Copart Inc (CPRT) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the Copart, Incorporated second quarter fiscal 2010 earnings call. As a reminder, today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference to Mr. Jay Adair, CEO of Copart, Incorporated. Please go ahead, sir.

Thank you, Miranda. Good morning, everyone. Welcome to the second quarter call. Before we get started, Will will give us a brief disclaimer, and then we'll go ahead and give you an update on the quarter and all of the great news.

Thank you, Jay, and good morning.

Before we begin our comments, I'd like to remind everyone on the call that our remarks will contain forward-looking statements. These statements are neither promises nor guarantees, and are subject to certain risks, trends, and uncertainties that could cause actual results to differ materially from those projected from our slides 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 of the factors affecting future results contained in our 10-Q, 10-K, and other SEC filings.

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

Thank you, Will. Again, good morning, everyone. It is a great time for Copart. 2010, both in a fiscal year, but in a calendar year, is shaping up quite nicely. We've got a number of updates to talk to you about. I'm sure there's a ton of questions. It's funny, because if you look back in 2008 and you think about how drastically that year changed from the middle of the year, we were seeing the best results we've ever seen in the industry and the company, by the end of 2008, we were looking at returns that were falling off quickly, both in the new car market, used car pricing. Let's face face it, we all remember the used car industry and the new car industry were really being pummeled.

And that caused us to really think differently about our business and about what we want to do in 2009. Specifically, we started focusing on our website. We had always been a closed website where you had to become a member to view vehicles, we changed all of that. We opened the Web site up, we changed the functionality, changed the navigation. We made it an open Web site. At the same time we jumped into a full steam ahead marketing program. So that was really geared about, geared around changing the awareness of Copart, making people aware of Copart and eventually converting them to members, and eventually converting them to bidders and buyers.

As we look at that, you may think, or I look back and think at 2009 at the time it seemed like a very aggressive year, a year we were making a lot of changes, a year where we were focused across the organization like never before, and the folks in Copart really, really worked hard in 2009 to effectively change the way we do business. And so I think the first bit good news I'll talk about is the Allstate announcement that we put out recently. As you can imagine, we are all very excited about Allstate's decision to select Copart as its exclusive national provider of vehicle sales and auction services.

Allstate went through a very thorough RFP process in 2009. I wouldn't be incorrect to say it's not only thorough, but a pretty rigorous process where you are looking at a lot of different data points. It is a confidential process, but at the end of the day, the decision was made by Allstate to pick Copart as its exclusive national provider. I think that really says it all in a nutshell. I can't really talk about it because it is confidential, but the results are there.

So I think the important things are maybe to answer some of the questions and there's some misinformation in the marketplace today. We've been asked a lot of questions about how much market share Copart has specifically, how much of Allstate's market share Copart had or how much business that we handled for them. And to answer that question you have to look at a couple of data points. One, how many cars did we sell for Allstate prior to this deal coming down and how many units does Allstate sell a year? And we reviewed that data with Allstate and we have confirmed that we had less than 50% of their volume. So I'm confident of that. I can tell you that and there's been a lot of questions about us having the majority of the business or a substantial majority of the business. That's not the case.

Also there's been aloft questions about roll-out and how long would the roll-out take. And right now we are in the process of hooking everybody up. Working towards operational future changes, working towards system changes, integrations and so that's going to take probably six months before we start seeing any movement. It could happen sooner, but probably won't, and it shouldn't be more than 18 months. So we may be done, fully integrated within a year built I'm going to give you a range of six to 18 months to get that done. It's a long-term contract as would you expect, because the integration alone is going to take awhile to do.

So let's see. I think I covered most of the points. The only thing I would mention is maybe we currently have capacity for Allstate for all of the locations. We spent the last decade expanding all of our locations. We've put a material amount of capital over the last decade, buying land and expanding locations so we'd have capacity to do something like this. So while it is the number two provider and while it is a material gain for us we do have space at our existing locations today, which is great news.

A bunch of things I want to talk about but let's look at returns for a minute. As I said in 2008, returns started to fall off at the end of the year. As we started 2009 in January, we saw that start to come back, February got better, March got better and we did that all the way through the year. We saw continuous improvement month after month after month. That trend took place in Q2. November was better than October but December better than November, January, better than December.

So we've continued to see an upward trend. The good news, that is obviously good news, but the additional good news is that we want to do give you February because we completed the month, we can look at the data, returns for February today today are higher both in the per car selling price and in the return percentage, which is the per car selling price divided by the ACV. Those two metrics that we look at are higher than they were in January but more importantly they are higher than they have ever been. So they are higher today in February, our average selling price and our return percentage is higher in February than it ever was in the history of the company, and ever was in 2008 when we were seeing the highs for the industry.

Let's also take another point into consideration. Scrap today sells at $100 a ton. Scrap back at the 2008 high was over $300 a ton. We are seeing some pretty interesting results right now, pretty exciting results. What's causing that? Well, as you know, we talked a little bit already about the marketing.

We kicked off 2009 with the marketing campaign in ESPN and Speed. We did a little bit of NASCAR. We've kicked off our marketing campaign this year with Speed, ESPN, NASCAR, Carl Edwards and NHRA Kenny and Brandon Bernstein. We are reaching to a large base of automotive folks, people that are technicians, people that are mechanics, real gear heads, in addition to enthusiasts. We are really going after that heavy gear head.

A couple of areas that we measure. One would be Web site traffic. Looking at January of 2009, compared to January of 2010, our visitors per day back in January of 2009 was about 46,000 visitors per day and that's calendar day, so 31 days in the month, that includes weekends. We obvious dollar more volume during the week on our site than we do on the weekends. So averaging all the days together, 46,000 per day. Looking at January, this year we are over 100,000 visitors per day. Again, looking at 31 days and averaging it including weekends. So we've seen that more than doubling of visitors on a per day basis.

Those aren't peaks. Those are averages. That's a really good number, much that's not looking at one week or one day. That's a whole month worth of data, and we could have expanded outer to the quarter but what we were trying to do is just pick an exact point in time, an exact month in time to review the data. You can look at some analytic tools and you'll be able to confirm some of the things I'm telling you here. The other thing we look at is membership.

And obviously our goal is to make people aware of Copart, the right people aware of Copart like mechanics and technicians and convert that awareness into membership and eventually get those members to bid and by product. So looking at new members signed up in the quarter, Q2 2009 versus Q2 2010, so this is a three-month trend just looking at everyone that we signed up, we are more than ten time the number in the most recent quarter, 2010. Meaning we have ten times more members that we've sign up in this quarter than we did a year ago. So we are obviously bringing in members at a much higher pace, a tenfold pace compared to a quarter where we didn't have near the marketing budget.

In addition to that, we talked about international buyers a bit because we are focusing so heavy on the domestic front but we are also marketing internationally. And while we've done both we've seen an increase in international buyers in Q2 of 2009 from 22% to 24% in Q2 of 2010. So that is again a nice move from 22 to 24 and more in line with how Copart looked in 2008 before a lot of what happened in the auto industry took place. I'm also happy to announce the debut of our new TV show, Copart Sold In Seconds.

It went live yesterday at noon eastern time on the Speed Channel. Hopefully some of you got a chance to watch that. It's a thirty-minute show. It's very fast. It's really geared towards speed and how fast we can sell cars and the play in there on the Speed Channel of course. We looked at vehicles selling in seconds across the country real time as they were selling on our Web site. We were commentating. We had our host Greg White and Jamie Howell literally going over how fast these vehicles were selling, commentating on the pricing and that kind of thing. We then looked at cars that we sold last week. We looked at cars that we are selling next week that are coming up for sale. We interviewed a buyer that bought a vehicle from Copart, turned it into a race car.

So it's an entertainment show. It's completely geared towards entertainment but it it's called the Copart Sold in Seconds show. It's really introducing the speed audience to Copart and what we do and what we're about, the industry. I think as one of the guys at the station said, hey, this show is all about how we roll, and I kind of laughed when we said it, it really is, it's about the way Copart functions, the industry functions. We will be introducing in future shows, we will be introducing recyclers and recyclers that buy from Copart, used parts that they've sold to people that have maybe built race cars or built hobby cars and other things, classics, you name it.

It was great. It was a good kick off, good show. Again, I hope some of you got it. I could keep plugging it but I will just do it one more time. Tuesday at noon, only on Speed.

Moving from there, talking about the UK for a minute, we are doing very well in the UK. We are excited with not just our team there that is running it but also the returns that we are seeing in that market. We made an acquisition in the quarter of D Held Limited. They have locations in Bristol which services the southwest portion of England, also Wells, Coalchester, which I'm call it Northeast London, it's really not quite north and quite east of London but it's actually Norwich area but for those of you that are not as familiar with the geography considered the outer northeast end of London. You have Luden and Bedford that are also north of London and then further north of London. What we've really done here is gained a lot of capacity in the majority of the population which sits around London and at the same time we've gained capacity in Bristol which was an area that we really needed to, needed space.

All those locations are fully integrated. They are all utilizing the VB2 technology. We are actually seeing higher returns than ever again so we are seeing that VB2 effect which is great. And they are all utilizing Copart.co.uk. Completely integrated, systems people 100% across the board.

I think the only other thing left to talk about would be mix and some CapEx. On the mix side we are about 20% noninsurance, 80% insurance. The net CapEx for the quarter was $36.8 million. That included our acquisitions in the UK. And a lease by out. And the buying of systems, computer systems as we are building another brand new data center. And we finished the quarter with $189 million in cash.

So for further clarity on the financials for the quarter it's my pleasure to introduce to you Will Franklin, our CFO.

Thank you, Jay.

Yesterday, we reported our financial results for the second quarter of our 2010 FY. Consolidated revenue was $176.6 million, compared to $169.9 million for the same quarter last year. The growth in revenue was driven primarily by increased yield per transaction as higher commodity pricing, higher used car pricing and, in the UK, the continuing impact of VB2, our Internet selling program, translated into higher gross proceeds. In North America, revenue grew from $138.7 million to $142.6 million. In the UK, revenue grew from $31.2 million to $34 million, despite the negative impact of the continued migration of seller contracts from the principal model to the agency model which we estimate to be approximately $6 million for the quarter.

Same store sales increased 3.2%. Excluding the impact of the migration of the sellers contracts in the UK from the principal model to the agency model, same store sales would have been an increase of 6.7%. Consolidated gross margin grew from $67.3 million to $78.7 million, and gross margin percentage grew by 500 basis points. The growth in gross margin and gross margin percentage resulted from higher revenue per transaction, lower purchased car revenue as a percentage of total revenue, higher yield on the purchased car sales, which grew by almost 46%, and lower cost to process each car.

General and administrative cost excluding depreciation were $23.4 million compared to $19.5 million for the same quarter last year. The growth was driven primarily by the increased investment in marketing and the impact of the new compensation structure for our Chairman and CEO; approved by the shareholders last April. Our operating income increased from $45.6 million to $53.2 million, and our operating income percentage increased by 330 basis points.

Included in our income tax expense for the quarter is the impact of a beneficial ruling in the UK concerning the capital structure of our UK operations. This resulted in a discrete tax adjustment of approximately $2.6 million. Were expect normal tax rates to be approximately 39%. Diluted EPS was $0.42 compared to $0.32 for the same period last year. On the balance sheet, cash declined which is typical for our second fiscal quarter, as we grow inventory and made two estimated tax payments. Nevertheless our balance sheet remains strong as our current ratio is over three to one.

In the quarter we generated approximately $5.1 million in operating cash flow. Net income plus non-cash expenses like depreciation and equity compensation generated approximately $51.3 million, while movement in the balance sheet consumed $46.2 million. As we made two estimated tax payments totaling approximately $42.9 million, and we grew inventory. Net capital expenditures, including acquisitions for the quarter, were $36.8 million included the buy out of one facilities lease.

This concludes my comments. Miranda, we will now return the call to you to moderate the question and answer period of the call.

Thank you. (Operator Instructions). We will go first to Scott Ciccarelli with RBC Capital Markets.

Hey, guys, how are you?

Good morning, Scott.

My first question is, Will, you gave a same store number of 3.2%, is that North American or that's total?

That's total.

Do you have a North American figure.

We are not breaking it out. We did in the past. Now it's simply because it was too difficult to calculate same store sales growth in the UK because of all the acquisitions and integrations and the migration of volume between yards. Since that's over a year old now we can calculate that and we've included that in the total numbers that we've presented.

Okay. And then, Jay, a question about the Allstate deal, and I guess this is kind of a little bit bigger picture question. You guys, you had your private negotiations with Allstate and I'm sure they were talking to other people. My understanding is that you guys did have to give price concessions to get that business. Can you give us first of all an idea of how large of a concession had you to give and second of all, could this potentially be a prelude to some sort of price war within the industry?

Sure. I mean, first of all we didn't give them anything that was out of the ordinary in doing a deal of this size. We've gone literally over 100 national accounts today as a company. Most of those obviously are not the size of Allstate, but some of them are as big as 60,000 cars a year. They are good sized accounts and they get concessions for that. So, sure, Allstate got a better price based on the volume and the size and that and what we were handling less than half of their business for. But nothing out of the ordinary I would say. And so based on that I would say, no, I don't think there's any kind of a price what are so to speak going forward with our competition.

But do you think that that big win which is kind of a signature type win I would think, does that create in your opinion, does that potentially create some sort of anxiety on their part where they feel like they have to do the same?

I can't speak for them. I can just say it creates euphoria on our part. We are pretty excited about it because they have so much data they can look at so much of the sampling. I mean the number two writers, they are looking at volume across the nation and so we think it really validates what we've been saying in our model and it will I think be a great statement to a lot of other carriers that are maybe thinking of moving to us maybe on a national level, maybe on a regional level. But here's someone that has a lot of visibility. They have a lot of data at their fingertips and they chose us so I think it's a pretty powerful statement.

Great, thanks a lot, guys.

Thank you.

We will go next to Bob Labick, with CJS Securities.

Good morning.

Just to continue on Allstate for a minute, it sounds like they put out the RFP to the industry. Have other companies followed that suit or do you believe others will be following that any time soon?

Like I said we've got 100 national, over 100 national agreements so a lot of companies have done it in the past but not of the size of Allstate. I mean Allstate is the number two writer. That's the first deal of that size I would say. Is it a trend? It may be. It may be a trend where companies are looking at consolidating because they see the benefits of that. Again, I don't know but I think it's positive on our part.

Then you discussed the six to eighteen-month integration. Can you give us a little more details? What do you have to do on your end.

To give you an example, they have people that are located at other locations, competitors locations. Those people have to be, a base has to be built out for them. They have to be relocated out to our locations. That kind of stuff takes time, the preparation, the discussions are now in place to do that and we are working on that and then the process of moving will start and at the same time there's the system integration. So we may be handling a lot of the volume in nine months but there's also system integration and other, a number of other integration points that have to be completed. So my guess is it will take a total of 18 months to get everything kind of working to date.

What kind of, incremental investment do you need to make to facilitate this?

It's pretty small, I would put it that way.

Great. Just moving out to the UK, obviously another nice acquisition there and everything seems to be working out quite well. Can you tell us, did you gain new insurance customers or are there still large insurers, you are seeking but that don't use you yet there or how this changes the dynamics in that market.

We did gain some new customers in that market through the acquisition which is great so it's introduced us to some additional leaders in the market. But, no, there is still very large players in the market that we don't do business with. From our perspective there's a lot of opportunity going forward in addition to the fact that we are very satisfied with where we are at today in that market.

And last one and I'll get back in queue but as it relates to Continental Europe, does this, you getting critical mass in size in the UK, allow easier transition in Continental Europe, is --

I think it's a good point because we've got a number of carriers that we do business with in the UK that are number one, let's say to that ten writers in Continental Europe. It definitely gives us the relationship that we would like to leverage as we go into Continental Europe. Plus it gives us the experience, plus it gives us the team over there because it has to be led by the UK. That expansion couldn't can't be led by the US.

Thank you very much.

Next question, Bill Armstrong with CL King & Associates.

Good morning, could you discuss volume trends during the quarter on a year over year basis?

Bill, volume was relatively flat. We think that we are seeing the impact of a couple of influences in that respect. One is we have a higher instance of uninsured motorists, and that's grown to almost 18%. 26% in some states. And naturally the higher value of these used cars tends to reduce the salvage frequency. So we think those both have led to a relatively flat market at this point in terms of volume.

Right. Okay. As you probably heard Insurance Auto Auction had a 9.6% increase in same store unit volumes. Does that indicate that you are losing share to them?

I can't speak to that. I can only speak to what we are seeing. We have like Jay said about 100, actually more than 100 national contracts so we get every car they have. And with those contracts we monitor their volume. So it excludes wins and losses. And in most cases, it's flat, and in some cases it actually is down slightly.

Okay. In the UK, can you update us on the ratio of cars that you sell on a principal versus agency basis?

Generally last quarter it was about 50/50, right about 50/50. In the same quarter last year it was 30% agency. So we are making progress in the migration. There is still a couple contracts that are coommited to migrate to the agency modeled which haven't done so yet but we expect that percentage to grow.

Okay. The $1 million in acquisition costs for D Held that you mentioned in the press release, is that in SG&A or is that the other income line or some where else?

It's, well, half of that is in SG&A and about half of that is in yard operating expenses. The portion in SG&A is primarily legal expenses. You may or may not be aware of it but accounting rules change. Previously legal expenses and many due diligence costs were capitalized as part of the acquisition. Now they have to be recognized in the income statement which is reflected in this quarter's numbers.

I see. And then finally on the Allstate, how long do you think it will take before you are actually processing all of their cars? I know they have some contracts with some of your competitors. When do those contracts winds down where you will be seeing all of their volume?

It's probably somewhere in the, again we said six to 18 months full integration but it's probably somewhere in the one year range.

One year range. Okay. Great. Thanks .

Next, Gary Prestopino at Barrington Research.

Hey, guys, how are you doing?

Good morning, Gary.

Did you or can you share with us just the size of the revenues from this D Held acquisition or is that something you can't make public?

No, we haven't disclosed that and we typically don't. Actually we at this point can't don't ex clues to the extent possible many details in our acquisitions because we found that it hinders us on occasion in future negotiations.

Right. How about relative to the size of the sites of the company of what you have over there, are their sites comparable in size, the five sites?

Yes, I would say out of the four that we mentioned on the call here they are comparable, yes.

All right. And then in terms of marketing spend going forward, did you mention the level that you spent this quarter?

No, we gave guidance at the beginning of the fiscal year and that hasn't changed. So we are still in line with that. And as I said on the call we are seeing some pretty phenomenal results so far so we are happy with what is happening there.

But the majority, this is going to be back end loaded.

I would say in the Qs three, four and one of the next year.

Okay. And then in terms of Allstate when will you have the benefit of the full volume from the new contract? Is that about 18 months from now?

I think that question was asked earlier. Full volume should be about one year.

So full volume, one year. All right. And then can you comment on some of your initiatives on the dealer side in Copart Direct in terms of getting vehicles as a source of supply? I mean you commented on what you are getting on the membership side. Can you comment on that?

Yes, I mean, we are having a lot of success on the non-insurance side both in Copart Direct, CDS, and a couple other initiatives that we've got. So those are continuing to grow and my guess is they will continue to grow. So that's a great thing.

All right. In general, though, Jay, you are looking to build your buyer base here which through sharing statistics with us it seems to be working somewhat but some where along the line don't you have to get more volume coming through the system to satisfy this buyer base?

Yes, I mean it's a supply demand game so we are seeing record returns right now which is great. We are selling a material amount of our product to new buyers so that's again we are happy with all these fronts. And the volumes is coming in. I think we talked about that in just the Allstate discussion alone. That will be quite a bit of volume coming in in the next year. So I'm not too concerned with volume. Right now I'm more focused on, and we as a company are more focused on trying to get additional members and additional awareness.

All right. Then just one last question. You said you increased your membership signings by ten times.

Correct.

There's a couple of levels of memberships but how many of these newer members are actually moving into where they are hitting, I guess there's a higher level of membership where you pay a higher fee and you can buy more cars.

Right.

Is that something you can share with us.

Well, yeah, I mean there's a migration process where they will come in as a basic member and then maybe over time move up to premier status but regardless they both, it's still has either one has the ability to buy cars. It's really based on license type and if they don't have a proper license they can go through the broker network that we've got. It's really about how many cars are we selling to new buyers and we are selling a material amount. Material to me would be 10%.

So more than 10% of our product is being impacted by new members, new members we think of as less than a years old. That to us is, that is an important part of what we are doing. That's, again, that's a majority part of this initiative, this marketing initiative is not only this marketing initiative is not only making buyers aware of us but make buyers eventually start bidding and buying. That's what we are seeing so that's good stuff.

Let me ask one more comment on that. It's not only a numbers game. We track what these new buyers are buying and these new buyers have an appetite for the clean title and the run and drive cars which is exactly what we are trying to accomplish.

Right. Thanks, Will.

Next, Scott Stember with Sidoti & Company.

Good morning.

Good morning.

Hi, Scott.

To clarify one last time, you said that total same store sales up 3.2 and that's to adjust for the purchase migration total up 6.7.

That's correct.

And just shifting back to Allstate, Jay, can you just talk about the kind of mix within this business that we are getting? I know right now you are doing 60, 40 or 70, 30, a fifth to nonfifth, what's the mix within that contract?

You mean the type of contract that we've negotiated with them?

Yes.

Signed up with them? It is a PIP contract where we will be doing the enhancements to the cars.

So this will be all the stuff where you can earn a higher percentage obviously?

Well, it's a, I can't get into the actual deal but, yeah, that is correct, if we end up generating more money for the car we will make more money on the car.

And circling back to Copart Direct, I know it's been a little bit of a slow go out of the gate but now that you have this new buyer base hitting your auctions have you seen any trends that suggest that more volume is starting to come through now that do you have a buyer who is willing to pay to that dollars for the car?

We are seeing more volume. We just talked about the Allstate deal so I think that's a big part of, they've, they are seeing what we are seeing and they made their decision based on a number of factors. But, again, I don't know how to say it any clearer that we are seeing increased volume and we are going to be seeing a lot of increased volume in the next year just from that commitment let alone anybody else who comes along and commits to Copart. So right now our focus is to continue bringing in these members and I can't give better news than we are at record levels in the month of February for ever. We've never seen the kinds of per car selling price or return percentage. So if we are in a situation where we've got a lot of demand right now for the supply we've got that's great because supply is going to be increasing going forward.

Great. And just last question with regards to this NASCAR shift, I think last quarter you might have said that they are currently publicly bid in about six states right now. Can you just talk about where that stands now?

The public can bid in every state because we have a broker network that we've built so there's nothing to stop you from bidding. We will connect you virtually to a dealer. That dealer will buy the car, book the car and sell it to you. So there's nothing nothing stopping you from going on our Web site tomorrow and buying a car anywhere in the country through the broker network. That's the, I think that's one of the great designs of our Web site. That's a big improvement that we put in in the last year that didn't exist over a year ago. Now that's within reason. If we've got a junk car that has to be crushed then you can't buy that of course, but everything else that we are selling you got access to.

All right. That's all I have. Thank you.

Thank you.

We'll go next to Justin Boisseau with Gates Capital Management.

Number, how much of the $37 million in the quarter was pure CapEx versus the CapEx plus acquisition?

Well, we don't break it down. I can tell you this, that of that number about $7.5 million was what we classify as noncapacity CapEx and of that $7 million approximately 6 million of that was computers and computer sites.

Okay. The last CapEx number you guys talked about for the year which included acquisitions was supposed to be around $40 million to $50 million for the 2010 year. Where do you expect to it shake out now? You guys are a little over 60 YTD.

Yes, it's just becoming too difficult to give guidance on CapEx because so much of it is is opportunity based. So there are certain locations that we can use extra capacity and we are searching for those locations if the opportunity arises we will pull the trigger.

And as we sit here today and just to add a little bit more to what Will says, as we sit here today we have capacity. But there's some markets throughout the country we've been looking for property for ten years. And if that property came up for sale, we are going to buy it and we may mothball it. We may not develop it for two or three years. Same thing with acquisitions. There's no way to anticipate that in the second quarter we will be making this acquisition that we made back in the fourth quarter when we gave estimates. So who knows if another acquisition opportunity will come up in the year between now and July.

Okay. What about the G&A line for the rest of the year. Did I hear you earlier saying that you think that will move up hire in Qs three and four or we had a great run rate here in quarters one and two?

No, it will increase the next three quarters actually and that's because of the marketing spend that's associated with the raising initiatives both in the NHRA and the NASCAR. Most of those events happen in the next three quarters.

As far as acquisitions and expansion what would be the next logical country for you guys to maybe expand in or do you think there is still a lot left to do in the UK if we were to thinking about neck opportunities for you guys?

I mean, we have opportunities in the US and the UK but we wouldn't be disclosing what's the next country we would be. That kind of puts us at a disadvantage.

Okay. Thanks.

Thank you.

We will go next to Tony Cristello with BB&T Capital Markets.

Thanks, good morning, gentlemen.

Good morning, Tony.

Jay, you talked a little bit about in the opening comments the impressive traffic, the very strong membership numbers. I'm assuming there has to be some magnitude of improvement or increase in the conversion rate of that member and or traffic to buyer. Is there anything you can share with us that, obviously you don't have to give numbers, but anything you can share that kind of directionally tells us what you are seeing on the actual final product there?

Yes, well, I can tell you that as we sign up new members, the first step is awareness and when people are made aware of it most of the time they didn't not industry existed. They didn't know the company existed. So they go from a awareness to becoming a member to looking around. What we've found is that there's a curve that takes place where their activity is slower in the beginning and then it's kind of like once they bought this year's first car then they start to increase substantially. As long as they've been a member with Copart, the more that they by, the more active they are, the more they get involved with the process.

We are starting to see the fruits of a year ago taking place today. And as I said with ten times more members that we signed up but again you get into, you start looking at how many buyers we brought in back then and how many buyers we brought in in July and August and September and now what buying they are doing today in February and it's definitely making an impact. So the exciting, I think what's exciting is where we are going to be 12 months from now. The volume will be processing. How many more buyers we will have on board. So it's, that's kind of where our focus is at right now is looking at awareness through membership and the impact it's having on returns.

Okay. And when you look at the various initiatives then, whether it's the dealer, the Copart direct, the speed, the TV the NASCAR, all these things you've got going on, is there any one in particular that you would say, this is going to be the better contributor to the ultimate growth in profitability down the road, or is it just an aggregate, let's get them all there because ultimately it's all going to drive higher selling prices and thus higher yields.

I'm sure there are some thing that are working better than others and we haven't been doing it longer enough to have that much visibility. But we will be in the next 12 months we will be kind of jockeying and repositioning into the areas that are are more most effective. It isn't like, this is the program, we are sticking with it. As I said a year ago or maybe six months ago, the intent is to look at the results, measure the results, we are doing that now, and there are areas that are more, that have a better return than others. There are areas that are more effective than others. We will be moving dollars around and spending appropriately to get those additional buyers and members in. Okay.

Okay. Not to talk much more about Allstate but just when you think about, maybe this is a question for Will, as we look down the road, eight, 12, 18 months, whenever you are at full ramp, I guess the question I have is, in the interim, are there new programs in place with respect to the fees and in respect to what you have to put in with cost standpoint to what you have to do, in other words, ruin occurring a little bit higher cost or less fee revenue on vehicles with Allstate until you have the full ramp up, until you catch up?

That's exactly the case. And that's, next quarter and perhaps the quarter after we it will actual have a negative impact on our margins as we ramp up, we incur costs and the existing volume is priced at the new contract rate.

Okay. Okay. So we have to be mindful of that. Will that impact more the revenue side or will that impact more the cost of goods margin side or will it impact a little bit of both?

It will impact both. Both cost and revenue.

Okay. All right. That's very helpful. One last question. When you look at, Will, I don't know if you shared this or not, did you give the impact of currency on the service and the vehicle sales side of the business for the quarter?

No, we didn't. It was immaterial in the margin line is almost nothing. It was $1 million or $2 million on the revenue side.

Okay. Perfect. Very helpful. Thanks, guys, I appreciate it.

Thanks.

Thank you.

Next, Edward Hemmelgarn with Shaker Investments.

I have a question regarding impact of I guess the used cars as opposed to junk cars. Does that lower or improve your margins the more nonwreck cars you get in?

Well, yes, the more nonwreck cars we process they sell for higher value so, yeah, there is a, it does improve margins over time.

Do you also, you're not having towing costs and things like that, so is that part of the contribution, too.

No, you may have towing costs. In fact you usually do. Whether it's a financed car or a dealer car you are still picking it up.

Okay. Thanks.

We will take our next question from Christian Buss with Thomas Weisel.

Can you provide some perspective into the transition from principal to agency model with the acquisition, has the time line for that changed?

Well, the number of cars that we are selling on purchases have gone up since we made that acquisition. But I think the roll-out of moving to a fee base has continued in the UK. That hasn't changed. But we just made a large acquisition that will overnight throw a lot more purchase cars into the mound. Our goal will be to continue down the path that we've headed and probably it will extend it, it will probably extend the process on those cars. I don't think it changes anything for the existing business that we had on the cars that we've acquired. We have to get in now and meet with our customers and show them the numbers and go through the process with what other suppliers of ours. So it's really about going through an education process on what the results are, what the results are, what the returns are, what we are doing and how that we are aligning our interests if we do it at a fee structure versus we are trying to by the car and negotiate based on conditions and categories and all the rest of the stuff.

When do you think you will be fully transitioned there?

On the new business I really couldn't speak to that yet. And I don't remember what numbers we gave out on the old business. But it's continued quarter after quarter to transition and I anticipate that I it will continue to be the same. Whatever numbers we gave out in the past I don't have in front of me but I don't think that's changed as we sit here today. It looks good and in the end there may be some customers that don't want to move off of it and that's fine, we make more money on the purchase and we've shown them that we make more money on the purchase on a per car basis. And again we think long-term the long-term benefit is being very transparent and showing them exactly what you make and knowing that you're interests are aligned versus here we are buying cars from you, you are not sure what we are making.

Operator, do we have any more questions?

(Operator Instructions). We will go on to Craig Kennison with Robert Baird.

Good morning, guys.

Good morning, Craig.

Would you provide us with an update on Auto MS?

Sure, I don't think it's changed much from the last up dates that we've given. We are integrated, not at all of our facilities but in our markets so if we have three facilities in a market we have only integrated one facility in that market just because of cost. And then we've got a team that are out there pushing to do additional business with them and in fact we recently saw some nice growth in that area. So we will continue, we are going to continue to be a player in that business and I'm still, nothing has changed with regard to, are we happy with did the deal with Auto MS very much so.

Are you continuing to see incremental volume from them? In other words, you haven't fully penetrated the opportunity?

Zero, no, we are at the beginning stages of that we will couldn't to do that for years and years and years. There is a lot of opportunity on that front.

Can you share with us any information that would help us size that total opportunity?

That's tough. You can give the size of the market and what we are really going after is the cars that fit the Copart model and trying to work that kind of business. So it's tough to give you a size of the market. I just, I can tell you that it's not uncommon to be able to win a 5,000 car a year account in that business. I mean those kind of wins are out there. And it's just about, it's again like we built Copart, we built Copart not by any one big deal but by growth, consistent growth, year after year after year over a couple of decades.

And then, Jay, how exposed are you to the repossession market and what are the trends there?

I don't know that I want to get into the trends, Craig, on repos simply because it is a relatively small piece of our business. It's a growth area for us. But are we going to be impacted if repos go up 10% or down 10%? No, it's not enough of our volume to impact us. We are much more focused on trends with total loss and things like that than we are repo volume.

Last question on currency Are you seeing any near term impact from the strength of the dollar and the relative weakness in Europe in terms of --

Do you and what me to comment on that or Will?

Yeah, in the last quarter we actually saw growth in the percentage of international sales as the dollar actually weakened against the peso and the Euro and the pound. It's too soon to tell what the current trend impact will have. There's a tight correlation. We've correlated this for some time between the strength of the dollar and our international sales.

Great. Thank you very much.

Thanks, Craig.

We'll go necessary to Gary Prestopino with Barrington Research.

Just one quick question, Will, or two questions. You gave a North American service revenue number of $132 million. Did I write that down right?

Let me confirm. I have 38.7 last quarter -- $142.6 million.

For this quarter, 142.6?

Right, versus 138.7 last quarter.

Okay. Then could you may be just directionally, we talked a little bit about these clean title drivable cars. As a percentage of the volume that you are doing where does that stand now versus maybe where it was a year or so ago? Can you share that with us?

One second, Gary. Yes, Gary, it's about 15% of our business. And it has grown slightly. It hasn't gone from ten to 15, it's gone from like 13 to 15.

Okay. But it's growing. So those.

That's correct.

So those are drivable cars.

All right. Thanks.

You're welcome.

Thank you.

(Operator Instructions). Mr. Adair, it appears we have no further questions from there phone audiences. I will turn the conference back over to you.

Thank you. Well, thank you for attending the second quarter call and we look forward to reporting on Q3. Thanks again. Good by.

Ladies and gentlemen, that does conclude today's conference call. We'd like to thank you all for your participation. Have a great day.