Copart Inc (CPRT) 2009 Q4 法說會逐字稿

Good day, everyone and welcome to the Copart Inc. fourth quarter fiscal 2009 earnings conference. Today's conference is being recorded.

And now for opening remarks and introductions I would like to turn the conference over to Mr. Jay Adair, President of Copart Inc. Please go ahead, Jay.

Thanks, Kelsey. That's not the first person that's had a hard time with the name. We just want to welcome all of you to our fourth quarter call and welcome you all to the data on the release for fiscal 2009. Before we get into general remarks I will turn it over to Will Franklin for just a brief disclosure.

Thank you, Jay, and good morning. Before we begin, I would like to remind everyone on the call that our comments will contain forward-looking statements, made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees and are subject to certain risk, trends and uncertainties that could cause actual results to differ significantly 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 10-Q, 10-K and other SEC filings.

With that I will turn the call back to you, Jay, to begin discussion of our fourth quarter result.

Again, good morning everyone, and welcome to the earnings release for fiscal 2009, and for the fourth quarter. We are obviously pleased with the results of the quarter. Again, we are comparing the fourth quarter with the fourth quarter of 2008, and really from our fiscal quarter ending in July, this is really the last quarter before the economic downturn in 2008. So, where we saw quite a downturn, especially in the automotive industry, in the US take place in September, October, November and really peaked in December, this is the last comparable quarter or comp that didn't have that downturn in it yet. With that said, we will get into EPS results on the quarter that Will will give you a lot more detail on. I am just going to give you some general overview.

We finished the year with $162 million in cash and we generated approximately $200 million in operating cash. We took an approach toward the end of the year, towards the end of the calendar year 2008 -- I will try to clarify those so we don't get confused between calendar and fiscal -- we took the approach of going down a path of conserving cash and reeling things in to see how the auto industry was going to fare during that period. Obviously we have got a very strong balance sheet, we are proud of that fact, and so we finished the year with an even stronger balance sheet. That gives us the ability to really weather any storms that are out there. I think in terms of the auto industry, I think the worst is behind us, and so now we really look at it as an opportunity for what's out there and what we want to do and what we want to use that cash for.

We finished the quarter with an acquisition in Massachusetts out on the western side, in West Warren. This will obviously relieve our facilities in both Boston and in Hartford, Connecticut where we had some capacity constraint issues. So this a great addition. Looking at the whole year we added five locations. I'll go briefly through them because we've announced them in prior quarters. Louisville, Kentucky, Richmond Virginia, Montgomery, Alabama, and Greer, South Carolina. So we finished the year with a total of five new locations.

The other thing that happened, as I said, at the end of 2008 we saw this huge downturn in sale prices. We saw buyers actually, in fact a lot of them went out of business. We saw buyers face financial struggles and difficulties that really hadn't existed prior. And that got our attention. We thought, okay we have got to look at options. So we did everything from some financing of buyers to keep them going to really thinking about how we would recruit additional buyers into the Copart family. And so we initiated a very grassroots marketing campaign. We have always done marketing but it has been more strategic and targeted to body shops, recyclers, and of course exporters. We have an enormous penetration in that market, the recycler, the body shop, domestically. I think there's no question they all know who we are. When we go nationally we've just done a fantastic job in recruiting that international exporter.

But we started to think about who out there that would be interested in the product that we are selling is not aware of us. And the obvious demographic to us was really that automotive enthusiast. The first step for us was in April we started to do some Nascar, some stock car racing sponsorships where we could get that automotive enthusiast, someone who's interested in automotive racing, is probably someone that's into cars. Statistically the demographic of fan base that follows Nascar is much more geared toward owning cars, having a third car in the driveway. They're not shy of older vehicles. Again, they're not shy of vehicles that maybe need a little repair. We don't sell front line ready product, we sell product that may need a little TLC to get it going.

Of course we are not talking about the recycler product. The recycler product that we sell, it will continue to go to recyclers. We are talking about the light damaged product that we are selling because it is a ten-year-old vehicle, has a damage to the quarter panel, maybe it's got a mechanical problem and so it ends up being towed. Maybe it is a repo, and it's a repo because the engine failed and the owner of the vehicle abandoned it.

So we have got a lot of product. I will talk about just some of the statistics and some of the product we have got available that would fit these potential buyers. It is a grassroots campaign. It is really geared towards going after those mechanics, automotive specialists, automotive technicians. What I think of as the real gearhead, someone who works in the automotive world, they work from automotive repair facility, but they may -- well, let's just say they don't know who Copart is. We are pretty confident that the majority of the automotive repair world out there doesn't know who we are. We are also fairly confident that if we go down this path of marketing directly to them, they're going to be aware of us. And it all boils down to more members. If we can bring more members into Copart and convert them to buyers or even bidders, then that's going to drive returns, and if we drive returns that's going to allow us to get more money for our clients and thus the clients going to want to get us more automobiles to sell.

So it is exciting to us and we just wet our beak and started with Nascar. And then in September this month we signed an agreement with Kenny Bernstein Racing for Copart to be the title sponsor for the Bernstein Top Fuel dragster. Top Fuel's really the top of drag racing. NHRA, the National Hot Rod Association is all about drag racing. Nascar is the stock car association. So obviously one is all about going 0 to 300 in less than four seconds, and the other one is more about driving, racing 200 miles. And the difference there I think is that your stock car racing fans are going to be much more into owning cars, having third cars, and be excited about the product that we are selling.

When you get into Top Fuel, it is a whole different ball game. Again, you are talking about a 500 cubic inch hemi motor that generates 8,000-horsepower, burning nitro-methane. Kenny Bernstein was not only the lead, not only did he have Budweiser for the last 30 year, he's referred to as the King of Speed, he's a hall of famer. His son, Brandon Bernstein, is the driver for the team. He has had Budweiser for 30 years. Budweiser made a decision not to continue sponsorship this year. We were able to jump in and partner with Kenny and the rest of the team and we are excited about that because of the fan base. You have got a very, very loyal fan base, and these are fans that don't come to watch a two hour race. These are fans that come to watch a race that lasts less than four seconds. Again less than four seconds in excess of 300 miles per hour. The engine after that is basically fried. So they take it back over to the pits and they rebuild that motor in just over an hour.

And it is not uncommon, if any of you have been to a drag race before, then you know it is not uncommon to stand there and see 300, 400, 500 fans standing around the pits trying to get a glimpse of them rebuilding the motor. These are true mechanics. These are real, real automotive related folks. I've gone out and talked to the fans. They rebuild motors, they work in automotive repair centers, they do transmission work, they work for transmission companies, that kind of thing. Totally not afraid of working on cars.

Again that's what we are trying to do. We have done a great job internationally. We want to really tap into a new buyer base domestically. We have got that body shop and we have got that recycler base already. The question is, as we continue to grow in number of units in our business, we want to bring more buyers in that would be attracted to a lot of the product we are selling. And just a ton of product we sell is not a recycler, it is not even a rebuilder for a body shop. It is going to be something with very minimal damage. You can go to our site and look for no damage vehicles, or go to our site and look at, sort vehicles by type, and then start to view how many of those vehicles have pretty minimal damage.

That's what we are trying to do. We are not selling the car with a warranty. We are not a dealership. What we are trying to do is tap into those buyers that would find enormous interest. So, again, we are very excited about the fact that we have got Kenny Bernstein and the KBR team for Copart, and it will be the Copart Dragster next year for the whole season, 24 races. It's televised on ESPN.

We will be, in addition to that, doing advertising on a number of different cable channels and we are going to reach millions. The question is how many can we convert. We will be doing the same with Nascar. I will talk about that not on this call but in the coming quarters as we make a deal with Nascar, and commit to that. We will talk more about what we are going to do in terms of that campaign. And again, very different fan base. There is some crossover. There are some fans that have been at the track. And I wear a Copart shirt and someone says, "Hey, man, we've seen you at Kevin Harlick over at Nascar when I was at an NHRA track," so you do get some crossover. But again it is very separate buyer bases, as well, or buyer base potential. The opportunity is just terrific.

The great news, the most exciting news about it, besides again I think it is something that we have done differently, when the chips were down and when the market turned down we didn't just sit around and woe is me. We thought about what can we do different, what can we do to try to offset this situation. What can we do to help our client base, what can we do to try to generate a higher return and make ourselves more competitive, which I think is great news. But, even on top of that, it is that this is 100% measurable. We can track how you found us, we can track how many we signed up as member, how many cars they bought, how many cars they bid. So for every dollar we spend we will be measuring that against the impact it has had on the Company and we will spend accordingly either up or down, depending on the success of the program.

In Q4 we spent approximately $2 million in marketing associated with racing. Now, if we were to just do that and be the same company we have been for the last couple, three, five years, it wouldn't work because we have been a members only site. So we made that change this year, we launched the new open Web site. This was a Web site that allowed anyone to browse. We have a number of usability opportunities we thought to improve it. We got a lot of feedback from buyers and the public, things they thought could be better about the site. We did that release this summer, and you will notice we have got a completely brand new site again that is out there.

It is very functional. Not only do we have a completely new look, not only is it friendlier, but it has filters. You can sort a number of different ways. The sorting capability on this site versus the old site is night and day. You can literally sort by a particular make or a particular model, select a particular year, go down to the damage zone, only look at a yard, only pick a title type. On top of that you can say I only want no damage cars. You can browse through what we have got. If you come to our site right now we have over 50,000 vehicles that you can look at. And you can sort that down to one car. That is pretty powerful filter and a pretty powerful improvement to what we have had plus it is completely open. So no membership needed to cruise around.

We have integrated into that a broker program where anybody on the call can go to our site, start looking for product, select a broker, buy the car through the broker and now you have access to a product. That didn't exist a year ago. So, these are massive improvements, they're reasons to market. I just looked this morning for kicks because we have over 50,000 vehicles for sale but I wanted to break them out by segment. We currently have over 350 classics, over 1,500 motorcycles, over 150 boats for sale, over 500 RVs, over 2,000 industrial pieces of equipment. Those are some neat stacks. Even have, believe it or not, over 30 jet skis for sale. It is a number of different items on there that you can sort through. Whether you are looking for a forklift or a trailer, a little pop up RV, or you are looking for a '57 Chevy, that's the kind of products that exist on the site. So, to us, record hits to the Web site generate record returns. That's what we are trying to do.

If we can double, triple, quadruple people coming to the site and get them to participate in the bidding and buying process, we will get more money. And again this whole thing is measurable. And since we launched it in April we have seen an immediate track to the hits to our Web site. You can go to Google or any of the sites and check it out for yourself. I will let you do it on your own instead of giving you stats because it is out there publicly available to you, and you can see the amount of hits that have occurred and the unique visitors that are coming to our Web site since April since we launched this program. So it is exciting.

We have had two consecutive quarters in improvements in both returns per car, meaning that our average sale price is up, and also in percent. So that's nice to see that. We also are sitting in the best month we have seen all year, calendar year that is. But we are sitting right now in September with the best returns we've had all year. So we are definitely on this uptick. We have a lot more visibility. Copart is going to make sure people are aware of who we are so that those enthusiasts, those car mechanics and specialists and technicians start to buy product from us and see us as a source for great product.

Also in terms of international bidding, we are up in Q3 as compared to Q2. We were up in Q4 as compared to Q3. So that has come back nicely. That's continued to improve. The fact of the matter is, what we saw last year at the end of calendar year '08 was pretty crazy times for our industry. So, things are really coming back strong and that international bidding is really up.

Speaking of international bidding we are also up in the UK. The UK has just had a fantastic year. They are up three consecutive quarters in sale price and they're actually up year-over-year comparing Q4 of '08 versus Q4 of '09 they're up, which is really hard to believe. But, I think it is just again, it is what we saw with Copart in '03, '04, '05 when we first implemented VB2, we refer to it as the VB2 effect. It's a more efficient process. We've eliminated the ability to collude, we've eliminated the ability to do any kind of price fixing. That's what VB@ does. It's just a more efficient process, it eliminates that making deals and flipping for cars and all of that kind of stuff that can exist in a live auction, and it generates a friction-free platform where I don't physically have to show up. I can go online and bid. We have seen a huge increase outside the UK bidding, i.e., international bidding.

In calendar year '08 they sold to approximately 35 countries. So far this year, they have sold to 49 different countries. So it is just one of those stories where it is more efficient, we are seeing the average sale price at a record in the UK, we are seeing the average return as a percentage of ACV, or as we refer to it in the UK, PAV, pre-accident value. It is up, as well. So it is just a lot of great news to report there.

We opened the Web site in the UK in June after we had made changes to our Web site here. We then implemented those changes into the UK. So we have both, if you go to co.UK or .com, either Copart site has the same Web site now that is open, that allows the public to come in, browse product, find that product, and convert, become a member and buy from us. That's good news, as well.

Again, as I said bids are up, the registrations are up both for the UK and the US, and the bidder attendance is up. So all good news there. I think we have got great things planned going forward. I am probably going to be asked about conversion of accounts in the UK as to how many are still on the principle method versus how many have converted to just a flat consignment. We talked about that in the last quarter. I can just tell you, based on the current commitments we have got, if all of that goes through, which we think it will in Q2 of 2010, which ends in January, we should exceed the 50% conversion rate. We should end up with more than half of our clients actually converted to a consignment model.

It makes sense. They're sharing, they're getting the upside of these great returns and that's what we want to do. We want to be a business partner, we want to be on the same side of the equation with them so that every single improvement we make we can pass that on and it is not we're buying the car and getting the upside and the gain.

Finally just give you a little visibility in 2010, before I turn it over to Will, CapEx budget for 2010 is approximately $40 million to $50 million. That is including maintenance, but is excluding any opportunities that we don't currently have budget for. So we have some opportunity, some acquisitions in that built into that number that we have already identified but I am sure there's something out there that will happen in the next 12 months that we are not aware of. If that happens you will see that CapEx number increase from there. Currently from what we can see, we're at $40 million to $50 million. Our marketing budget, as I said earlier, is completely quantifiable. We can quantify every single member we bring in. We can quantify every single bid they make, improvement they make, and we will be obviously communicating that to our customer base.

And based on that, our current budget right now is approximately $10 million to $20 million for 2010. That number can change depending on the success of the program. And of course we will look at that every single quarter as we go into the next year because we want to make sure what we are doing continues to add value. If it does that we will continue to support it and if it didn't for some reason we would obviously adjust accordingly.

So, good stuff, and I am sure you have a lot of questions so we will turn it over to Will and give you an update on the financials before we open up to Q&A.

Thank you, Jay. Yesterday we reported the financial results for our fourth quarter of our 2009 fiscal year. Consolidated revenue was $184.3 million, down $22 million or 10.6%. The primary factors that led to the decline in total revenue were the decline in the number of purchased vehicles sold, the decline in revenue per unit per car sold on the agency model, and the impact from the change in the dollar to pound exchange rate. Total unit volume was consistent with the same quarter last year.

Vehicle sales revenue represents cars bought by us and resold for our own account and occur almost entirely in the UK. This revenue declined from $42.2 million to $33 million due to the migration of certain seller contracts in the UK to the agency model and the negative impact of the decline in the pound to dollar exchange rate which reduced recognized revenue from vehicle sales by approximately $6.7 million. Offsetting the impact of the decline in unit volume and the impact of foreign currency exchange rates was an increase in the net gain on the sale of purchased cars as VB2 continued to generate higher gross proceeds per car and higher return percentages.

Service fee revenue declined from $164.1 million to $151.3 million despite the growth in unit volume. Over half of our service fee revenue was tied in some fashion to the ultimate selling price of the vehicle. Declining commodity pricing relative to the same quarter last year depressed our average selling price and consequently led to a decline in our revenue yield per transaction. In addition, the change in the pound to dollar exchange rate reduced service revenue by approximately $2.2 million.

In North America, same-store sales was down 9.3% due almost entirely to the decline in the revenue per transaction. In total, the impact on revenue from the decline in the pound to dollar exchange rate was approximately $8.9 million. Despite the decline in revenue per transaction, our consolidated gross margin percentage grew from 42.2% to 43.4% or 120 basis points. The growth resulted from a reduction in vehicle sales revenues as a percentage of total revenue, an increase in vehicle sales margin as VB2 generated high returns in the UK, and the decline in the average cost to process each vehicle led by overall efficiencies in the UK, and by reductions in sub hauling costs in North America.

General and administrative costs, excluding depreciation, were $22.4 million compared to $18.8 million for the same quarter last year. The growth was driven by additional costs associated with increased head count primarily in the technology and development areas, investment and advertisement, primarily Nascar events and sponsorships, and the impact of the new compensation structure for our CEO and President approved by the shareholders last April.

Income tax expense for the period was $21.7 million for an effective tax rate of 38.5%. We expect normal tax rates going forward to be between 38.5% and 39%. Our net cash grew by over $43 million to over $162 million, and our current ratio is over 3 to 1. During the year we added over $141 million to our balance sheet. In the quarter we generated $48 million in operating cash flow. Net income plus noncash expenses like depreciation and equity compensation generated $49 million while movement in the balance sheet consumed $1 million. For the entire fiscal year we generated over $200 million in operating cash flow, more than any previous year.

Capital expenditures were $9.8 million and we generated proceeds from the sale of capital assets $1.8 million. During the quarter, we repurchased approximately 110,000 shares, at an average price of $34.39 per share. For the next year we have earmarked approximately $45 million for specific investment facilities and technology. However this amount will increase if an opportunity to purchase land in certain areas or to buy out leases on favorable terms arises.

Kelsey, this concludes my comments and I will turn the call back over to you for the question and answer session.

Thank you so much, Mr. Franklin. (Operator Instructions). The first question is from Bob Labick with CJS Securities.

First to wanted to clarify one thing. You mentioned obviously the spending on advertising and sponsorships, mostly Nascar and the Dragsters. Your base G&A was probably in the $19 million range before this, and I was wondering the impact in the quarter, if you can give us a sense and where we should expect the base G&A to be for next year, given this $10 million to $20 million budget for those initiatives.

Bob, I think our second quarter is a good run rate, I think that's about $19.5 million. We have Nascar expenditures, which Jay mentioned, would be between $10 million and $20 million. Because there's a $10 million variance between the two it is hard to give specific guidance. I will tell you that we do expect to have approximately an extra $6 million in compensation expense next year due to the new compensation structure for the Chairman and the President. That delta or that difference between the normal run rate will decline over the course of the vesting period of those options to the point in 2014 when it actually turns around the other way.

We also had, and we have been talking for the last few quarters about the impact of extra head count in the IT and development areas. Most of that came on in the fourth quarter of last year so that should no longer be at item we will talk about going forward. So on a run rate basis you have got the change in the expense associated with the compensation structure, and then you have primarily the marketing expense which is between $10 million and $20 million.

Great. And then sticking with that marketing expense, can you tell us how you will ultimately judge the return on that, and if it is a multi-year commitment or if it is a 2010 kind of thing or how you are thinking about this in the next one to three to five years.

We are out one year right now, we're not even two to three years out. It is a brand new concept. It is a one year commitment. And, as I said, we will discuss more in quarters as we spend because right now we are not even committed to the $10 million, but we will be coming up. And the ability to measure this is wonderful. I mean it is 100% quantifiable. You simply look at what members you signed up that didn't know about us before, you measure how many of those members bid on product, and how many of those members actually bought product. And we look at both because if you are bidding on product and raising the price there's value there even if you don't buy. Obviously if you are buying product, then you clearly raised the price. So we will be looking at both of those and measuring that throughout the year, and that will determine what we do in 2011.

Okay, great.

I should add, Bob just so we are clear, I should add that 2011 we are referring to as calendar year. Racing doesn't follow Copart's fiscal year. So there's going to be racing in fiscal 2011 as well as fiscal 2010 just because we are committed throughout the 2010 calendar year.

Okay. Great. And then just looking big picture in the US in terms of volume. Miles driven have picked up in the last few months. I know it lags, but in July in particular. Which should potentially help you but ACVs probably have risen as well as used car prices have gone up. Can you give us your best sense of volumes on a go forward basis just based on those or other factors that may drive them.

ACVs, again, they're a lagging indicator as well. So when everything melted down back in the fourth calendar quarter of '08 we didn't really see that initially. So we will have to see an ACVs, but they still seem to be in the position they're at. I went into quite a bit of detail this year, I think it was Q1, about the impact of ACVs and the impact of demand as people keep cars longer on need for used parts from recyclers, et cetera. So I won't get into all of that again just because we have talked about that in the past. But clearly if ACVs go up then we would expect potentially less volume because as ACVs come down you anticipate increased volume but as miles driven go up, we expect more volume, so maybe we will end up in that position we were in before. Right now what we see is average selling prices just going up month after month after month. That's the trend we want to keep. We want to see that continue.

Absolutely. Okay, terrific. Thank you very much. I will get back in queue.

Our next question will come from Tony Cristello with BB&T Capital Markets.

Thanks, good morning, gentlemen. One question, Jay, when you talked about, and I get a little confused when you're talking about calendar and this month and the end of the fourth quarter, but you were talking about the yield or the revenue per vehicle continuing to show month to month improvement, not necessarily year-over-year improvement. And one of things I am wondering, at what point do you start to, if we held yield constant at today's run rate, do you then start to see it be flat with where it was or would have been last year?

Will may be better qualified at answering that question in terms of yield. Just so I am clear with you on the numbers, we are not ahead of average sales price in fourth quarter of this year as compared to fourth quarter of last year but we were selling scrap at something north of $300 a ton and we are selling scrap today at something less than $100 a ton. So that's a component of it. Demand for used cars right now is definitely up in the product we are selling. That's good. And I will defer the yield question to you.

Yes, Tony, this was a tough quarter for comp. Like Jay said, the metric we measure for commodity pricing is the price of crushed car bodies on a per ton basis. That averaged about $240 per ton our fourth quarter of last year, and fourth quarter of this year was less than $80 a ton. We really didn't see that decline until the end of our first fiscal quarter of this year which will make the next quarter's comp somewhat difficult, as well. In terms of yield, if the question is when do you expect us to get back to that yield, I am not sure if we will ever see commodity pricing, at least not in the near future. I think it was a bubble that existed in the fourth quarter of last year. I don't see us coming back, based on commodity pricing, to that level. However, what we have seen is the beneficial movement of the used car pricing. In fact, on a year-over-year basis, on a quarterly comparison it is up 2% and we see that continuing to rise.

When you look at the yield or revenue per vehicle flattening out at some point rather than -- this quarter I think you said organic growth was down over 9%. Is that a gap you can close, assuming that the scrap prices stabilize and then this used car, or the prices continue to rise?

I just hate to reduce it to a discussion of two elements, used car pricing and commodity pricing. There's product mix as we bring in more non insurance cars, we have a higher yield. As the dollar weakens we have more international participation in buying which drives up the price of the car. So it is hard to isolate one or two items and predict what impact they will have on future yields.

The other thing I would add, Tony, obviously when you get into scrap, we can't control scrap pricing, what we can control is how many buyers and participants in the auction we can bring in. So, if our campaign is as successful as we think it will be, and the initial signs are very good, then we may see increased sales prices, not because of any particular scrap price but because we are actually selling units for more money than we've done in the past because we have a larger buyer base,.

I was just trying to understand, if I think about the recovery or continued improvement at least from July to August, and September to October, should I be thinking that your ability to close that gap improves more dramatically into your January quarter than it would into your October quarter?

I'm not sure if I understood the question.

Tony, are you asking relative to the fourth quarter?

Yes.

Or as year-over-year comparison.

Correct, right, because this was the toughest quarter that you probably faced.

Like I said, I am just not sure if we will ever get the benefit of commodity pricing, at least in the near term, that we had in the fourth quarter of last year. But I also cited other factors that affect yield, and Jay talked about them too. One of the more important ones is the quality and the value of the cars we are selling. As that increases, our yield increases.

Okay. And on a different subject, you talked about the investment into the marketing for the Nascar and the auto side of things. How are you thinking about measuring your return on investment when it comes to that? It is hard, you are going to be able to track the person when they click through but is there a certain amount of dollar spend you are willing to put on someone, or I should say maybe getting a dollar in return at some point? How are you measuring?

We are very comfortable spending $10 million or $20 million and not generating $10 million or $20 million directly but generating $100 million for our client base. We are comfortable with that because if we can do that, then we think that we will see a significant amount of cars come our direction. And that will be a big piece of the measurement for sure.

Okay. And one last question, just on the auto IMS side of things. How is that really tracking in terms of expectation? And when we think about, are there fees associated with that on a per vehicle basis or is there just a participation fee that you are required to pay?

No, there's fees on a per vehicle basis and we are currently taking vehicles now through Auto IMS. We've got that immigration piece done. In fact, we recently got some business because of the Auto IMS piece. There's no question in our mind that it is going to make us more efficient, reduce some of our operating costs by being able to take vehicles throughout Auto IMS and it's going to get us additional volume, as we have recently seen. Quantifying that is a whole different ball game. My crystal ball is about as good as yours. I don't know how many vehicles we'll gain in the next 12 to 24 months because of it but we are out there working it very hard, showing the benefits, and the benefits of doing this with Copart, and the fact is now that we don't hear, "Are you on Auto IMS? No? We can't deal with you now." Now it is, "Yes, we are on Auto IMS, we can take the assignment electronically." So we have eliminated that friction point which was key for us.

Great. Thanks, guys.

Moving on to Bill Armstrong with CL King & Associates.

Good morning. Clarification, then, the $10 million to $20 million marketing budget is that for fiscal 2010 or calendar?

That is for fiscal.

Okay. And then SG&A were also on top of that $19.5 million quarterly run rate, an extra $6 million for the full year, and the CEO and President compensation?

That's correct. And those aren't new numbers. Those were set out in the proxy statement issued in March. They changed slightly because the numbers we used in that example were based on the share value at the time of the proxy, and between that time and the time they were actually granted the share price increased, and therefore the option value increased.

I think the proxy went out, the stock was about $25.

It was $26. And they're actually granted at $30. And the difference, the impact it had on the option value was about $2.40 per option.

Understood. How much of that compensation appeared in the G&A in Q4?

About $1.5 million.

Okay. Okay. Will, did you disclose things for sale for the first quarter?

I did, for North America. I can't actually address it in the UK yet. But in North America, it was 9.3% decline, and it was almost entirely due to a reduction in revenue per unit. In the UK, it is important to keep in mind of the time line that we are dealing with in the UK. We had our last acquisition the end of our third quarter of last year, and in our fourth quarter of last year we were going through the process of addressing redundancies and consolidating our network, and we really don't have a baseline to measure against until the first quarter. So we will talk about same-store sales numbers in our first quarter of 2010.

Understood. And then finally just on processing costs per vehicle, I think you said they went down, you had lower sub haul costs for North America.

That was one of the drivers. And I think the others, I can tell you one of the other is just increased efficiency across the board in the UK. They have done a very good job in adopting Copart's processes and implementing them, and consequently our cost of processing cars are declining there.

Okay. Any impact from fuel price, positive or negative?

That's reflected in the sub hauling costs.

Right, okay, that's all I had, thanks.

Scott Ciccarelli with RBC Capital Markets has the next question.

Hi guys, Scott Ciccarelli. A couple of questions. First is related to this marketing spend, Jay, you said you are not committed to $10 million, but it is not an inconsiderable expense for you guys. So how quickly do you need to see some fruits of those effort to maintain the marketing program, and then how quickly could you turn it off if it just isn't playing out the way we thought?

We are going to give the full fiscal year worth of time to make sure. It takes a while for people to see you and then get used to who you are and then look you up. And of course there's TV ads and the rest that have to be absorbed over time for people. So we will give the fiscal year to gauge it and then we can shut it down by the calendar year 2010. If by, let's just say, July we didn't think it was making sense, then obviously by calendar year 2010 we could say, okay, no more for calendar 2011. But it will definitely be, part of the expense will be in '10 and part will be in '11 in fiscal years.

All right. That's helpful. And then, Will, this is a follow up question to something that was asked before. I think what the investment community is trying to figure out, isn't when is commodity pricing going back to $250 or $300 a scrap ton, but when do you get back to a parity level on a year-over-year basis? I am assuming it happens in that January quarter.

You are right. It will be our second quarter of this year, of our fiscal 2010.

Okay. So it's at that point where we don't have the big drag from the commodity pricing and that is when we can factor in mix changes, volume changes, et cetera.

The bubble burst in our first quarter but it was at the very end of our first quarter. So you really are talking about our second fiscal quarter until we have reasonable comps.

Okay. Those are my questions. Thanks, guys.

We will now hear from Craig Kennison with Robert W. Baird.

Just a follow up on that last question. Would you expect the revenue per vehicle impact in the first quarter on a year-over-year basis to be better or worse than the impact in the most recent fourth quarter?

I don't know if I want to get into guidance that specific. I would be happy to talk about all the influences that drive the revenue per vehicle but I'm not sure we want or we ever have given guidance specific amounts.

I'm just wondering, Will, if the pressure is intensifying in the fourth quarter because of the comps, or are most of those inputs dissipating?

Ask me that again.

What was the most difficult comp, the fourth quarter?

Fourth quarter by far.

Okay. Thank you.

And the first quarter will be somewhat less difficult, and then we should be on a level playing field for our second quart.

That's very had helpful. Thank you. Then I joined a little late, I don't know if you addressed the clunker issue and what impact, if any, that you saw.

The clunker program came and went before anybody blinked. It was approved, out of money, they added more money to it, and it was out of money again. So, we look at our business as where can we build partnerships with people over the long haul, five, ten, fifteen years. We don't really look for relationships that are one month, two month. The only clunker business we really went after was with dealers who's used the clunker program and we'd service the clunkers for them as a way to build a relationship with them long term on their trade ins. And so we will sell some clunkers but it is nothing to talk about, it is a small amount.

Okay, thanks. On the longer term here, did have a chance to visit your UK operation, came away very impressed with the people you have there. I noticed you changed the name to Copart Europe, not Copart UK. Maybe you can just talk about the longer-term opportunity you see there in Europe.

I think we talked about this in prior calls. Our intent to go into the UK was always from day one was to be successful in that market and then try to use the London office as the staging ground for growth in other markets in Europe. So we still have that intent, still have that on the drawing board, so to speak. I think we are right on target for what we thought we would be doing from first stepping into the market to the success we've had. We have a great team there. They are making it happen. We are giving them the technology and the playbook, so to speak, but they're the ones that are running with the ball. So they're doing a great job. We are excited about that and we think the opportunity to take our model throughout Europe definitely exists when there's the three components we need -- people, insurance and cars. It's a little tough if you've got population and they don't drive cars, or if they drive cars they don't have insurance. But if those three exist, then yes we will be stepping into those markets and trying to do business there.

Okay. Thank you.

Our next question will come from Scott Stember with Sidoti & Company.

Good morning. Can you talk about any early returns you have seen so far you are measuring with these increased advertising expenditures.

I did a little bit in the opening remarks. Hits are up, membership is up, buyers are up. All of our gauge points that we are looking at are up across the board. We are happy with that. I didn't plan now or in the future to get specific to this many thousand or that many million, so to speak. But yes across the board it is up and it is really, like I said, it is very objective, very quantifiable. We will sit down and look at where we have gained business and where we have been able to increase returns and demonstrate that to our customer base. And that will dictate how much money we are willing to put into that opportunity.

How would you expect this program could help Copart Direct with Nascar promotions? Have you seen any benefit from that?

Copart Direct is up. They had another record month. I haven't actually looked to see how much of that is because people heard of us through Nascar, NHRA or ESPN or online. I haven't particularly gone down that path. It hasn't been a marketing campaign that was geared toward that but I am sure some of that exists. We have had fans that have sent us e-mails already, and said thanks for stepping in this sport and we are going to look at buying a car from you. It is that kind of thing. I am sure there will be some fans that decide they want to sell a car through Copart, through Copart Direct. There will be some of that, as well, but it hasn't been something. We are giving you guys the really early stages of what we are doing here. We just got into this, we are excited about the opportunity. Again, it is new for our industry, nobody has ever done this before. From our perspective we feel like we are doing something, again, that is cutting edge.

Okay. Will, just going back to the G&A, I think you said that $19.5 million per quarter was a good core number. Is it fair to assume if we throw the $10 million to $20 million on top of that plus the $6 million, at least $1.5 million for the option, that we can get to a good quarterly number going forward?

That's reasonable, Scott.

Okay, and on the income statement, you had interest expense in the quarter, was there some kind of reclassification?

No, we actually had a small amount of debt associated with an acquisition in the UK. And normally, we have sufficient interest income to offset that but when you are getting ten basis points on your cash, that's a thousand dollars for every million dollars you have in the bank. It just didn't cover it this quarter. And that debt was paid off in the quarter.

Okay. Got you. That is all I have right now. Thank you.

(Operator Instructions). We will now turn to Gary Prestopino with Barrington Research.

Good morning guys. Could you give us what the 123R expense was for the full year this year, please?

Why don't we circle up after the call and we can go through those types of numbers.

Okay. I just wondered if you had that handy. Copart Dealer Services, Jay, nobody has really touched on that or if they did I missed it. Can you give us an overview of what's going on there?

They have continued to grow. August was the best month of the year, fiscal or calendar. September looks like it is going to be August. So they're in growth mood. They're a brand new business, something that we didn't do at all, three years ago. And they're just having a good time over there. They continue to see success, they continue to meet new clients, and essentially increase the number of units going through the company. So we are excited about that. There's no question about that. The numbers have continued to improve month after month after month.

In terms of your focus for growth here, you have talked a lot about what you are doing, with the advertising and the Nascar. Are you still throwing dollars and manpower efforts, are you going to throw just as much towards this Dealer Services?

We have invested in Dealer Services since the day we started. We continue to do that every single month. This marketing campaign will benefit them because obviously higher returns, more cars, the same way it does if you are are a bank car or insurance company car or anybody else. So that doesn't change. There's not a number on top of that, if that's what you are getting at, that we will be spending to see CVS continue to grow. Their numbers are there, their budgets are baked in, and they will be successful. They will continue to grow in calendar 2010. There's no question. It has got legs now. Once you start a new concept, conceptually it is whether or not it will work or not. And they're selling thousands of cars a month, not hundreds, so they're definitely at the point now where they will succeed. So we are in good shape.

Okay. And then in terms of what you are doing with this advertising with Nascar and all of that, you said last year you and the brain trust there were mulling around how we can take advantage of the downturn in the market. You targeted the whole Nascar thing with trying to develop brand awareness. But, prior to what you are doing there in Nascar, were you actually seeing a level of interest from these so-called enthusiasts of vehicles that you are targeting now, that would give you some degree of confidence that on a longer term basis, with the money you're expending on this market, that it is going to work?

If it doesn't work we won't spend the money. That's simple. We are not in it so that we can let people know about us and they don't buy from us. It is all about brand awareness and those folks stepping up to the plate and buying product from us. If you were to go to our web site and just click on "vehicles available to the public" or "no damage vehicles," my guess is, off the top of my head without even looking at it, that there's over a thousand different vehicles you could access today that fall in those categories. Maybe independently, maybe combined. So there's huge opportunity for your mechanic, your enthusiast, your technician to come to our site, find product and buy that product and do some repair work to it. We have the network of parts sellers, obviously, so we will connect them to all recyclers who will sell them parts to fix the vehicle. So it is just a huge opportunity for them to learn about Copart and win from that. It has been our experience since we got in the business that you tell people about Copart and the more they learn about it the more they ask can I buy a car from you. So what we want to say is absolutely, yes, you can. We don't want to say we're wholesale only, we don't want to say, sorry, you don't have a license. We want to connect you, we want to connect you to a buy that will sell you a car, or we want to connect you directly if there's nothing that restricts us from selling to you.

The system you have right now, it measures hits, can it actually quantify new unique visitors to the sites if they're purchasing something.

That it can. It can tell me who came to the site, it can tell us when they became a member, what they bid on, what they bought, how many dollars, all of that. We track every single bid. We are not like a live auction where you have 20 people maybe standing there and two bid or three bid or four bid and you only track the high bidder. We track, if there's 20 people looking at that lot and four people bid, we track all four of them. If there's 15 people bid we track all 15. We have every single bid, know what they're bidding on, know when they're high bidder, second high bidder, fourth high bidder. Doesn't matter, we have all of that data.

So in the brief time you have been doing this, how has that metric formed out? Are you happy with the level?

If we weren't, we spent $2 million in Q4, if we weren't happy with it we wouldn't be spending anything next year. We know that, at the minimum, we're go at $10 million. And like I said, depending on how that goes, then we may commit to more. But, we wouldn't be doing it, Gary, if we didn't like the results we saw so far.

Thanks, Jay.

Our next question will come from Jordan Hymowitz with Philadelphia Financial.

Hi guys, thanks for taking my call. Can you quantify the vehicle sales are all UK, but some of service revenues also UK. How much of service revenues is UK?

That's something we haven't disclosed. With these types of question, Jordan, I would invite you to call me after this call, as well.

Will you disclose the information?

I will know if I can between now and then.

Okay. And also, would it be fair to think that if all of the business moves over to service revenues from vehicle sales, that the margin would be the same as vehicle sales margin?

The margin percentage?

Yes.

It will be higher.

No, no. Let me put it this way. Is the profitability of the consignment the same in the US as the UK, is what I am getting at.

No, it is not. It is less in the UK. We fully expect over the course of time to match the US levels. But we're not there yet. I can tell you this. I can tell you in the fourth quarter it was double what it was in our second quarter and we see those trends continuing.

So even on an apples to apples basis, forgetting it's vehicles sales, the UK is less profitable at this point on a gross margin basis?

On a gross margin basis, per vehicle, yes. You have to expect that. This is a new venture and new processes and VB2 hasn't had a chance to mature. It will take some time but we expect to reach the same level.

Why on a gross profit basis? I understand on an operating basis it would be lower but are you charging less in the UK in general than the US?

I don't want to get into pricing or pricing structures. I think we have answered the question adequately in terms of the comparison between the US and the UK.

Okay. And different topic real quick. Buyback. Will there be a buyback next year ongoing, or what's the plans for that?

I think yes. I think in the course of going forward we will be buying back shares. It's just a matter of the timing and the amount. But we are generating cash and we will continue to generate cash and we're earning 10 basis points on that cash, so we will be a buyer of our own stock from now on.

Okay. Is there a target amount?

You wan the playbook?

Sure.

You are not going to get it, buddy.

Okay. And that's it then. Thank you very much.

Moving on to Justin Boisseau with Gates Capital Management.

Just a follow up to the previous question. What are the plans for the balance sheet, what sort of cash level do you feel comfortable holding, and at what other ways of deployment of that cash do you expect to see in 2010?

$100 million is a nice number for the balance sheet and 2.5 to 1 current ratio is a really nice number to have. After that, the opportunities for our cash are, obviously, the first and best use is acquisitions. To the extent we can identify acquisitions and make those, we will pursue them. After that, we look at improvements in technology, ways to make us more efficient. And probably the third option would be returning the cash to the shareholders. Dividends are not in the consideration. So we are looking at share repurchasing.

Thanks.

Mr. Adair, Mr. Franklin, we have no further questions, gentlemen. I will turn it back to you for closing remarks.

All right. Thank you very much for everyone that attended the call and we look forward to reporting on first quarter in the next call. Thanks. Bye.

Thank you again, ladies and gentlemen. That concludes the conference for today. We thank you all for your participation. Enjoy the rest of your day.