Copart Inc (CPRT) 2008 Q4 法說會逐字稿

Good morning, everyone. Welcome to the fourth quarter earnings call for Copart, Inc., for fiscal 2008 and the fiscal year. Before we start I'd like to turn it over to Will Franklin for a brief update, and then we'll go ahead and do our introductory remarks and that open it up for Q&A. At this time, Will?

Thank you, Jay, and good morning. Before we begin our discussion of our fourth quarter results, I would like to remind you that during this call we may make forward-looking statements within the meaning of securities laws. These forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected or implied by our statements and comments. For a more complete discussion of the risks that could affect our business, please review the Management's Discussion and Analysis and the factors affecting future results contained in our most recent 10-Q, 10-K and other SEC filings.

With that, Jay, I'll turn the call back over to you to begin discussion of our fourth quarter performance.

Thank you, Will. Again, good morning, everyone. We have a lot of information we want to go over this morning, but I think what I wanted to start with was the catastrophe update with respect to Hurricane Ike and the Houston area.

The cat -- or the hurricane hit on roughly Friday the 12 through the weekend, and we did have a sale that Friday through VB2 at the existing Houston location. And then, come Monday, we had our catastrophe team hit the ground. So we were up and running on Monday. We had to operate on generator power. We sent in our Chief Operations Officer with the cat team. He was able to hook the facility up vis-a-vis a satellite link to the home office so that we had access to phones and Internet and our operating system, et cetera.

So we had full office up and running, everything completed by the end of business on Monday the 15th. So that was really the good news.

Since then, we have shipped in fuel for trucks. We're currently operating about 100 trucks in that market. We've shipped in additional generators in case we have failure there. So, as I think everyone is aware, we are very knowledgeable on how to operate in a cat situation. We're doing a great job. We've got a great team there that's offering the traditional Copart legendary service, making sure that we've got office space for all of our clients at the location. We're taking about 500 assignments a day, but we've got plenty of space. We have a 150-acre location in that market. Next week we'll start selling off about 1000 cars a week.

And I'm sure I'll get asked on how many units we think we'll pick up in this market. I really don't know the answer. I can tell you we're doing about 500 assignments a day, as I said. Galveston is not opened yet, so we can expect a few weeks of this, I would think. This is a much more normalized cat situation than what we saw with respect to Hurricane Katrina in '05. And the primary reasons for that are simple. We've got, obviously, a cat that hit, but we've got people that are living at home, they're showing up to work, the town is coming back. It is not the type of catastrophe situation that we saw in 2005 with so many people being homeless and so many -- just utterly so many vehicles that were flooded.

So this is probably going to carry on for a few weeks, maybe a month, as we talked about, at a run rate that we've discussed, 500. So maybe it's 10,000 cars, maybe it's more. We really don't know.

The key is not so much that. The key is that we are there, we've got the right people on the ground, we've got the top senior executives from the Company that are there working this cat every single day. They've been doing that for the last two weeks now. We would expect Galveston to open up very soon. It is not open yet. When Galveston opens up, then my guess is we'll be picking up quite a few more vehicles out of as well.

We'll probably end up processing a lot of boats as well in this cat.

So that's the update as to what's going on there. I can answer any other questions that we have with respect to Hurricane Ike.

Looking at the Company, we had a great year. Will will comment on some of the financial results for the quarter and for the year. I can just tell you a couple of highlight points that I think are worth talking about. Miles driven obviously down. Looking at May and June, we saw this decrease of about 4% nationally. I think this is clearly from the increase in fuel costs. We've looked at fuel now and it has nearly doubled in a period of about three years.

So increased fuel causes, obviously, a decrease in miles driven, causes a decrease in some frequency. At the end of the day, I think it's relatively small numbers. As we've said before, the nature of Copart's business is such that insureds have to drive, people have to get to work. So there's probably a little less of that happening. I think that's starting to stabilize now because we have seen fuel come back; it has pulled back a little bit.

Towing costs were up quarter after quarter in the last year. We've seen towing costs now start to stabilize, again, with the pullback in fuel. So I think that's really the good news there, and we'll report quarter to quarter on those trends as we go forward.

Looking at vehicles that are being sold within the Company, we've obviously been reporting on some of the non-insurance. We've got quite an initiative internally to push for non-insurance-related vehicles. These would be franchise dealerships and other dealerships that have trades that really fit the sweet spot for Copart.

We are really, really good at selling that high-mileage and older vehicle and that's where we go in. We going with the approach of like us sell that 100,000 mile unit. And then, over time, the dealers start to see that we're also really good at selling late-model vehicles as well. So it's kind of go in with the approach of selling on the types of vehicles that a lot of liquidators don't want and we do want because we do very well with those, and then kind of up-selling to higher vehicles later on.

And really, that happens internally from the dealer on their side.

In addition, we've done a lot more vehicles in the quarter for financial institutions as well. The prior quarter, it was 83% insurance, 17% non-insurance. And in the current quarter, Q4, last quarter of the year, we finished at 81% insurance and 19% non-insurance.

So that's great news. We're excited about that growth. We're also excited about some of the international sales that we are seeing. Gross proceeds for the quarter sold to international VAR's was roughly 31%, and in terms of units was approximately 25%. So we've seen an increase in these numbers and that's been, I think, a great driver in same-store sales for the Company. Obviously, a higher selling price in average vehicles from Q4 '07 to Q4 '08. So the average selling price of the car is higher, and then we're seeing an increase in [non]-insurance growth, which, incidentally, sells for more than a typical damaged vehicle, which is, I think, pretty intuitive. I think everyone understands a non-damaged vehicle would sell more than a damaged vehicle.

So that is some of the volume drivers within the Company. In Q1 in fiscal '09 we opened up a facility in Louisville, Kentucky. So we figured today on the call, with 144 locations, 143 for the year. At this time I'll talk a little bit about the new stores that we opened in fiscal 2008. We opened up six new locations. One of those was in Fayetteville, Arkansas, servicing that northwest corner of Arkansas; Trenton, New Jersey; Walton, Kentucky, which will service the Cincinnati, Ohio area; Birmingham, Alabama and another -- an additional location in Minneapolis, Minnesota, and then finally a location in [Sikeson], Missouri.

Looking at new stores for 2009, we have discussed this on prior quarters, and we anticipate, based on current zoning and availability and land that we've purchased that we've got in the pipeline that we'll probably open up somewhere in the neighborhood of 10 locations in fiscal 2009.

Talking about the UK for a minute, we have completed the integration of all of our locations. We have 12 facilities in that marketplace. We did do some right-sizing of locations really to achieve the optimal network. Again, it's all about having a facility that's large enough to store enough vehicles that you can have a large enough sale in that market, and it's also about being close enough to the vehicles so that when we pick those vehicles up we can do that and reduce cycle time in such a way that we're faster than anyone in doing that. So, again, our goal is always to pick up same day if possible, next day if not, and so that our average pickup time is less than 24 hours. We are achieving that today in the UK, and we want to continue to drive down those cycle times and be further competitive in that marketplace.

VB2 in the UK is showing record sale prices. Again, in Q4 -- we've referred to this in the past in the US as the VB2 effect. So it's no surprise to us to see the increased returns in that market. It's great news. We're continuing to show that to our customers because currently we purchase the majority of the vehicles. We are showing them the benefits. There are some significant benefits, especially from a transparency perspective and from a calculation of should I total the vehicle or shouldn't I. It's much better to have a transparency-based model where you're deciding to repair or total the vehicle based on its actual value and not based on averages of purchase numbers.

So we're going through that. In the quarter we did convert one of our top five accounts from purchase over to fee-based, and we will continue to see that trend in 2009, I believe. In addition to that, we will probably purchase a little bit more on the land side and potentially businesses in the UK, just to further develop the network in that marketplace.

Looking across purchase for the quarter, the Company purchased approximately 2.853 million shares in the quarter and finished the quarter fully diluted shares outstanding at 87.4 million. If you adjust it as of the first day of the quarter -- in other words, we bought the stock on the very first day of the quarter -- fully diluted EPS for the quarter would have been 85.3 million shares. So we're excited that we've gone out and acquired additional stock and that we are bringing those numbers of outstanding shares down, and we believe that will be great long-term for improved EPS. Of course, we think we have a great future ahead of us in 2009.

I'll be reporting in Q1 on some of the Internet products that we'll be releasing and you will hear from Will some of the comments about G&A that has increased and some of the expenses that we've got there. We are investing in technology and infrastructure with respect to VB2, and I'll be reporting in Q1 and Q2 on some of those products that will be launching in the coming months.

So a lot of good news, a lot of exciting things happening in the Company. And at this time I'd like to turn it over to Will Franklin for an update on the financial review.

In our fourth quarter consolidated revenue was $206.3 million, an increase of $52.3 million or 34% over the same quarter last year. In North America revenue grew by $19.4 million to $158.6 million. This is an increase of 13.9%, which was driven by growth in same-store sales of 11.8%.

Units from our insurance sellers has been affected by a decrease in accident rates resulting from higher fuel prices and reduced miles driven. We're pleased with the increases in units sold on behalf of our non-insurance sellers, specifically franchise and independent dealers, banks and finance companies, fleets and public sellers and also with the success of our specialty sales. The insurance companies represented less than 81% of total units sold during the quarter as compared to 83% in the prior quarter.

On an annual basis, insurance companies represented 82%, 84% and 87% of total units sold for the fiscal years 2008, 2007 and 2006, respectively. During the quarter unit sales to our internationally registered customers was approximately 25%. In terms of value, or gross selling price, sales to internationally registered customers was almost 31%.

During the quarter in North America, gross proceeds per car and return percentages did not change materially from the previous quarter. In North America, operating costs excluding depreciation for the quarter were $67.9 million, an increase of $3.3 million, or 5.2%. The growth was driven by an increase in volume of units processed as well as an increase in the cost to process each car. Growth in the per-car processing cost was driven primarily by increased transportation cost due to the rise in the cost of fuel. Operations depreciation for the quarter was $6.8 million and the gross margin was $83.9 million. At the end of the quarter we have 131 facilities in North America, an increase of six from the end of fiscal 2007.

We entered the market in the United Kingdom through a series of acquisitions. Universal Salvage, which had seven locations, was acquired in June 2007 and accordingly, we had some UK activity in our fourth quarter of last fiscal year. During this fiscal year we have acquired Century Salvage with three sites, A.G. Watson and Simpson Brothers with one site in August 2007, February of 2008 and April 2008, respectively. The activities of these acquisitions are reflected in our financials as of these dates.

Our total cash investment in the UK is approximately $155 million.

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 in revenue. In the UK we operate primarily as a principal, purchasing the cars from the insurance companies and selling them for our own accounts. When cars are sold in this manner, we recognize the entire amount of the gross proceeds as revenue and the cost of the car and operating expenses.

During the quarter in the UK revenue was $47.7 million. Of the units sold, 70% were purchase cars, down from 73% in the prior quarter. Also during the quarter, we saw a meaningful increase in the return percentage and in gross proceeds per car, which we believe is the influence of VB2, our Internet selling platform. In the UK operating costs excluding depreciation were $43 million and included $29.4 million in the cost of purchased cars. During the quarter we took steps, where possible, to improve the efficiency of our network, reduce redundancies and to convert fixed costs to variable costs. As a result, we determined that the most efficient network configuration required the consolidation of three sites, which were initiated during the fourth quarter.

At the end of the quarter, we had 12 sites in the UK. The benefit from the elimination of redundant positions and the converting of fixed costs will be reflected in future periods. Operations depreciation expense was $1.5 million and the gross margin was $3.2 million. Combined gross margin was $87.1 million or 42.2% of revenue. Consolidated general and administrative costs excluding depreciation for the quarter were $18.8 million, an increase of $3 million. The increase was driven primarily by programming and systems resources added during the year, as we are accelerating the development and enhancements of VB2 and through our seller interfaces. We also saw increases tied directly to the need for additional human and technical resources to support our international operations. General and administrative depreciation was $2.9 million, and operating margin was $65.4 million or 31.7% of revenue.

The income tax expense for the period was $27.2 million for an effective tax rate for the quarter of 40%. This included a $1.2 million negative adjustment for a sales tax issue that was resolved during the quarter. Due to the reduction in tax-exempt interest going forward, we expect the normal effective tax rate to be approximately 38%.

Consolidated net income was $40.8 million, and net income percentage was 19.8%. Our net cash was approximately $21.5 million. Accounts receivable, vehicle pulling costs and deferred revenue all declined as we sold off winter inventory.

During the quarter we repurchased approximately 2.9 million shares of our own stock at a cost of $120.5 million or $42.24 per share. During the year we have repurchased approximately 6.6 million shares at of cost of $269.3 million, for an average cost of $40.70 per share. We have approximately 15.4 million shares available under our currently approved share repurchase program.

As a result of our repurchase program, after-tax return on equity on a trailing 12-month basis has increased to 17.8%. In the quarter we generated $53.3 million in cash from operations. The movement in the balance sheet contributed $2.2 million as reductions in accounts receivable were offset by reductions in payables and deferred taxes. The balance, or $50.9 million, came from net income plus non-cash expenses.

Capital expenditures for the quarter were $26.4 million and included one lease buyout. For the year we spent approximately $92 million on lease buyouts and capital improvements. Of this, approximately $43 million was for land, $35 million was for building and improvement, $4 million for computer equipment and $10 million for yard and transportation equipment.

Finally, during the quarter we consumed $106 million in financing activities, driven primarily by the share repurchase program.

That concludes my comments, and now we will turn the call over to you to handle questions.

(OPERATOR INSTRUCTIONS) Robert Labick, CJS Securities.

Good morning. Congratulations on another fine quarter. First question I wanted to ask relates to the gross profits, particularly in the US. It was, I think, a sequential almost 300 basis point -- I get a 100 basis point improvement versus last quarter on similar volume. I guess potentially a there was a buyer fee increase offsetting the diesel impact. Could you just talk to the underlying parts there and how diesel may have impacted you in the quarter?

Yes. To the extent that revenue grew because of increased revenue per car, obviously that has a direct bottom-line impact and improves our gross margin percentage. And that, in fact, is the case. We did have a nice increase in our revenue per car, driven by a number of factors including growth in our gross proceeds per car.

In addition, a higher percentage of our cars were not on the insurance. And, as Jay said, our non-insurance cars yield a high return. It's pretty intuitive, as Jay said, they are generally not damaged. We don't have the associated cost to haul the car in. And on the working capital side we generally don't have an advanced charge associated with it, and they have a much smaller cycle time.

So, to the extent that we change our mix, we tend to enhance our gross margin percentage.

That's helpful there. And then, on the UK side, could you discuss maybe, broadly speaking, about long-term expectations? It appears that obviously in the quarter you remained in the -- I'll call it the investment phase, as you consolidated a couple of operations. In the past, you've talked about 15 to 20 locations. Where do you stand in the investment phase? When do you expect to reach your optimal profitability, roughly? Is it six months, 12 months -- one year? And what are the next steps to get there?

Yes, sure. The other thing I wanted to point out is Will is on the West Coast, I'm on the East Coast. So we're not in the same room. So there's sometimes -- if everyone on the call could direct who the question's for, that would probably help us a little bit.

With respect to the UK, Bob, yes, we can't utilize small locations. Some of the companies that we bought had extremely small locations that either won't work or they are too close geographically to an existing location. So that's the reason for some of the consolidation there down to 12 locations.

I think 15 to 20 locations is still an accurate number, and I think we're going to continue to work towards the goal in that marketplace. It really is all about being close enough to the vehicle and having enough capacity to pick it up quickly and then, obviously, store the vehicle. So we'll continue with that.

With respect to profitability, there has been -- to bring in four separate companies is a lot of work to do in a year. And anybody who has ever done that before, I think, can relate to just the sheer logistics involved in working in an environment with four separate companies and bringing the cultures together and converting and then bring in new systems. And we've done that. So the full integration is in place. The systems are in there. We are heavily in the process of reporting the results daily of vehicle sales and how we're looking at those. We look at results on a daily level in our business, so we look at the average selling price and we look at the gross return percentages, and we'll continue to do that.

And now the goal for us is to sit down with our clients and show them the benefits of switching the way that they currently do the model. The real key is, I don't think any of them care whether or not they sell the vehicle to Copart or they sell it to the buyer and we end up being the remarketer of the vehicle. That's not the issue. The issue is, today they use purchase numbers to decide whether or not to fix the car. In the US we use ProQuote. So in the US, every time an insurer decides, okay, do I have to repair this car this car, or do I have to total this vehicle? That decision is made based on looking at Copart's ProQuote value that says that vehicle is worth $8700.

So we've got all the data. We've got over 100,000 cars in the database already. So there's plenty of data in the UK, got over a million vehicles, obviously, in the US database. But over 100,000 vehicles in the UK. So we are more than able now to start delivering that information to them, and that's going to be happening in the first quarter that we are in now, so that we will start utilizing ProQuote.

And you really couldn't get them to switch much of their mix without that. So some of the companies that have switched are still using the purchase valuation numbers. It's really not the right way to do it. What you want to do is not use averages, you want to use actual numbers that tell you what that vehicle is worth. So that will happen in this year, so we will be doing a lot of the conversion in fiscal '09. And then, with respect to profitability, a lot of the right-sizing and consolidation of the business will (inaudible) show in Q1, Q2, Q3 in the year as we go forward.

So we've had a lot of cost associated with the acquisitions and associated with the integrations, and we chose not to break those out. So we've just absorbed those costs, and instead of having their non-recurring expense that we report and so we've chose to absorb that cost. And then you will see the benefits of all the work we've done in the year that we are in now, in fiscal '09, with respect to profitability.

Just sticking with the UK, you discussed the conversion of the top five customers to fee-based. From a modeling standpoint, how should we go about trying to anticipate -- obviously, the revenues will change materially in that scenario.

It's not -- I want to make sure I'm clear. It's not all top five; it's one of our top five accounts switched over.

Okay, right. So I guess the question is -- how should we even model it?

It's tough to model, but what you're going to see is, obviously, a reduction in revenue going forward. And then, because of all the work we've done in the past year and getting the Company on the right track, you're going to see an increase in profitability at the same time you're seeing a reduction in revenue. But it's really going to be tough to model. I don't know, Will, if you want to comment on that.

It's exactly what you said. We've probably got four or five different models that we look at for the UK, depending on the conversion rate and the timing of the conversion. So no one knows. This just emphasizes our efforts and the direction we are headed. The timing of the change is unknown, but the impact is just what Jay said. We'll have a drop in revenue, a drop in cost of sales, an increase in margin percentage. And in terms of absolute margin dollars, to the extent we have better yields on the fee-based contracts, then we'll have a benefit in that line as well.

As it relates to ultimate profitability of the UK business on a per-car basis versus the US, down the road, once all this is done, give you two years or so (inaudible) how do you think about the ultimate per-car profitability, the gross profit on a car once it's converted or what not, down the road in the UK? Are the models and similar enough that they should be --

They are fairly close, but I think the big difference is that currently the average selling price in the UK is not at the same level as the average selling price in the US. And that obviously would have a negative impact if it stayed the way it is currently. The unknown is how the VB2 effect -- how long will that be taking place? And so we've seen an increase in the average selling price in the UK now for the last five years, every single year. And we keep anticipating that at one point that will level off. But again, more buyers, more international -- and part of it is that as we generate higher returns that we end up -- if we sell the car for more money, then insurers potentially will total more vehicles, too, because they're getting more for the cars, so that kind of increases the market. And when you get better vehicles, that increases the average selling price, too.

So we are kind of in that mix right now in the UK of watching that. And the unknown is how long will that take place. Our hope, obviously, is that we'll see the same trend that we saw in the US.

Scott Stember, Sidoti.

Could you quantify what this cycle time is for these non-insurance vehicles versus a typical insurance vehicle?

Yes. In typical insurance vehicles, 60 to 90 days, and the non-insurance is under 30.

And maybe you could talk about Copart Direct, if there was any impact in the quarter, and in general your general thoughts on how things are going on that front?

The two big pushes we've got right now are really the CDS, Copart Dealer Services, and then Copart Direct. Copart Dealer Services saw a larger growth in the quarter than Copart direct, but they both saw significant growth. It was -- in terms of quarter over quarter and year over year, they both had growth in the quarter. And it's just that CDS currently is growing at a faster rate, as we go out and talk to dealers and talk about bringing in those trade-in vehicles that fit our models into Copart, whereas Copart Direct is selling vehicles for the public.

We've done no national campaign. We've done nothing to really push that in terms of advertising. We've done very small, very, very small advertising actually, because we're really wanting to make sure we've got the models to figure it out completely.

On the dealer side, on Copart Dealer Services, we've got that model figured out. So we're just pushing it out about as fast as we can, to be honest with you. So at this point it's rolling out and it's got people in place and they are going to continue to bring more -- engage more people and bring more people on to work in that role. I'm sure we'll see growth in this quarter and the following quarter, because it has just continued to do that quarter after quarter.

What percentage of your locations has Copart Direct Services right now?

Copart Direct is at every single location and Copart Dealer Services is probably less than half.

You've already talked about, obviously, higher profitability with the non-insurance vehicles. On Copart Direct, could you talk about the margin profile of what you'll be earning versus with traditional business?

Well it's higher than the traditional business, but I think Will has really covered those points already. He hit them in really four major points and it's no different. They're not towing the vehicles. The average vehicle is selling for more money. The fee structure is a higher structured rate than what we'd offer to the insurers; it's going to give us a 10,000 or 20,000 car a year allotment versus going in and getting one car at a time. You obviously are not going to get the same pricing structure.

So for all the things there and all the things that Will mentioned, the margins will be better on that book of business.

Just talking about the catastrophe side of the business, the hurricanes. In the past you have always said that, net-net, excluding a Katrina type of hurricane, that their revenues would typically be offset by the costs involved. Is that the same thing that I hear in this situation?

No. I think we typically said was -- yes, you are not too far off. But I think, if you want to compare Katrina to this cat, it's not going to be to that extent, by any stretch. So cost will be covered, a little bit of profit may be generated. But they're all incremental vehicles, but there's a lot of cost associated with handling those vehicles.

But, with that said, not to the extent that we had in Katrina, so it's obviously not going to be the same scenario as that.

There has been a lot of talk about -- with scrap pricing falling in recent months. Could you possibly comment on what you guys are seeing there and what you would expect or what the impact would be on you guys?

If you look at Q2 of the year, scrap was at about $300 a ton, $296, so roughly $300 a ton. If you look at Q4, it moved up to around $550 a ton in average selling price. So scrap is obviously, looking at the fiscal year, has come up.

The impact to that, I think, from an international standpoint is that you tend not to sell quite as many vehicles in terms of units internationally. But the average vehicle that they do buy tends to be a higher-valued vehicle because the domestic players obviously get more aggressive as a scrap goes up on the junk, the low end, really low-end cars.

But again, we are looking at our business in terms of providing value to the insurers and to the rest of our clients, and scrap is definitely on the low end of total value. The value that we add is really on the mid to high-end vehicles that we are selling.

(OPERATOR INSTRUCTIONS) Scot Ciccarelli, RBC Capital Markets.

Jay, can you discuss the impact of falling used vehicle prices, if you think that that may have had an impact on the business, and potentially how much?

It's really hard to track used car prices. And the reason for that is Copart is a lagging indicator. We are selling an average vehicle that's about nine years old. So when you start to get into, A, the average vehicle is nine years old; and, B, the vehicle we are selling is damaged. So a lot of those vehicles are rebuildable vehicles, but a lot of them are parts cars. A lot of those vehicles that are rebuildable are being taken to other countries. So I get asked the question about the strengthening dollar, the falling dollar. And it's really hard to track either of those at the end of the day. It's just kind of the nature of the world we live in.

So I don't know if there's something specific you want me to try to give you. But it's kind of hard to give you a real answer to that.

I guess I was just trying to get any color you guys might have. With the way some of these vehicle prices have fallen, it just makes more economic sense for, I would think, the insurance company to send it to the scrap heap as opposed to trying to fix it.

Well, if we are talking about whether or not they are fixing or totaling the vehicle and we're not talking about the impact on the average selling price, that's an easy answer. And the one to that is simple. If you've got a $35,000 vehicle today, and that's the ACV, and obviously it's an SUV, and that vehicle is now worth $30,000 or $25,000, well, the repair costs aren't going to change much. As a general rule, you are going to see that vehicle, if it's wrecked a year ago or it's wrecked today in the same wreck, it's going to cost roughly the same to repair. Labor is not going to move much, parts aren't going to move much. And yet, the ACV just came down from $35,000 to $30,000 or from $35,000 to $25,000.

We have seen some dramatic decreases like that in valuations on some of these trucks and SUV's. Now, when that happens, you just total more vehicles. That's a no-brainer because if my repair cost on that vehicle is $20,000 and my salvage value on it is $10,000, I may not totally it at $35,000 ACV. But if I can buy that vehicle as an insurer, write a check for $25,000 knowing that I've got $10,000 coming back, I'm out $15,000 versus $20,000 to repair it, I'm going to total that vehicle all day long.

So in terms of falling used car prices, it's hard to track it to the average salvage price. In terms of the impact on totaling more vehicles, there's no question. As cars gain strength, then you have more pressure on fixing the cars. As vehicles lose value, then you have more pressure on totaling those vehicles.

Another question regarding -- you had mentioned there was some consolidation of the UK facilities in the quarter. I don't know who this question is for; maybe it's Will. Were the charges reflected in -- first of all, were there any charges, number one? And, number two, were all the integration costs included in the (inaudible) operations or reflected at the gross margin line?

Right. There are certain rules that you have to abide by when you take a hit, and we did charge everything in the quarter that was appropriate to be charged in the quarter. There will be some in our Q1, and there will probably be integration costs that will continue for a few quarters. So the benefits from the changes were really not reflected much in the quarter. They will be reflected going forward.

Regarding the UK, is that all insurance business today, or do you have some non-insurance business in that mix?

It's primarily all insurance. There's a very tiny, tiny amount that's non-insurance.

Okay, so it's fair to assume you guys will expand that non-insurance program in the UK?

That's our goal, yes.

Matt Nemer, Thomas Weisel Partners.

My first question was regarding the new volume sources that you have been talking about. Is there any way to give us a sense for the potential size or the opportunity from CDS to Copart Direct? And then the third category that I didn't hear you talk about were non-insurance consignors, like finance companies.

I'll do it in reverse order. The non-insurance on the finance companies, we've seen very material moves in that business recently. We've actually promoted one of our execs to national director for that, just for that book of business, just going after the finance industry because it's obviously a very appealing industry to us. We do very well with those vehicles, hence the client ends up very happy with the results and the average selling prices. But you are also saying, unfortunately, due to the economy right now, you're seeing an increase in repossessed vehicles. So as we bring on those accounts, not only is that great but the accounts that we've already got, we're seeing increased volume there.

Now, when you talk about Copart Direct, Copart Direct is geared to selling vehicles to the public. And that's the whole purpose in it. The customer can dial 1-888-SELL-IT-1, or they can go online and they can go through a process of selling their vehicle through Copart. And we're doing very small -- what I'd call very small numbers right now, learning the market. It's profitable. We're more than covering our overhead today, so we are showing a nice profit in the business. It's a good business, but at some point we want to roll out advertising. We'll want to go after that market in a different way.

Your guess is as good as mine. Everybody in the US that owns a car and wants to sell it, I think, is a potential customer. How much of that we'll get will depend on traditional methods of using newspapers and magazines and trading your car in, et cetera.

When you get to Copart Dealer Services, that's a pretty finite number you can focus on. So there's well over 40,000 dealerships in the US. A dealer obviously is going to have varying amounts, but 50, 100, 150, 200 trades will come in a month. We're not asking for every single trade. We go in with the position of just send us your tired and your worn out vehicles, and those are the vehicles that we really shine at. Those are the vehicles we really excel at. Our buyers love them. Often, the buyers will end up buying other vehicles from Copart to work on those vehicles that maybe they've got a mechanical repair to them or something like that.

So it's a real complementary book of business. And in addition, the dealers are becoming aware of us and a lot of the vehicles that we sell. So they end up becoming buyers sometimes as well, in addition to being sellers.

But that's a fairly large marketplace, and my guess is that that book of business will become a material part of Copart. I'm not really in a position today to quantify how many units or how big it could get. But I think we started the process of reporting insurance and non-insurance, and the reason we've done that is we think we've already seen that a material amount of volume today is non-insurance. It's worth talking about. We'll continue to see that push forward. The potential in the marketplace is that maybe one day, half of our source is insurance and half is non-insurance. But it's already material, and I think it's going to move more towards that over time.

As you grow these businesses, are you willing to take a hit to profitability to market them, if it's short-term? Or, do you feel like you really want to protect the total Company profit?

There's no need to do that. There's no need to do that in any of the businesses, and the reason for that is very simple. First of all, CDS doesn't have any real great marketing expense. You go out, you explain what Copart is, and you get volume and you start to sell it. When you look at -- the same way with the bank business, the same way with repossessed vehicles. It's no different.

When you get into Copart Direct, if you go out and spend millions of dollars tomorrow to drive volume, if it's not going to drive volume then it doesn't make sense. But if it does drive volume, you're going to drive profit. So there's really no scenario there where we're going to be spending money and not making money. If we're spending money in rolling it out, then we're generating profit.

I guess part of that is that you're using search marketing, so you're not really paying for marketing unless you're getting a hit.

That is currently the case with Copart Direct, not really with Copart Dealer Services or finance division or fleet division or any other divisions that are non-insurance related. Those are much more traditional work-to-market approach, whereas with Copart Direct, yes, we pay by the search, if it's Google or Yahoo. And if you're going to be running ads in newspapers or magazines or radio or television, then should get a direct correlation to dollars you spend advertising in terms of assignments and vehicles sold.

The key with Direct is really finding out what people's expectations are. As much as we love Copart and as much as we can do a lot of magical things, I can't get high book on an SUV. If the dealer won't give it to you, and you're not going to get it in the newspaper and you're not going to get it in the magazine, well, Copart can't get it either. And what you'll find today and what we find is that you've got trucks and SUV's and these vehicles that obviously have lower mile per gallon scenarios where people are wanting to sell them.

And, if your expectations are right and reasonable with respect to book, then we can sell that vehicle and get you the right money. If somebody's head is in the clouds, then we don't want that vehicle. We don't even want to get in a situation of processing that vehicle, because the last thing -- basically, the last thing we're going to do in that scenario is make you happy. You are going to feel as though you went through all this work and you didn't get the vehicle sold. What we want is to find out where your expectations are at, make sure that we can run that against our database, see that we'd be able to exceed your expectations. And then we'll have you bring the vehicle in, we'll running through VB2, call you up the next day and say, boom, here's the amount, we can have a check in your hand today or tomorrow. That's the selling [tip]. That's were people say, wow, this is great. That's were the general public gets excited about the product.

So long answer, but I think you can tell we're kind of excited about where we're heading on some of these products.

That's helpful. The second question that I wanted to ask was -- there appears to be some movement in Washington around national title rules. I'm just wondering if that could have any impact on the ultimate value.

That has been going on for over a decade now, so it's nothing new. We have a government affairs department. I was out in D.C. about three months ago, doing a tour of the Capitol. So we spoke to a number of senators and congressmen and women that are, let's just say, aware of this bill, aware of talks. There's a [Lott] bill that's out right now. So where we think legislation will pass, we want to be involved and we want to have input and make sure that that legislation makes sense. But I don't think there's going to be a national title (inaudible) if you ask my opinion, in the next year or two or three. I think it's just too difficult to try to convince the states to give up salvage.

Currently, it's a state-by-state law, it's a state-by-state decision and I just don't see the states giving up that position and saying, great, we'll let the feds go ahead in and deal with salvage title laws. It's not going to happen.

Just to think through the potential impact, even if it's remote, does it make sense that it could lower the value of salvage vehicles?

I don't think so, because the bill that I've seen for all these years has always been wrapped around like a 75% damage waiver with respect to damage. The fact of the matter is most of the states are, at this point, regardless of the percentage of damage, the majority of them are, if you total it, you've got to salvage the title, whether it's got 15% damage or 75% damage. And there's very few states that are left that don't have rules in place that say, if you total that vehicle, you have to get a salvage title, regardless of damage.

So if the feds come in -- and again, it's so minute, it's just hard for me to even really get excited about talking about it. But if they were to come in and they were to do something like this, they would definitely set a threshold because everyone's going to argue, well, wait a second. If you constructively total a vehicle because you've repaired it and the insurer doesn't want it and they are not happy with it because, as far as they're concerned, that vehicle wasn't repaired maybe 100% to what it was. And so, the insurance company, for whatever reason, decides, okay, we'll go ahead and total that vehicle. Does that make sense, in that scenario, to have a full branded salvage title? No; that may be a different level of title. You may have a scenario where a vehicle has got -- some states have junk titles, and some don't.

So it's such a state-by-state issue, I just don't think it's going to become something that's federal.

Great quarter and great fiscal year.

Craig Kennison, Robert W. Baird.

Good morning and congratulations as well. First question really for Will. During Hurricane Katrina, as I recall, there were several extraordinary COGS that were flushed through early in the process, and so really your COGS did not match your revenues early. Is that going to recur here with Ike, or is that not material?

I don't see that happening here. I don't see the cost being nearly as extensive as they were with Hurricane Katrina. I anticipate that we'll see the cost flow-through when the car is sold, and not accelerated into a different period.

Thanks, that's helpful. And then, you did address the steel scrap issue. I'm just wondering if you can qualify in any way what impact it actually had on your overall growth. Is it 1%, 2%?

It's very difficult to quantify. There are so many different elements that influence our growth, and that's just one of them. I think Jay pointed out the impact -- and it's very obvious -- and that's just who our buyers are. If scrap metal pricing increases, these cars become more attractive to domestic and local buyers. And that's reflected in our percentages.

I think those vehicles were going to get totaled, anyway, because you're talking about the very bottom end of the market when you get into scrap values. Scrap is obviously not going to be a factor when you are rebuilding the car. So I don't think you're going to see a big change or shift in terms of totaling more vehicles because scrap has gone up, in other words.

Okay. With respect to the three sites that you consolidated in the UK, what actually did you do with them?

We gave them back to the landlord.

Finally, on the litigation front, can you give us the status of your lawsuit with AutoIMS and, really, what it means for Copart?

No; I don't think I want to comment on that today, Craig. We are obviously -- we believe in what we're doing. We're going to continue to aggressively pursue it, but I don't really want to comment at this time, just for legal reasons.

Can I ask if there's a timeline? Or is that not --

No, I don't think that would be a very good thing to say, either. So I'm just going to stay away from the question.

Congratulations, as well, and take care.

(OPERATOR INSTRUCTIONS) Bill Armstrong, C.L. King & Associates.

On the UK revenues, $47 million was down sequentially from the third quarter. Was that due to the higher percentage of fee-based vehicles, or were there other things going on there?

We just sold more vehicles in Q3. Will, did you want to comment on that?

Yes. There's a seasonality to our business and our third quarter is always the highest, in the UK and the US. In addition, in our second quarter this year in the UK, we actually deferred some sales. And so, those sales that would have ordinarily been, or in other situations been in our second quarter were recognized in our third quarter. So that makes the change between our third and fourth quarters appear higher than it actually was.

It will impact third quarter of the current year we are in, as well, but we won't do that this year. We will be selling vehicles as they come in. Last year, for conversion reasons, we held vehicles back.

Right, okay. And the three sites that you closed during the quarter -- would that have cost you any sales? Or, were you able to shift all of that business over to the remaining sites?

We did move the vehicles around. So we didn't stop from selling cars. We sold everything we had.

So these three sites that you closed, going forward, shouldn't result in a lower overall level of business?

No, they have no impact on the number of units we're selling. It's simply a logistics decision -- too small a size, not well located. The position wasn't properly located for us, those kinds of decisions.

Just a clarification -- I think, Will, in your prepared comments -- I just want to make sure I heard this right -- did you say that 70% of the vehicle units in the UK were purchased in Q4 versus 73% in Q3?

That's correct.

Tony Cristello, BB&T Capital Markets.

This is actually (inaudible) in for Tony. First of all, congratulations on another great quarter. Most of my questions have already been answered. So now that you have been in the UK market for a little bit over a year, I'm just curious -- has there been anything about the market dynamics there that have really surprised you relative to your initial expectations going in?

No. I think -- we've loved the experience. It has been really enjoyable to learn some of the differences in the market and some of the nuances. But you know, I think we are more excited than we've ever been because the opportunity -- again, looking at the effect of VB2 and the increased sales prices and then the opportunity to make the transparent market and just all the things that we've done in the past. So we are excited about that.

Then there's some things that they are doing in the UK like engineering and the way that they handle engineering, that we're looking at in the US. So it's really great. Then, of course, you've got the cross-pollination of buyers that has been nice. So we have been able to implement our systems and then bring a lot of the buyers in the UK into the US and bring US buyers into the UK and, of course, Eastern European buyers into both markets. So overall, it has been great.

It was interesting for me to see the UK finally became one of the top buyers of product in the US. It had never been on the list before. So some of those experiences that have just been terrific.

Just as a follow-up, could you provide a little bit more detail on the reporting structure in the UK at the yard level, how this compares to what you have here in North America? And then also, could you provide a little more color, maybe, on some of the changes that you are going to make on the expense side in the UK to move the model more towards variable expense and away from the [big] side?

Well, yes. Well, I guess I can comment a couple things on that. Hold on one second. I guess I can comment a couple things. The variable cost component of that -- we have right-sized all of our yards with respect to staff and trucking and I think we're where we need to be. We're happy with where we are at, and we have great staff, great people. I don't see any real changes there going forward. So we're going to run the business the way we've got it. We've got it running the way we want. We've got the systems in place. We've got the right structure in place, so things are good.

With respect to reporting lines and the structure, it's really a component of the same structure, different titles. So where we have VP's in the US, we have directors in the UK. But really, it's the same functionality. So we've got directors of sales and marketing and IT and finance and you name it. So all of these different directors are running components of the business, and then they report up to managing director in the UK, who then reports up to the parent company in the US.

So we've got a great team in place. I talked about it in Q3. Nigel Padgett is running the UK for us. He's doing a great job, he's got a great relationship with the employees and with our customers both internal and external. So everything is really right in line. I think the timing is about what we thought. If we had just made one acquisition, then, sure, we'd be further ahead. But to make four acquisitions and to do the things that we've done and to implement the systems we've done, the timing is about where I thought it would be. I think we'll be miles ahead of where we're at today a year from now.

But I can't say I'm disappointed with anything. It's all gone well, and there's really been no surprises, per se, anything that really kind of shocks you. So it's all been really good.

There appear to be no further questions at this time.

Again, thank you for joining the call. We look forward to reporting on the first quarter results in the coming months and look forward to building a great company and continuing on all the work that we've done. We'll talk more in the next call about the hurricane Ike and Houston and updates in that market as well as the UK. Thanks again. Bye-bye.

That does conclude today's conference call. We thank you all for your participation, and you may now disconnect.