax expense for the period was $18.6 million for an effective tax rate of 36.7%. This includes the beneficial impact of the state tax audit settlement. Included in, excuse me, consolidated net income was $32 million and net income percentage was 18.5%. On the balance sheet our cash was approximately $173 million. Accounts receivable, vehicle pooling costs and deferred revenue all grew as revenue increased, excuse me, as inventory increased. Taxes payable to decline, due to the timing of estimated tax payments per state and federal income taxes.

During the quarter we repurchased approximately 983,000 shares of our own stock at a cost of approximately $41 million. We have established a $200 million revolving line of credit, it is unsecured and currently available. After tax return on equity on a trailing 12-month basis was 15.8%. In the quarter we consumed $700,000 in cash through operations. As cash generated from net income and depreciation of $43.1 million was more than offset by growth in inventories and receivables and the reduction in income taxes payable. Capital expenditures for the quarter were $38.3 million and included a lease buyout, the replacement of the airplane that we sold in the third quarter of last fiscal year and general yard expansion and yard improvements. And with that, Katherine, I'll turn the call over to you for questions and responses.

Thank you Mr. Franklin. (OPERATOR INSTRUCTIONS). We'll take our first question from Bob Labick with CJS Securities.

Good morning . Thanks for taking my questions. Good to hear your voice

I'm back and I love it. You have no idea. It was terrible.

I believe it. Especially for you.

Yes, especially.

Just wanted to verify, in terms of-- (technical difficulty) you mentioned the timing on sales, the delay in sales in the U.K. was a conscious effort on your part to, for the integration of VB2 and things like that, but I just want to understand the underlying fundamentals there, the pick-up volumes and your market share gain and everything is still consistent with your expectations; is that true? (technical difficulty)

We're extremely happy with what we've done so far. I can tell you that we took more assignments than I thought we'd take. We exceeded my expectations in terms of assignments that came in in November, December and January for U.K. operations. It was just crazy on our part to go out there and start selling off 800 car sales. I'm doing that now where some of the locations had 300 car sales in Q2, they've got 800 car sales going now. But that's okay because the marketplace is now familiarized, VB2 has been out there four months. You take four months and four sales a month at a location-- (technical difficulty)

Yes, everyone, stand by.

We just did the math. 16 sales at the location. So now they're comfortable with it. We're getting the right returns. But to have flooded the market with another 20 or $30 million dollars worth of vehicle sales just would have been stupid.

That sounds great. Obviously people shouldn't be looking at this as a quarterly event as you said. It sounds good to hear the fundamentals behind it are still strong. Could you expand with a little more color on the acquisitions you made, the five new locations? Give us a sense of your estimated market share or your footprint, where else you need to go. You said you're going to look for potentially five more by year-end, will that be your full complement in the U. K. for the time being?

I think from a U.K. perspective, that'll give complete coverage. We have coverage across the U.K., we're doing it now, but it's no different than we cover Alabama and we needed a location in Birmingham. It's the same concept that we've done in the states. So we've got full coverage in the U.K., but towing 120 miles sometimes to get a car. I don't want to sit here on the call and paint out exactly who I'm talking to and exactly where I want to go, but I want to further that network and be closer to the cars and an increased capacity for storage, et cetera.

Great, just finishing on the U.K. for me, could you give us progress and thoughts you mentioned, principle versus agency actually kicked up a little bit, but what's the overall, your overall thoughts on the one, two-year outlook for the switch potentially at the agency buying.

Yes, the reason it kicked up was just because the clients on that model happened to send more product in, happen to have more totals. It wasn't that we shifted anything. I would say all, I want to say majority, but I think all of our clients are on supply agreements that, that have dates to them, terms, where they expire and so to, we can renegotiate that now, but our approach has been to just go ahead and handle the cars the way we're doing and make the money we're making right now. It's not the right long-term effect in our view, of the industry. For a number of reasons, but we saw this ten years ago in the U.S. when the U.S. was on a purchase model and so they're, today, because they used the purchase numbers to total off the vehicles instead of using a pro-quote valuation from Copart. They'll fix cars that should have totaled and they will total cars that they should have fixed.

It's really about what's the right value of the car, total the right cars, fix the right cars, instead today, we may take a really high-end unit that would bring 50% in VB2 Auction and because the purchase number on it is less than that, they end up fixing the car and then we may take an older car that has, isn't worth the purchase number that we've got on it and because of that, they total it when they should have fixed it. It's about sitting down with our clients, showing them it's a true business partnership and we want to have full transparency. They can see what we're earning. There's no question. It's all -- -- (technical difficulty)

Katherine?

Yes, Mr. Franklin it does appear that Mr. Adair's line has dropped. Please stand by while we rejoin. Once again, ladies and gentlemen, please stand by. We'll rejoin the speaker in just a moment. And Mr. Adair rejoined.

Sounds like a got a little sound on the phone as well, but hopefully we can live with that. Is Bob still on the call?

I'm still here, can you hear me?

I hear you fine, can you hear me okay?

Yes.

All right, so I guess what I just, I don't know where you lost me, but the point is that you want to, you want to be delivering a business partnership where you're getting the true value of the car and because you're doing that, you're totaling the right cars and fixing the right cars and with a purchase method, because there's numbers that are, that are set based on the different year and categorization of the car, you don't get that. Plus you don't get market value, so today if we have a supply agreement which we do and VB2 increases the returns over the next six months, we generate more income. Which sounds great to the financial community but it creates an adverse relationship with your supplier. Where they're saying "why I think you're making more money now and why don't you give some of that back to us" and my feeling is just to say, let's always have a set amount that we make because we have to we have to generate a certain income to do business and then let's give you fair market value. We'll be going through that, through those explanations with our suppliers but we have already some conversations with it and my take on this they've been very receptive to it. You're talking about an industry that's done it this way for a long time and introducing a new idea. Change has to be embraced and thought about and eventually accepted.

Great, well I will jump back in queue and let others ask. Thank you very much.

Thanks Bob. Will, you there?

Yes.

Got to love modern technology man, getting dropped off the call.

If you gentleman are ready we'll go to the next participant.

Sure.

We'll go next to Tony Cristello with BB&T Capital Markets.

Hi guys. I guess one question , with the principle model, what we're doing in U.K. is there something that doesn't allow you get as much fixed cost absorption, and I guess the question I have, with relation to gross margin, I know there was some reclassification items from Q1 into

For the G&A?

Yes. Is there something that would cause gross margin to be down so dramatically on a sequential basis and is this more how we're integrating and see something progress out to Q2 and Q3?

For sure it's going to normalize as we go back out, we're going to have the integration costs now associated in Q3 and Q4 with the recent acquisitions. Hopefully we'll be making expansion moves as we said and there'll be costs associated with that. That's going to happen, but let's look at a year from now. Things will normalize considerably and you'll see--- We made it clear in Q1, sometimes maybe people think that it's like a Safe Harbor statement and that we're not serious about it, but we made it real clear to everyone that, yes , this is Q1, you just saw the results but that's because we haven't integrated and don't look at that as being a way to model out the future quarters. I feel the same way about Q2. It's just the corollary now.

You can't take Q2 and map that into Q3. Q3's going to be high revenue and it's going to a very different quarter than what you're seeing in Q2, but then Q4 will be different again. So it's really about, let us get everything in place and get kind of a consistent program in place and then I think it will be a lot easier for us, you and everyone to model

Okay, so sounds like results will vary between what we saw in Q1, what we saw in Q2, while you're integrating, they fall in between. Once you have 12 months under your belt, we should use Q1 as the benchmark to show improvement from?

That's right.

Okay, is there anything from integration in U.K. from a regulatory standpoint that differs and that you have now benefited from as you think about maybe using that as your spring board to further expansion into Europe?

Well, it's a pretty big question. I'm trying to think from a regulatory standpoint. It's obviously a different marketplace than Europe. If you take the U.K. and compare it to Germany or some other market for instance, it's a very different-- each marketplace, each country has a different set of expectations and, and rules that you have to live with, but we've been very, all I can tell you, we've been very pleased with the acceptance both on the supply side, on the buy-side and all our internal customers, all our employees. So it's really positive. I haven't seen any kind of regulatory issue that's going to put up a wall as we said here today. Looks great.

So it should ease as you think about expansion further into Europe at some point that you cut your teeth in the U.K.?

I think we're doing a great job in the U.K. We have a team that's really excited and committed. They're pumped up about what we're doing. It's just part of our culture. We're excited about what we do and we kind of live of it. That's the same approach you see in the U.K., I was out last week in the U.K. going around to different locations and everybody's really excited about where we're headed. It's all good stuff.

And that's encouraging. I think it's, from an investor standpoint, we have to be understanding there's going to be lumpiness and volatility.

I could have blown the doors out and sold a bunch of cars in the quarter, it would have been silly to do that. I would have got the revenue, but not had the returns. We have done the right thing and now selling the vehicles off in Q3, it's the proper thing to do and we're seeing the returns associated with it and we're happy about that.

And maybe just two quick questions on something a little different. The credit card fraud, how does---

How does that happen?

Yes, ---

Any time you're doing an integration of this magnitude, you're talking about something that's larger than 10% the size of Copart, you're talking about doing business in a completely different environment---- building different-- we had to change all of our systems so that they could accept dates that are different, postal codes that are different, towns instead of Canadian or U. S. dollars. You're talking about major changes, you're going to miss something. I'll call it what it is. We missed something. We allowed for fraud by not having a secured code enabled on our credit card. We fixed that and going forward we don't envision that happening in the future. You're always going to miss something. Usually they're small enough that you don't report it, you don't talk about it and move on. This is something that occurred, we get burned on credit card fraud and don't anticipate it'll happen in the future. (inaudible)

And maybe one, just one last question, maybe this is for Will. I guess the Katrina and Hurricane Anniversary, I thought ended last quarter, is there anything in Q3 and Q4 that you face on a comp basis or was this sort of the last sort of piece?

It was the last piece. Q2 of last year was the last, last material element of the hurricanes that flowed through our financials. We won't be adjusting any of the comps going forward.

Okay. Great, I'll let some else have it.

Okay. Thanks Tony.

Thank you and we'll go on to Scott Denver with Sidoti & Company.

Hey Scott.

How are you?

Good. How are you?

Not bad. Can you talk about the noninsurance vehicles, again, in the U.S. versus last year, I didn't get that number.

Will, do you have that in front of you?

Sure. Last year was over 85%.

This year about 83.

Function of you getting more vehicles from banks, repo companies and so forth?

Copart has a marketing technology and we go out and show customers in all marketplaces. We're growing in the insurance market as Will talked about in his opening remarks, but also growing in insurance as banks and other industries are saying "this is great technology" let's sell some cars.

During the quarter you made an announcement that you had an agreement with Harley-Davidson to auction off their repose bikes.

Right.

Is there anything else within the mixer that's notable that shows how you're going outside the cars?

No, I think that's just a great example. I get, and will gets asked a lot of questions, what are these noninsurance (inaudible) related? Are they all just (inaudible) banks? No some are manufacturers like Harley, so this was a way to say "this is another segment and marketplace that we're processing vehicles for" and we think there'll be continued growth there. There's no doubt in my mind we're going to see numbers to move. It's got a certain momentum to it now. My guess is that overtime you'll see more and more noninsurance vehicles going through the market. It's great. It allows the buyers to find more product and I think it raises returns across the board. Our average selling price a day is up across the board compared to last year. So that's-- that's a great thing.

As far as the delayed sales you had in the U.K., is there any way to quantify how much got left on the table, or is going to get booked in the second quarter or talking a high level?

Well, I think we did by telling you inventory's up 27%. Then you'd say "well, how much would it be normally" and I'd say, I don't really know. How would I know, it's a new marketplace for me too. I can tell you on the call there's going to be considerable sales in Q3 compared to Q2 and we'll just have to see how that ends up. What it ends up being in terms of dollars.

Okay, that's all I have. Thank you.

Okay, thanks Scott

Thank you. (OPERATOR INSTRUCTIONS). We'll go onto Scot Ciccarelli with RBC Capital Markets.

How are you?

Hey Scott.

Just wanted to be clear on one thing. So the delays you referenced, that was the conscious effort you talked about in terms of getting the proper returns. There weren't technical integrations?

Absolutely there were technical issues. No questions about that. After tweaking technical issues, we had every single day on the fly fixing things. That's how integrations go. As soon as we found one little thing and tweaked it, was that the reason we didn't sell vehicles from a primary standpoint? Absolutely not. We had no intention of going in, integrating a company, switching them over to new systems, switching them over to a new remarketing technology like VB2 and then flushing out 16,000 cars a month. That would just, it wouldn't make any sense. And, so, we, we held back and we did the right thing, now we're selling off units in Q3. We'll be selling them in Q4. They won't all go out in Q3. Q3 is February, March, April. It'll be all the way to the end of of the year, all the way July.

Okay, that's helpful. Can you guys address, there's been recent articles regarding Mexico and regulatory changes going on there. Can you outline it for me and the potential impact if any on you guys?

Sure, we haven't seen an impact of it yet. I can tell you the law. Supposedly, you can only import 1986 model years into the country. And the reality is, there's this 20-mile area of towns like Juarez and Taiwan that all border, they are all border cities and this area allowed to import any model year but it has to stay in that market place and it used to be they weren't supposed to import anything older than ten years. Look, the laws are going to be what they're going to be. All I can tell you is as of right now returns are up and if it's something that we thought was worth discussing, we'd talk about it. We'd do a press release.

As of 2009, the NAFTA rules kick in January 1 of 2009 and they have to, they basically have to sell vehicles every single year. They have model years until I think 2019 or something and then they have to allow every vehicle into the country. I guess the point is, you can look at and the law and read it, if it's got an material impact Copart will talk about, right now we don't think that's the case.

That's helpful. Thanks guys.

Thank you. And we'll go onto Bill Armstrong with CL King & Associates.

Hi good morning.

Good morning, Bill.

Just going back to the U.K. for a minute, even if we add back the fraud and integration costs, gross margins were still down significantly. I guess I still don't quite understand, I understand how, how your sales volume was down, but why was the gross margin down so much?

There's two elements to focus on. First is the percentage of purchased cars, that went from 66 to 71% so the cost of those cars flow through our cost of sales, our yard operating costs. The second is, we have a lot of fixed costs. It's the same model in the U.K. as it is the United States. And so you saw that we had increase in revenue substantially more than our increase in costs of, our operating costs this quarter and that's because we have a lot of fixed cost s and that works the opposite when revenue goes down. When revenue goes down we still have the cost remaining on our books. If we process 30,000 units or we process 50,000 units, we have a lot of the same costs that we have to incur every quarter. So with the reduction in volume, that flowed through, our cost per vehicle went up substantially. And it suppressed our margin.

Okay and I think, I think it was Jay who mentioned in the opening comments, towing costs went up in U.K.?

We had increased towing expense, simply because of the volume. The shire volume that was coming in and dealing with the integration. We ended up subbing out a lot of the towing instead of using just our own trucks. So you've got-- there's clearly just in any integration like, Bill, you're going to have one-time costs that exist because you don't have efficiencies built in. A year from now you'll have your metrics figured out and SLA requirements figured out and by then you;ll be a lot more efficient.

Okay, just two more quick questions. The credit card fraud, , do you have any recourse to the credit card company? Can you get any of that money

No, we've checked all the avenues of recouping that cost and it's our responsibility. We won't capture anymore of that.

Okay, anyway of getting those vehicles back from the fraudulent buyers?

We've gotten some of the vehicles back already that recovered, but I wouldn't bet on all the cars being recovered. They may be in the U.K., Poland by now, you don't know.

Okay and I guess finally, you got a new credit line of $200 million, you haven't really had, I guess you haven't had a credit line in a while, you haven't really needed it. Why do you feel at this point in time that you need this extra financing capacity?

Just keeping our options open. Just making sure if we need the money we've got it.

For potential acquisitions maybe?

For anything. The line can be used for acquisitions, companies, can be used for the acquisition of stock. It can be used for a number of options. Again it's just keeping our options open.

All right, thanks a lot.

You bet, thanks.

Katherine?

Well, no further questions...

I do apologize. We'll go onto Mr. Craig Kennison with Robert W. Baird.

Hey, Craig.

Good morning, guys. Sorry not to let you off the hook there, Jay. Question on the U.S. market, last year, I believe in the summer you announced some wins or you had wins that allowed you to gain significant market share and since then, you've been reporting very strong same store sales growth. Have you earned any additional wins in the subsequent periods or might that same-store sales growth begin to slow after next quarter?

Well, we have had, I can't tell you whether it's going to slow or not, in the next quarter, I can tell you we've had, we've had wins all through the year and that's a good thing. We're, we're continuing to get higher returns for the product that we're selling and it makes a compelling statement to our suppliers and we have a number of suppliers, Craig, that we don't do all their business. We do either a portion of it or a small portion of it and they'll look at these results and want to try other markets and run other tests so I would expect we'll continue to see growth, but I don't look quarter-to-quarter I'm looking two, three, four, five years out. We'll continue to see growth in the U.S. that's why we're going to open up another eight to ten stores this year.

Jay, could you characterize what a win feels like? 1 to 2,000 cars they're committing.

I'll tell you what it feels like, Buddy, It's like a happy day. You get up, do a little dance and you just feel great. It is, it's terrific. And yes, you talk about volume, hey, a thousand cars a year is a great thing, 10,000 cars a year is a great thing. It's nice to have a company test you in a market, validate the model, validate what you're doing and then make the decision to give you more business andI think we're all, we take a lot of pride in being able to show the value that Copart brings and I've always said to my team that, if we don't have a client today, we failed to demonstrate the value of doing business with Copart. That's the challenge we have. And so when you can actually get that win, you've done that. You've demonstrated the true value of remarketing your vehicle through us.

And just one question on the U.K. The recent acquisitions that you've made there, could you characterize sort of the revenue margins, sort of agency principle characteristic of those businesses? Is it simular to what you've done with Universal and Century, or are they much different?

The acquisitions we just made?

Right.

I think they're all principle, but I could be incorrect in that. Will?

I don't know, Jay.

I think they are, but I'm not positive.

A scale or a volume, or size perspective, anything you can comment on relative to your other operations in the U.K.?

Yes, their material and volume, I don't want to break out all the numbers on that. The biggest reason for not wanting to do that, everything, we're becoming more efficient. To build the network we become less efficient at first. So we're adding costs and then later on as we bring cars in and we streamline the model, it becomes more efficient. So it's just, if I knew it, like I knew the U.S., it'd be different. But I don't and until we get that market more mature, we've almost had our one year anniversary and we're still babies in that market, so as we mature and have been in that market longer, I'll be happy to report you on how things look.

Jay, let me respond to the question Craig had. On the acquisitions they are primarily principle-based.

Okay, that's helpful. And last question on the credit card issue again, what was it that allowed you to catch it? And are you, are people constantly trying to defraud you and you have systems in place?

Unfortunately they are constantly trying to defraud us. That's just a fact. If they can, you deal with falsified cashiers checks, they'll run them up on laser printers and you'll deal with reversing banking and we were notified of this because the bank reversed the charges and we realized, uh-oh and then we stopped it, but the problem is, there's a tail with credit cards. The minute you get notified there's all the other sales you've done. We've solved it, we've stopped it. It won't happen. We've been defrauded in the U.S. and we fix that and then we get defraud somewhere and we fix that, that's a constant, I think every business faces that. That's the constant part of business. Someone trying to do that to you and of course we're new to the U. K. so coming into that market we thought we covered the bases and this was the one area we were open. So the good news is, we fixed it.

Okay, thank you.

Thanks Craig.

Thank you gentlemen. We'll go on to Tom Lamb with Weybosset Research & Management

Looks like a great quarter to us and you're doing a fantastic job, so keep it up.

Thanks, Tom.

You're welcome. I think you said you had $35 million of U.K. yard Op expenses in the quarter?

That's correct, that includes cost of sales.

Cost of sales and then you had 25 million, I think you said from purchases cars?

That's included in the 35-- 23 million included in the 35.

Okay thanks. Was there any negative or positive foreign exchange impact in the quarter?

It was minimal.

And then -- go ahead I'm sorry.

It went from basically about 203 to 201, I think. Average FX exchange rate during the, Q1 to Q2.

Okay and then regarding the VB2 patent in the U.S. Are you going to try to get it patented elsewhere? Or copyrighted elsewhere?

We have been doing that and will continue to push to get patents issued in other countries. We were just really excited about the fact that we got the patent in the U.S. and again it, returns validate the model. It turns five years old this year, believe it or not. I think getting the patent validates we have a unique process and we've seen pretty dramatic effect on that, of that process over the last five years.

Yes, it's been great. Thanks a lot. Keep up the great work.

Thanks, Tom.

You're welcome

We'll take our next question from Gary Prestopino with Barrington Research.

Hey Gary.

How you doing?

Good, how are you?

Most of my questions have been answered, really, Jay, but the credit card on Internet transactions or was it a face-to-face transaction? Internet. I figured as much. Yes, the face-to-face we get a pin from them. They've actually got a more secure credit card technology in the U.K. than they do in the U.S. It's actually better technology--- (technical difficulty) You mentioned your returns are at record levels, vis-a-vie, last year at this time what percentage increase you've seen in the returns?

I don't have that in front of me, I'm not in the office today.

Normally, we don't explicit on what the returns (technical difficulty) trends-- (technical difficulty)

I'm not asking what exactly what the returns are, but was it up 5 to 10% over last year? I mean, I think that's a fair question to ask. (technical difficulty)

It's about 10%.

That's fine. What specifically are you doing, are you holding training classes for your buyers on VB2.

Yes, we did that already in September and October before we integrated in November. So we had costs to training at the facilities and then we did daily training. So at this point everybody's utilizing the product. It's the number one sales sales method in the U.K. More vehicles are sold over VB2 than any other model in the U. K. so at this point, they, they definitely know how to use it.

So how long have you actually had the, this VB2 fully rolled out from December, right?

It started November 1 and as of the end of February as an example, the locations are all rolled out. I think we rolled, I think rolled the last of the 10 in January, but clearly I think they were all on in February. (technical difficulty)

We'll take our next question from Chris Blackman with Empirical Capital .

Hi Chris.

You mentioned you spent about $170 million investment in the U.K. so far. Have you given projections on how much you think that you'll end up investing in there with the additional five aquistions?

Yes, it won't be just acquisitions it will the acquiring of some land and it'll be investment in systems technology and a number of things, but it could be, it could end up being in the 250 million range.

$250 million.

Give or take.

And CapEx for U.S.? Have you disclosed what you expect your CapEx for this year to be?

Will, I'm going to give you that one.

No we didn't. We stopped disclosing that and providing guidance with respect to that number because there just so much uncertainty that surrounds the timing of acquisition.

Okay.

Part of our issue, Chris is in the past we gave numbers, it's almost impossible to even come close. If you end up making deals you spend more, if you don't you spend less.

Sure. When you're talking about the efficiency curve of the U.K. integration and how it can be less efficient at first and then become more efficient, where are you, would you say on that efficiency curve?

We're more efficient now than we were last quarter. Going to love this answer and we'll be more efficient next quarter, but no, I mean seriously, it's just a number of things going on right now. And it, it's-- as we, as we integrate the five locations that we've got that aren't integrated yet, we'll go through some inefficiency. We'll go back a little bit and come back more efficient.

If you tried to balance the efficiency and cost on the curve somewhere, uh... somewhere in the middle, I guess.

I guess I look at it as it's the right long-term strategy. Right long-term thing to do. We could leave all the locations on the old technology, old systems and not integrate them. That would be bad long-term. By integrating them, you'll have up front costs but long-term it's just the right thing to do for the business.

Sure. Stock buy back, you mentioned you bought back little over 900,000 shares or close to 1 million shares, how much do you have left on that? And can you comment on your plans there? I mean I believe the stock is 15, 20% below where you were buying it before.

We don't comment on what price points will buy the stock back, I won't change that, but I think we got a little over $20 million. Will, you got the number in front of you?

Closer to $21 million remaining on authorization.

21 million of----

Shares available that have been authorized.

Thank you very much.

Okay, thanks, Chris.

Thank you, bye.

And now Dan [Rudder] with [WAZ]. Hey good morning guys.

Good morning Dan.

Can you disclose what the interest rate is on the line of credit you just signed?

Well it's sliding depending on our leverage ratio. The low one would be LIBOR plus 47.5 basis points.

Okay. Is there a cap?

Ye, we'll never get to it based on the leverage ratios that are in there. And then, our commitment fee is 7.5 bips for our commitment for utilized funds.

Wonderful, it looked to me like the gross margins in the U.S. were up kind of nicely. Is that kind of a level you think is seasonable or was there some things that really kind of aligned this quarter?

The, we're doing more volumes so that improves it. As we open up more locations that'll obviously knock it down. It really depends on the rate that we open those ten new locations in the next year. Every time we bring those locations on, we cannibalize our existing locations. We have all this new expanse with no real new volume, obviously, and the will reduce margins so I think it's-- we're happy with where it's at and there's, my expectation would be that it flattens out, but we'll see what happens. Simply because I know we're going to adding those locations.

All right, that's helpful. Will, could you repeat what you said about the CapEx. I can't write as quickly as you talk sometimes.

Over the quarter?

Yes.

Sure we had $38.3 million in CapEx for the quarter.

Okay. And real quickly I think you broke it down.

I didn't quantify it but I gave categories. We bought some land, lease buyouts, bought a plane, we sold our plane in Q3 last year and replaced it with another plane and the rest was general expansion improvements in our existing facilities.

Putting up new buildings, rocking stores, that kind of thing.

Sure. Okay, great. And Will, also alluded to rising fuel costs can you that into some color for us in terms---- .

We're seeing upward pressure on towing costs. We try to reduce tow zones and go through a lot of effort to be efficient in the selection of our towers. All that can only take us so far. We have diesel going up to 3.5, $4 a gallon, it's going to have a negative impact on our cost per car. We can't quantify it, just tell you what kind of impact it will have.

Can you talk about what kind of percentage fuel expense typically is?

No, no.

All righty and last question, I guess, real quick, you've dabbled periodically with things in the public domain maybe for VB2, I'm curious if those thoughts are taking a further back seat these days or is there anything that's bubbled forward a bit in a relative sense.

We're sold on the fact that our model works best with VB2 and vehicles in our possession. So with that, with that qualifier up front, we're going to go after a lot of different market segments of business out there, but we're going to keep it in that model. We're not really interested in trying to off-site sell vehicles, so to speak. We'll try to bring those vehicles into our location where they can be inspected properly, receive pictures taken and allow for buyers or their appraisers to come in and look at the vehicles and assess the true value.

Wonderful, all right, thanks for the time.

Okay, thanks Dan.

Thank you and we'll take our next question come from John Christensen with [Kayne, Anderson Rudnick].

Good morning.

Good morning. We talked about VB2 and Jay as you said, five years old, it's hard to believe it's that old.

Indeed.

You are surprised as we are that you're continuing to see you know, in the U.S., specifically, revenue per car continuing to increase, what do you attribute that to?

Well, revenue per car is going to go up, based on the average selling price, obviously. So if we can keep increasing the average selling price of the car, then we'll, we'll generate a higher revenue per car. The other thing is if we can offer more services. International buyers for instance are very different than a local buyer. Local buyer's going to pick that car up in a day. International buyer may buy 50 cars and then send a truck out across the country over the next two weeks to pick the vehicle up. We've been expanding a number of stores because we run out of storage capacity. We always thought of storage as being a seller function. Today we look at storage very much so from a buyer end seller perspective. So we have got to store those cars before they go to sell but once they go to sale we may have to store the car another two weeks while the buyer deals with the logistics of getting that car moved to another location. Not to mention, I think we tend to, I know from my perspective because we didn't track the international number at all, that one time, so from my perspective, I get amazed by the 28%, but we often forget about the interstate effect. It's not just a local audience, but buyers from other states are bidding and they need to deal with the logistics of hauling the car 200 or 300 miles and if I could offer more services, I'm using that as one example but if I can offer more services to the buyer that generates more revenue too.

You also talked about opening new sites in the United States, as you open new sites you cannibalize existing states. Tell me about where we are in saturating the market in the United States?

Oh you mean, as far as market share?

Yes.

I would say we're probably 35 to 40% of the market. Will?

I think the question is with respect to our sites.

Is that what you mean, not total market share?

Right, I'm also talking about at what point do you have enough-----

Locations?

Yes.

I think we'll add another 10 this year and I think it'll be entirely possible for us to do 10 the year after. I always thought 125 to 150 would the be the number but it's obvious more than that so if I had to guess for the U.S. today I'd somewhere around 150 to 200 locations, it would seem like the right number. I say that, we have two locations in Miami. We're looking for a third location in Miami. Three in Chicago already. We have two in Atlanta. Probably be opening a third.

So there's, just as you think you're, just as you think you've really got enough locations and got it covered, it goes back to towing costs that Will talked about. If you can be on the east west and south side of the Citi, you can reduce the hauling. Maybe your average tow goes from 60 miles to 30, you reduce the cost for your customers and pick the cars up quicker. I don't put too many limits on how many locations we have. It's entirely possible we can end up with 200 to service the U.S.

Great thank you.

Okay, thank you.

Thank you, and Mr. Garo Norian with Blackrock

Two quick questions around share repurchase. How do you philosophically or conceptually think about allocating capital to share repurchase versus other alternatives?

Well, I think we look at the return we get from purchasing our own stock versus the return we get from investing in our business versus the return from acquiring other companies and then we do that as a board. We make that board decision and go forward, whether or not we want to buy stock back. It's a fairly methodical return base (technical difficulty) if I can't find acquisitions it becomes a default. No we don't do it that way. I think at one point we had nearly $300 million on the balance sheet. That's proof. We're not opposed to building a large sum of cash if that need be the case, but it's definitely not a this or that, it's what's the best use of the cash at that time.

Okay, and just more, nuts and bolts. When are you guys allowed to go back into the market?

Next week.

Okay, great thank you.

You bet.

And we'll take our final question from Edward Hemmelgarn with Shaker Investments.

Thanks, I just had a question, can you go through the seasonality again in the U.K.? Which, which quarters are going to be--

I don't know it's any different than the U.S. As soon as daylight savings time occurs you lose an hour of daylight and you see accidents start wracking up quicker and as we go through winter, you obviously have a lot more rain and ice and as you come out of winter, you start to get more daylight and better weather and so the number of accidents tend to go down. So we've always looked at it as kind of a February peak in terms of accidents coming in and then coming out of February, March, April, May you get less volume but selling off units.

So you'd expect that like in the U.S., the April quarter is going to be your biggest sales quarter when you hit normalcy?

Yes, I think that is fair. I compare the U.K. to kind of California I don't compare it to the East Coast. California just tends to rain through the whole winter. That's how the U.K. is. You just tend to get a lot of rain. I was there last week, I think it rained three out of five days and I got to go through an earthquake. In all the years I lived in California I never felt an earthquake. That was interesting. But yes, I think it's similar to that marketplace. You'll see from a seasonality perspective, you'll see the volumes increase. (technical difficulty)

So January you'd expect to be your lowest volume quarter in terms of revenues?

It will be this time, especially because of the integration.

Didn't get the sales, but I mean in the future would you expect that to be the case too?

It depends if you get new business doesn't it? If you sign up a brand new account in August, September, October, you're going to start selling those vehicles off in November, December, January and that would break the whole theory. As long as you don't get new business, that's fine.

Okay. Appreciate it.

Okay, you're welcome thanks.

Thank you and we have no further questions at this time. Mr. Adair, I'd like to turn the conference back to you for any closing remarks.

Thank you very much, Katherine. Thank you to everyone out there that par took and listened to the call today. We look forward to reporting Q3 on the next call. Have a great week, thanks. Bye-bye.

Thank you and this does conclude our presentation for today. We thank you for your participation. Have a great afternoon.