Copart Inc (CPRT) 2010 Q3 法說會逐字稿

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

For opening remarks and introductions, I would like to turn the conference over to your host, Mr. Jay Adair, CEO of Copart Incorporated. Please go ahead, sir.

Thank you, Holly. Well good morning, and it is my pleasure to welcome all of you to our third quarter conference call. As you can see from the results, we had a great quarter, and we want to give you an update on the quarter and the nine months, and then open it up for questions.

Before we do that, I will turn it over to Will Franklin for just a brief disclaimer.

Good morning, everyone. Before we begin our formal comments, I would 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 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 over to Jay Adair to begin the discussion of our third quarter results.

Thank you, Will. Again, good morning, everyone. I think I will just start off by stating the obvious, in the press release as you have already seen, Copart generated $220 million in revenue, $72 million in operating income, and $44 million in net income. We started the year with $162 million in cash. We finished the quarter with $264 million in cash, so we generated about $100 million in cash over the year.

Looking at CapEx, we spent approximately $56.5 million in CapEx for the nine months, and we spent approximately $18.4 million for the quarter. Now, the majority of that capital expense is made up of land improvements, improvements to existing locations, new locations that we'll be releasing like the one we did in the quarter, Scranton, Pennsylvania, land that we bought for new locations coming up.

And then as many of you are aware, capital gains rate will most likely be going up in 2011, so we've had a lot of requests from existing landowners that we lease from if we will entertain buying their property. Currently Copart owns about 70% of our property and leases about 30%. Those leases are on long-term leases, and in most cases we have an option to buy or if not an option to buy, first right of refusal.

And so we're always open to entertaining a purchase option. If we have a landowner who is interested in selling the property and the economics make sense, then we're interested in buying that property, so there has been a fair amount of that this year. I would anticipate there will be more of that in the final six months of the calendar year. So that's the update on CapEx.

Looking at Allstate, we talked about Allstate in the last quarter. We gave you a 12 to 18 month timeframe on rolling out Allstate. That, obviously we have more visibility today, so that probably is now somewhere in the six to 12 month range.

A lot of cars came in in Q3. We didn't sell a lot of cars in Q3. We'll be selling those cars in Q4. We're bringing on more cars in Q4 and bringing on more cars in Q1, and then of course there is a 90 to 180 day lag there in terms of when you get those vehicles and when you finally sell those vehicles. So that's the reason for the six to 12 months full timeframe to do the full integration on that.

As far as, we're trying to anticipate some of the questions. As far as the impact in Q3, there was really no impact in terms of results associated with selling additional Allstate cars because we just started picking them up. Of course, we did have the costs associated with picking up those cars in Q3, and we'll start to sell those vehicles as I said in Q4, Q1, and Q2 fiscal years.

So things are going well. I will tell you that our team is very excited with respect to the new business. Allstate has just been fantastic to work with. The integration has been extremely smooth, and as you can tell from the last quarter, it is going faster than we anticipated it would go. So we are revising that integration timeframe now from 12 to 18 months, down to six to 12, and I would anticipate that that will be the case at this point from all the visibility we have.

On the marketing front, we've had a great year with respect to marketing. Will has some data that he will be giving you with respect to new buyers at the auctions and what those buyers are doing. I can tell you that we're measuring the new membership that's coming in. There has been a fair amount of course correcting in Q2 and Q3, and our existing fourth quarter that we're in now.

That course correcting is, just makes sense. I can tell you, rest assured, Copart will do everything we can do to get additional cars into the Company, and we'll do everything we can do to get additional members into the Company. And when we're spending dollars that work, we're going to spend more, and when we're spending dollars that don't, we're going to stop.

And so there was a little of that that existed in Q2 and Q3, a little course correction in some of the areas where we were putting money and we weren't seeing the return that we wanted. We have limited dollars we can spend, so we're going to put that money where we get the best bang for the buck, and we'll do more of that course correcting in Q4.

As far as the marketing program goes, no major change. We're going to continue this. We will have this for the rest of our lives. That's not going to change. I can tell you that. The results that we're seeing are too good, they are too promising, and you will see with respect to our non-insurance business, both in our insurance and our non-insurance business, there is just too much opportunity.

When we get into the insurance business let's talk returns for a minute. Returns are at an all time high. We have never seen the average selling price at the level it is at currently, and we have never seen the gross return percentage. That's the sale price divided by the ACV. We have never seen the levels that we have seen in Q3. We think that's a combination of market factors, VB2 was, obviously being a zero friction product, was able to carry pretty well through the 2008 and the year of recovery 2009, and it has just been out the gate in 2010. There is no friction associated with getting to the auction, with being at the auction, you click it, you're on, you bid.

And so from VB2 to the marketing effort, to some other factors that are in the industry, we have just seen a real, real strong, strong return quarter. So both gross percentage, both average selling price, when you get into non-insurance, we don't have ACV. These are dealer trades and such. And so we can only measure average selling price and average selling price is at record highs as well. So across the board we're very happy with the results we're getting, and Will Franklin will talk to you more about the non-insurance growth and how it relates to previous quarters. So, just checking off my list, we gave you an update on cash, CapEx, marketing, new facilities and returns.

So I think with that we'll turn it over to Will, give you a financial update, and then we'll open it up for questions.

Thank you, Jay. Let me make some brief comments about our financial performance for the quarter. Yesterday we reported our financial results for the third quarter of our 2010 fiscal year. Consolidated revenue was $220.3 million compared to $197.3 million for the same quarter last year.

The revenue growth was driven by increased yield per transaction, as higher commodity pricing in North America and the UK, higher used car pricing primarily in North America, and the continued impact of VB2 and our recent marketing efforts that have led to increases in the number of unique bidders and unique buyers that participate in our online auctions. In the UK, the number of unique bidders increased by over 94%. In the US, that increase was somewhat smaller because of the maturity of the market. But what's of interest is, of the new buyers that came on board in our third quarter, 27% of those were buying clean title cars, which is significantly higher than the average overall. *** Total unit volume was relatively flat. We saw a decline in overall size of the salvage market, as it was impacted by the high rate of uninsured motorists, which has grown to over 18%, and the impact on insurance company salvage frequency from the higher car values and higher pay off amounts.

However, the decline in the salvage market was offset by growth in units from noninsurance sources, which in North America grew by over 23%. In North America revenue grew from $159.6 million to $169.2 million. In the UK, revenue grew from $37.8 million to $51.1 million, despite the negative impact on revenue of the continued migration of seller contracts from the principle model to the agency model, which we estimate to be $13.7 million. Same-store sales increased 6.6%. Excluding the impact of the migration of seller contracts in the UK from the principle model to the agency model, same-store sales would have increased approximately 13.5%.

Consolidated gross margin grew from $85.5 million to $100.5 million, and gross margin percentage grew by 230 basis points to 45.6%. Including in operating costs for the quarter is an impairment of certain real estate which is part of the Universal acquisition in the UK, and was determined to be unnecessary for the facilities network in that region during the quarter. The impairment was approximately $1.6 million. General and administrative costs excluding depreciation were $26.3 million, compared to $18.5 million for the same quarter last year. The growth was driven primarily by the increased investment in marketing of approximately $4 million, and the impact of the new compensation structure for our Chairman and CEO, which led to the recognition of a non-cash equity compensation expense of approximately $2.9 million.

Our operating income increased from $64.9 million to $72.1 million, while our operating income percentage decreased by 20 basis points, due to the growth in general and administrative costs. Included in the other income section is a loss on the disposal of an aircraft of approximately $800,000. Diluted EPS from continuing operations was $0.52, compared to $0.48 per share for the same quarter last year. Excluding the impact of the impairment in the UK, and the loss on the disposal of the aircraft, diluted EPS would have been $0.54. On a sequential basis, cash increased significantly from $189.3 million to $264.3 million, which is typical for our third quarter as we sell off winter inventory.

In the quarter we generated approximately $91.2 million in operating cash flow. Net income plus non-cash expenses like depreciation and equity compensation generated approximately $62.3 million, while movement in the balance sheet generated $28.9 million, as accounts receivable and inventories declined due to the seasonality of accident rates. Net capital expenditures for the quarter were $18.4 million, and included the buyout of two facility's leases. That concludes my comments on the financial performance. Now we'll turn the call back over to you, Holly, for the question-and-answer portion of the call.

Thank you.

(Operator Instructions).

We'll take our first question from Bob Labick with CJS Securities.

Are you there, Bob?

Yes. Hello. Can you hear me?

Yes, we hear you.

Hi, Bob.

Great. Good morning.

Good morning.

First question I wanted to ask relates to the new bidders. You cited significant rise in new bidders and new buyers. Could you talk a little bit about the retention? We're getting a little more time, since the inception of your marketing program. And how were you judging the effectiveness of the marketing, and how is the retention going? And maybe talk a little bit about some of the positives and negatives without tipping your hand competitively as it relates to marketing, please?

Yes. I don't think there is any negatives. If you think about what we bring to the marketplace, we're the most efficient process to disposition of -- whether it be insurance, total loss product, or whether it be dealer product. So from our perspective it is about just getting additional members in. And we really measure, you bring a member in, and the reason we say members, is they may not be a buyer. You may have someone who is a member. They may bid, they may bid on 100 units, but they may never actually buy something. And so, we're looking at bid activity, bid impact, purchasing, and I think, did you go over those numbers already?

I did.

Okay. Feel free to do them again. Will can give you these numbers one more time, just so you can hear them, and I will give you an additional number.

In the UK, the increase in unique bidders was over 94%, and in the US it was about -- it was over 9%. However, the US was obviously overall is a mature buyer base. You asked about measuring the retention. It is fairly difficult, because in many situations with new buyers are coming in for one or two transactions, as opposed to the existing buyer base which buys weekly.

And of course they will come back. And we measure now, we have got data obviously that goes back quite a ways. And we'll see that they come back eventually over time. The other thing we see is, they grow over time as they learn. But to take a mature market like the US, and to grow it by 9% is phenomenal growth. In terms of total members, I can tell you over the last eight months we brought in over 200,000 new members. Those -- those are huge numbers, huge numbers. We're really happy with what's going on. And again as you said, or as I said earlier, there is really no negatives. It is just positive.

Okay. Great. Shifting gears a little bit, just in terms of the industry in general, I think Will mentioned flat volumes, but obviously record returns. Can you talk a little bit about some of the drivers? It appears -- and the sustainability of that, and it appears potentially that the low SAR out there for new cars, and the lack of used cars is potentially bringing new bidders into salvage. Do you think -- have you seen that? And do you think therefore until a significant growth in new car sales -- ?

Well, it is hard for me to tell you that it's a low SAR that's causing the additional volume, when we're spending over $10 million in marketing on getting additional recognition and additional members. So from my perspective, it was the low SAR count back in 2008. It was the low average selling price of new cars and used cars that caused us to think differently. We have seen an improvement ever since then. I think some of it is from the low SAR count. And then that's pushing more demand for used product, but I know a big piece of it is the marketing effort we've got, because we can see it.

We can reach out and talk to people, and they never heard of us before and now they learned about us and heard about us, through -- I won't get into all the avenues that we're working on, but they heard us about us through the different avenues, and now they're members of the Company, and they're buying product. So from my perspective, I think it is a lot of the efforts we made in addition to that. But as long as the SAR stays low, you're going to have an aging fleet. And as the US fleet ages, there is going to be more demand for used cars out there, because there is not enough new car inventory out there to offset it. So I think if they kick the SAR back up to 17 or 18 million units, we may see that change. But as we're sitting here today, that doesn't appear to be the future. Right, I think it is 11 million right now?

Yes.

So we're pretty comfortable with that. And you got to remember at the height of the market back when it was 18, we were seeing record returns on that, because then you get more late model product that's coming through as well. So I think the two offset each other as we have seen.

Okay. Great. Thanks very much.

Thanks, Bob.

And our next question comes from Tony Cristello with BB&T Capital Markets.

Good morning, gentlemen. This is actually Allen in for Tony.

Hi, Allen.

Good morning. First question, just wanted to I guess ask a little bit more on Allstate, and the acceleration of the timetable for the conversion. Relative to your initial expectations, can you shed a little bit more light on what to surpassed your expectations, and allow for a quicker ramp in that business?

Well, large companies have -- there is a lot of logistics, and there's a lot of things that have to take place for large companies, for them to make moves. And so we were expecting or anticipating that it would take longer to get the changes made across the organization. Allstate has been very quick to move, and we love that. I mean, our teams out there, keeping up the pace with them. We're moving at the same pace, to make sure that we can bring those vehicles in, and we have office space, and all the other things we have to do as a Company. There is quite an integration process that you have to go through. We're doing that, and we'll keep up that pace. That's no problem. But that's the reason for it moving so quickly. They're just -- they want to do this. They want to make the change. They want to get things implemented. And they're doing it quickly and we're happy about it.

Okay. And did I hear correctly that non-insurance units increased 23% year-over-year?

That's correct.

Could you maybe help us better understand the buckets from where these incremental units have been sourced from, and how you have been so successful in targeting these additional business consignments?

Yes. I won't get specifically into every bucket. I'll just tell you it's bank repos, it's rental cars, it's fleets, dealership trades, cars that is we sell for charity. So it is just across the board. And obviously the reason I don't want to get in each bucket, is this is -- we're obviously pretty successful right now in growing this business, and we don't want to tip our hand.

Certainly. And just one last question if I might. In prior quarters it has been intimated SG&A would likely move higher in the back half of this fiscal year, and into the first part of fiscal 2011. Relative to your comments about a little course correction, and relative to Q3 results, are we now at a good proxy for G&A spending over the near term, or should we expect it to move slightly higher from here?

Yes, Allen, I think that's fair. I think this current quarter is probably good proxy for the next two or three quarters.

Okay.

That being said, things can change. So just like after our last call, we made some course corrections in our marketing budget to decrease it. There could be things that would give rise to a decision to increase it. As we stand right now, I think this is a pretty good proxy.

Okay. That's great. Thank you so much.

Thanks, Allen.

You're welcome.

Next we'll hear from Scott Stember with Sidoti & Company.

Good morning.

Hi, Scott.

Good morning.

Can you guys talk about, with Allstate you said you have seen no real incremental volume. But it is my understanding that you, basically had to accept some new pricing on existing contracts. Did you have that lower pricing on existing Allstate business throughout the quarter?

Yes, we did. And I just want to clarify we brought in a fair amount of cars, of quite an increase in volume in the quarter. We just didn't sell the product, because we have got this lag. The cars come in, and you have to wait 60 to 90 days before you can sell them to process title and that. So we'll be selling those cars in Q4. The cars that come in in Q4 that are coming in now, that are integrating now, we'll be selling in Q1. The cars that come in in Q1, we'll be selling in Q2, and by then we should be pretty integrated. It should be the volumes coming in, the product is going out, and everything is in place. Yes, of course we did have the price adjustment in the quarter, and we had the cost of picking up the additional volume, and we didn't have the actual sales.

Okay. And going back to the question on NASCAR spending and the course correction. What would be the new run rate of spending for the full-year, and that are we looking at potentially for 2011?

Yes, as Will said, and I am going to just repeat what Will said, because we don't want to get into every piece of it, Scott, with respect to marketing costs. The G&A, our marketing today is in G&A. G&A for Q3, we feel comfortable right now that that's going to be a good guide for what G&A will look like Q4, Q1, Q2 of next year. So we're going to change the way we spend, but we may be moving dollars from one area to another, and not necessarily eliminating spend.

So the course correction here, just be clear was not out of any -- not being happy with the results, just more of actually just pinpointing where you think you're spending your dollar, and what could be more effective?

Yes. I mean, we are very happy with what we're getting on the marketing front. We gave you some statistics on it, that are pretty amazing. So we're really happy with that. The issue is -- we're not necessarily happy across the board in every dollar we spend, so we're moving around, and spending where it makes more sense for the Company, and where we get more ROI.

Got you. And well, you gave some information about the percentage of clear title cars that -- or clean title cars bought in the quarter. Just give us a framework, where was that about a year ago?

Yes, about a year ago -- it was actually -- third quarter of last year was 12%. Our third quarter this, overall, it was over 16%.

What was the 27% that you had given?

That was the clean title activity for our new buyers. So you can see the new buyers we brought in our third quarter have an appetite, an increased appetite for that type of car which is exactly what we're targeting.

And that led to the increase in --

That led to the overall increase.

Great. And last question, can you talk about with the euro weakening against the dollar over the last six weeks, how that impacted your business in the just completed quarter, and what you're seeing right now as far as international participation?

Yes. I can tell you that we saw a decline in international sales, despite the fact that the peso strengthened during the third quarter. And in the past we have been able to relate international sales very closely with the movement in the value of the dollar. What's happened this quarter, is we had a strengthening in scrap metal pricing, which means that more cars are being bought for scrappage, and obviously those cars are stayed close by. They stayed domestic. And that reduces the number of cars that are available to our international buyers.

So, it wasn't necessarily related to currency?

No, no. Usually it is, but this was impacted by the movement in scrap metal pricing.

Got you. That's all I have. Thanks a lot, guys.

Thanks, Scott.

Next we'll hear from Gary Prestopino from Barrington Research.

Hey, guys, most of my questions have been answered. But given that you had flat volumes, but the clean title cars were off, is it safe to assume that salvage units were down in the quarter?

Yes, yes, absolutely.

Okay, but, and then you feel that this is going to become less of an issue as you get into Q4 and Q1, based upon Allstate and that you picked up a lot of cars?

Yes, the Allstate will definitely push it up. But the other thing that you have is that you've got, is we've had miles driven drop pretty dramatically over the last eighteen months, and it just recently has bounced back, if you saw the recent report. So obviously miles driven, when it goes down it is going to impact the number of total losses. And now with seeing that turn around, you're going to be anticipating, or we are anticipating more total loss volume coming in in the future, as people start to increase the number of miles driven again.

And then, Jay, could you possibly just talk about, maybe without putting specific numbers on it, but put some numbers on it, in terms of the growth of your non-salvaged seller base, because this is really more of a volume driven business, you're clearly going after a clean title car now. Can you give us some insight into how much that's grown over the last year or two?

Well, we would of -- if you would have called me and asked me two years ago, how many members we had, we would have said over 100,000. In the last eight months, we signed up over 200,000 new members. So that should give you a feel for how fast, and how much the member base is increasing.

So -- but when you're saying members, you're not going to break that out between sellers and buyers?

Well, I think Will gave you, and you just hit on a good point. When you sign up new members, you do get additional sellers as well. But, yes, Will gave you the numbers in terms of unique bidders, and the impact we've had there. But, yes, we're not actually disclosing like how many cars we sold, and how many buyers bought them and those types of things. But I can just tell you that we have seen dramatic increase in membership. We have seen dramatic increase in bidding, in the number of bidders per unit.

And coming from a guy who has been in the auction business his whole life basically, I would rather have 500 people at the auction than 50, and that's really what this boils down to. We're just seeing record numbers of attendees to the auction. In fact, we will be coming out -- I will just give you a little of the future. We will be coming out with, on VB2, with the number of members that are currently on the auction. So you can currently, if you watch a VB2 sale you can see who is bidding. You can see what countries, or what states are bidding.

In the future we'll show you the actual number of buyers that are on the auction. So you will see that there is currently 850 buyers on the auction or 1,100 buyers on the auction, because they're just -- we're starting to see such increases in the number of attendees to the auctions. And it is just a pretty simple cycle, Gary, the more you watch the auction, the more you want to bid. The more you bid, the more you end up having a chance of buying. And so, it is really that evolution that we're focused on.

But in terms of trying to get non-salvaged cars, I mean I guess is it Auto IMS, has that helped with the repo end of the market?

For sure. We have seen improvements in Auto IMS. But it is across the board, and I am not going to get into specifics whether it is the dealer business, or charity business, or rental car, or bank repos. It is across the board, that we're seeing improvements in those segments of business.

Okay, thanks.

Yes, sir.

Thanks, Gary.

(Operator Instructions).

Our next question is from Scot Ciccarelli with RBC Capital Markets.

Good morning. This is Austin Paul sitting in for Scot today.

Good morning, Austin.

My question is regarding the UK business. I believe you said in the past that, as you migrate from the principle to an agency business model that you think you will see lower revenues, but higher gross margins in that business. But I think you said that UK revenues were up pretty substantially. Could you help us understand what drove that?

Well, sure, increased volume and higher yield per transaction. You may recall that we had an acquisition in our previous quarter, and the volume from that acquisition is obviously reflected in these numbers.

Okay. And in terms of the breakout between principle and agent, is that still about 50/50? I think you gave that number last quarter. Is that about right?

It is. It remains at 50/50 despite the fact that most of the volume that we acquired in the recent acquisition was principle, so we have been fairly successful. We have been very pleased in the migration path.

Okay, great. Thanks for taking my questions.

Thanks, Austin.

Next we'll hear from Dan Rutter with Wentworth, Hauser and Violich Investment Council.

Hey, good morning.

Good morning.

I am wondering if you can elaborate a little bit more. There was a reference or a comment made about uninsured motorists and how that impacted salvage volumes, I believe it was. Can you help me understand the implications of that?

Sure. When an uninsured motorist is involved in an accident, then he is not necessarily aware of his options with respect to disposition of that car. So that car may be sitting in his driveway. He may repair it, when it may be more economical to salvage it, or he may sell it directly to a you-pull-it or an entity like that. In those situations, it bypasses us. If the insurance company controls that decision, then it comes to the salvage pools. So that has a tendency to decrease the overall size of the market.

Okay. So it is not -- there aren't really any implications about mix or profitability or anything, it is just fewer cars coming into auction.

Fewer cars finding their way to us.

Got you.

It is not necessarily an indicator of what's happening with accidents.

Right. Right. Okay. Great. Thank you.

You're welcome.

Thank you.

At this time, we have no further questions in the queue. I will turn the conference back over to you, Mr. Adair, for any additional or closing remarks.

Alright, thanks, Holly. Hey guys, we really appreciate everybody coming on to the call, and as I said earlier, we're excited about the future. We look forward to giving you an update on Q4, and some of our outlook on fiscal 2011. So things look good, and again, thanks again for coming. Bye- bye.

This does conclude our conference for today. Thank you all for your participation.