Copart Inc (CPRT) 2011 Q2 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Copart Incorporated second quarter fiscal 2011 earnings call. As a reminder, today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Mr. Jay Adair, CEO of Copart Incorporated. Please go ahead sir.

Thank you, Peter. Good morning, everyone. Before we start I'll turn it over to Will Franklin for a brief statement then we'll open it up for comments and then questions. Will?

Thank you, Jay. Before we begin our 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 final results to differ materially than 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-K, 10-Q and other SEC filings With that we'll turn the call back over to Jay Adair, our CEO, to begin the comments on our second quarter results.

Thank you, Will. Again good morning and welcome to the second quarter earnings release and conference call for Copart Inc. Start with international bidding for the quarter. Units came in at 24%, so internationally gross proceeds were at 28.4%. So obviously the international units are a little better vehicle than the typical car that we sell.

So sequentially let's look at that as compared -- I'm sorry. Year-over-year let's look at that comparatively. And the number was -- and actually it is sequential. 22.5% in terms of units and 26.6% in terms of gross proceeds. So the trend from Q1 to Q2 is up.

The mix in terms of what percentage of our vehicles being sold to insurance companies as opposed to what units are coming from or being sold from insurance companies as opposed to what units are coming from noninsurance has maintained at about 80% to 20%. And that's with a large increase in insurance units coming through for the quarter. So we've seen a nice improvement in our noninsurance sales in the quarter.

Looking at G&A, Q-2 came in at $23.6 million in G&A as compared to $27 million in Q1. We predicted or we talked about in the beginning of the year that G&A would be coming down as we work towards reducing costs. Those costs are associated with marketing and personnel primarily. Talk a little bit more about that later in my discussion and Will will give you a little more flavor for that as well. So yes, sequentially looking at Q1 versus Q2 we are down. And we're continuing to push on that trend for G&A.

Capital spending in the second quarter came in at $27.6 million, $5.6 million of that was lease buyouts so the year to date number for six months, $42.4 million in capital spending. Also in the quarter we announced a stock buy back. We purchased 12.2 million shares, approximately $463 million worth of stock. We have a 13 million share authorization still in place. We also bought stock in the prior quarter so total stock purchased in 2011 is 14.4 million shares. Our average purchase price is at $37.33. Currently total shares outstanding fully diluted are at about 71 million shares.

Debt for the quarter, we announced also that we were taking on some debt. We brought in Bank of America and secured $400 million in debt. The rate is floating at 150 BPs over LIBOR, so currently under 2%.

Also in the quarter we announced the sale of our corporate office. And we in doing that did a two-year lease back so we'll be leasing the building for the next two years. And then in addition we announced that we would be relocating the home office from California to Texas in the Dallas area. So that will be happening in 2012. So we've announced it now in 2011 but it's still over a year away.

So there's a number of changes that will be taking place to our G&A as we get structured and ready to do that change. It's a big move. We're excited about some of the things that are happening inside the Company from a cultural standpoint. The move and both the move and technology. And we'll report on that in subsequent quarters as we make some of those plans become reality.

We finished the quarter with cash on the balance sheet of $204 million, and with that it's my pleasure to turn it over to Will for a little more commentary on financial.

Thank you, Jay. Yesterday we reported our financial results for the second quarter of our 2011 Fiscal Year. Consolidated revenue was $207.4 million compared to $176.6 million for the same quarter last year.

These results include the impact of the change in revenue recognition rules adopt at the beginning of this Fiscal Year, which mandate the recognition of certain revenues, primarily towing a car into the yard, converting a title to a salvage or branded title, and the performance of vehicle enhancement as the services are performed. Previously these revenues and their associated costs were carried on the balance sheet until the car was sold. As a result of this change we recognized $3.6 million in revenue and $3.4 million in expenses that otherwise would have been recognized in subsequent periods.

In addition during the quarter, we settled a dispute with HMRC in the UK concerning the appropriate amount of VAT associated with cars sold under a certain program. The result was a refund of VAT previously paid of approximately $1.8 million which is reflected in vehicle sales. Excluding the impact of these items, revenue would have been $202 million. This represents an increase over the same quarter last year of 14.4%.

The growth in revenue came primarily from increased volume. Overall volume increased in most segments. In North America insurance volume grew, excluding the impact of Allstate. Overall, insurance volume remained at approximately 80% of total volume.

On a same-store sales basis, excluding the impact of the change in accounting rules and the VAT settlement, revenue increased 8.4% and was driven by volume. However, during the quarter in the UK, 37% of the cars sold were sold on the principled model compared to 51% for the same quarter last year. The transition to the agency model had the effect of reduction revenue by over $9.6 million. Excluding this impact, overall same-store sales would have increased 13.9%.

Our gross margin grew from $78.7 million to $85.9 million or 9.2%. Excluding the impact -- included in yard and fleet costs for the quarter was the impairment of a real estate asset which totaled approximately $1.3 million, $3.4 million in costs associated with the service revenues whose recognition was accelerated due to the change in accounting rules and a $1.5 million adjustment to our self-insurance reserves.

The increase in our self-insurance reserves was a precautionary move to protect us from future exposure for a claims trend we are seeing with respect to medical claims that's in excess of what we have seen in our actuarial studies.

Excluding the VAT settlement, the change in revenue recognition rules, the impairment and the adjustment to the insurance reserves, the gross margin (sic) would have been $86.8 million, and gross margin would have been 42.9%, A 170 basis point reduction on a year over basis. This reduction represents additional costs associated with the development and the support of new business segments.

General and administrative cost, excluding depreciation, were $23.7 million compared to $23.4 million for the same quarter last year. On a sequential basis, G&A expenses were down from $27 million due primarily to reductions in marketing expenditures and reductions in head count.

Our operating income increased from $53.2 million to $60.2 million or13.1%. Our overall tax rate for the quarter was 37.6%. Diluted EPS was $0.46 per share compared to $0.42 per share for the same quarter last year.

We ended the quarter with $204 million in cash. Accounts Receivable, deferred revenue and inventory increased as the number of cars on hand grew. Taxes payable declined as we made two estimated tax payments during the quarter. In the quarter we generated $15.8 million in operating cash flow.

Net income plus non cash expenses like depreciation and share-based compensation generated $55.9 million and was offset by movement in the balance sheet as cash was consumed for the building of inventory and the payment of taxes.

Capital expenditures for the quarter were $27.6 million and included the buyout of two facilities leases totaling $5.6 million.

We generated $16.5 million in the sale and lease back of our corporate office building in preparation for the relocation of our headquarters in Texas.

Finally during the quarter we expended approximately $463 million to repurchase 12.2 million shares of our common stock. At the end of the quarter we had 70.2 million shares outstanding, undiluted. And we had approximately 13 million shares remaining on our share buy back authorization. That conclude my comments.

Peter, now we'll turn the call back over to you to moderate the QA portion of this conference call.

(Operator Instructions). We'll pause for just a moment to assemble our queue. First go to Robert W. Baird, Craig Kennison.

Good morning and thanks for taking my question. The first one has to do with -- hello -- the first one has to do with the yard margin. You had very impressive revenue growth and yet that did not flow through to yard margin like we thought it might given the scalability of your business. Can you help us understand that dynamic?

Sure. Part of it is what Will already explained, the one-time events that took place. The other piece of it is really the investment that we're making right now in non insurance businesses. So all the business segments that were going out to the non insurance side, we're putting a lot of effort into that, a lot of personnel. And then the other side would be technology. So we've got some technology costs that are in there as well right now.

So thinking ahead and going forward, how much of the weight on gross or yard margin should we expect to see in the next few quarters? I would expect given those investments you're making we should continue to expect some pressure on that line item?

Yes. I think that you'll see the trend that we just talked about continue. That will be increasing investment to develop these business segments. The technology that Jay mentioned is primarily computer equipment. We've spent about $10 million or we [entered into a lease of] about $10 million of computer equipment. And that will continue as well. You'll see based on these new revenue recognition rules, though, a seasonality to our margin. So you'll see lower margins in our second quarter and higher margins in our third quarter. As our second quarter, now, we'll start to recognize the low margin revenue.

That's helpful. And then Jay, would you please elaborate on the move to Texas? Maybe what we should anticipate from a G&A perspective as well?

Sure. I can tell you what our goals are. We're in the move -- in making the move we're going to be closer to our customers. Obviously there's only a few major customers that are based out on the west coast. The vast majority of the insurance industry is the Midwest to east coast.

So there'll be a process where we're getting closer to more of our locations, closer to our customers. That's going to reduce the amount of travel time but also the amount of travel costs. In the process we're also reviewing everything that we do at the Corporate office. How do we do it? Is there a better way to do that? Both from a technology and a process standpoint.

So this is not a one-year deal. This is going to take three to four years to complete in terms of the full transition from a process and technology standpoint. But from a move perspective we'll be moved in 2012. We'll have the move in place, and then in doing that we're going to basically take care of as much low-hanging -- pick as much low-hanging fruit as we can, just the obvious stuff to do. But as I said, the full transition you should be looking at three to four years. And the trend, the goal is to reduce G&A costs through all of these changes.

In the short run will there be an increase in G&A but then over the long term a decrease? Is that how we should think about the flow?

We expect G&A to be down this year as opposed to last year. That was the comment that we made in Q1. And we still believe that to be the case. So we expect G&A to come down in quarters three and four. And then internally we've talked about what costs are going to be associated and what we've decided to do, Craig, is give you in the investment community guidance at the end of the year. Because we'd like to finish the year and see where we're at and then come back with what we think G&A will look like for fiscal 2012.

Thanks, and then --

And let me add a couple comments. You'll see a little choppiness in our G&A. One of the reasons, we've talked about this previously, is the timing of when races occur. And we're still involved in racing. And the other is there will be quarters in which we'll recognize severance costs or [stay] pay costs. And those will not be continuing. They'll be unique to that certain quarter.

Okay. That's helpful. And Jay, one final question just on the non insurance business. Some of your competitors have finance arms where they can provide wholesale floor plan financing to dealers. Is that a business you need? Or can you partner to provide that service to grow in the category?

We already are partnered with DSA. So we have a finance instrument that we provide our dealers. So I don't view that as any change coming in the future. There's no reason for us to get into the business. We've got a great partner that basically finances all the dealers that are out there. So it's really as we sit today we don't view it as any kind of a competitive disadvantage or advantage today. I think it's just been equalized.

And not a business you want to be in?

No. We've got no plans right now to be in the finance business.

Great. Thank you.

You're welcome.

Let's move on to Bob Labick with CJS Securities.

Good morning. Thank you.

Good morning, Bob.

Obviously you had strong results driven by volumes there. Allstate was a part of it. Could you give us a sense of your non Allstateinsurance volumes and what you think the industry trends are right now?

Will stated in his remarks that we're up. We've seen growth in both non Allstate insurance, growth in non insurance and of course growth in Allstate. But we have not in the past gone through a process of breaking out each segment. So we're not going to do that today.

Right. Okay. Thank you. I missed his remark on that. Then back to the non insurance initiatives, I know generally you don't like to share too much on it but could you give us a sense of the incremental investment maybe now versus a year ago or even where you stand in that process? Will there be significantly more than the current run rate of investments towards I'm assuming it's Copart Direct or Copart Dealer Services or other initiatives like that.

Yes, it is. It's both of those. It's really a function of growth. And the non insurance saw a lot of growth both in the quarter but look back over the last year, over the last four quarters. It's just been one of these products or one of these divisions of the Company that's just grown sequentially quarter after quarter. And our goal is to stay ahead of that, to keep that growth going.

So you want to put more people out there to build the business than you need. And the reason for that is you've got -- you're building a pipe line. And then what happens is they mature over time and you start to get some improvement in margin. But as long as we can keep growing this we're going to keep fueling that. And you're going to see that. Because as they get more mature there's going to even be further and further growth. We had fantastic growth in the insurance side. And to be able to maintain, I can just tell you my expectations were we wouldn't come in at 80% to 20%. To be able to maintain that ratio just tells you how much we were able to grow the non insurance piece of the Company.

Absolutely. That was a surprise to me as well on the positive. Last one and I'll get back in queue. Obviously you've repurchased a significant amount of shares in the last three or four months including obviously the Dutch. Can you give us a sense of where you stand on your thoughts on the balance sheet now and use of cash flow going forward and priorities?

Sure. We've got less than $200 million in debt. In net debt. When you offset it for the cash that's on the balance sheet. And we generate over $200 million in EBITDA. So less than 1-1 in terms of debt to EBITDA. So we think it's very conservative. We're paying less than 2% interest rate. Very conservative. But we were able to retire a significant amount of stock. And I think that speaks for itself.

I could tell you -- I could get into what we think the valuations are but that really speaks for itself, the fact that we did that. So we'll be going forward and we'll be looking at our opportunities to buy companies. There will be some companies we'll be buying in the quarter that we're in now, and we'll be talking about that in the next quarter. And that will be using up some cash. And so we're just going to weigh the opportunity to acquire against the opportunity to acquire our own shares. And that will be part of the process, part of the decision we make.

Okay. Great. Thanks very much.

Thank you.

Let's go to Scott Stember of Sidoti & Company.

Good morning.

Good morning, Scott.

Could you talk about within the non insurance segment any pockets of strength or weakness that you're seeing?

Specifically? I'm not sure if I understand the question.

Well, within the non insurance, car dealers versus let's say finance companies?

Well, yes, clearly the dealer side has been the strongest.

Okay. And as far as the costs go, could you just talk -- I mean, we know that the -- some of the racing spending is coming down. But could you just talk about which areas or which racing segments will be sticking as we go forward?

Yes. Sure. The racing that we're going with this year will be NHRA, drag racing. As I've talked about it on prior calls, Scott, but it's a very grass roots, gear head sport. It's all about the race and tearing down the engine and racing again and tearing down the engine. So it's a sport where there's a lot of our existing clients already there. And a lot of future members and eventually buyers to bring into the Company. So we're going to continue with that. But when you think about marketing it's a lot of things for us today. We are focused on search engine optimization, search engine marketing and print, and a number of areas where we're out there building awareness for the brand. It's not just racing is my point.

Got you. And last question, Will, you were saying that most of the growth in North America came from volume. But could you talk about how pricing was in the quarter?

Yes. It was very similar to what it was the previous quarter. And frankly it was very similar to what it was the same quarter last year.

And that's being driven by high used car pricing and scrap metal?

Well, there's a number of influences. So it has to do with mix of product, it has to do with growth in Allstate, it has to do with [gunmetal] pricing and used car pricing. And it's hard to identify or impossible to identify the specific impact of any of those specific items.

All right. Great. That's all I have. Thanks.

Thank you.

Let's move on to Tony Cristello, BB&T Capital Markets.

Thanks. Good morning, gentlemen.

Good morning, Tony.

Will, a point of clarification. You talked about the margin and the accounting change. I want to make sure I understand correctly. It sounds like you incurred more of the lower margin hit in the second quarter but then will receive the benefit of the actual sales sell through in the third quarter or subsequently into the fourth quarter. Is that how I need to be looking at it?

Yes, it really complicates the way you look at our business at least from I'm sure your point of view. Because historically what we did is we put all the revenue and all the costs on the balance sheet until the car was sold. We recognized it all at one time. Now we've had to separate different elements of our revenues. And the ones that are associated with the pickup of the car and the initial services on the car are recognized generally around the time of assignment which is about two months prior to the time it's sold. So we have -- the seasonality of our business indicates that we have more assignments in our second quarter which means we recognize more of this initial revenue in our second quarter and it's very low margin. So now -- we've always had seasonality to our revenue. We've always been highest in our third quarter. Now we're going to add seasonality to our margin percentage. And we tried to provide some color as to what the margins would have been on a pro forma basis so you'll have a basis for your comparison.

So when I think about then the revenue in thus the margin then into the seasonally stronger quarters, will revenue be a little bit less but then the margin seasonally will actually be better not only than you normally would expect but also better from a sequential standpoint than you would normally expect as well?

That's exactly correct.

Okay. Okay

You're going to have reduced revenue but higher quality revenue in our third quarter.

Okay. All right. And the other question, another question I had that you mentioned was sort of the reserves with respect to medical claims. And I'm trying to understand, what is it that is sort of happening and how should we think about that as an impact on a go-forward basis? Is it a one-time adjustment? Or do you still run the risk that this cost will continue to inch higher?

It's a catch-up adjustment. What happens is every year we have an actuarial study conducted that indicates how we should accrue for our exposure, our expenses. And in this quarter we determined that the trends were actually higher than those studies would indicate. So we needed to book an extra reserve which covered the prior 12 months, basically. So if you were to apportion that $1.5 million expense on a quarterly basis, I would apportion one fourth to this quarter and 75% as one-time.

Okay. Is there something going on? I mean, did it get more dangerous all of a sudden to work on your yard? Or is there just something that is out of -- just timing? I mean, it's kind of --

No, this isn't worker's comp. This is actually health insurance.

Okay.

So it's just when you have -- and we have a sizeable population. But not one to which it's not subject to a certain small number of high-volume claims.

Okay. Okay. And maybe one last question, Jay, you talked about the technology. And I know you guys have always been investors into the future. Is there any more color that you can shed on the exact sort of spend and the $10 million and the technology that you're putting in today and what that's going to do for you over the next six to 12 months?

No, I really can't. But I mean, it's all geared towards additional units. Except for the -- well, kind of except in the technology piece. I say kind of because all the other spend is directly attributable to -- we're going to spend that because we know we'll bring in more cars. The technology is going to improve the Company, and over time technology has always helped us get additional volume. But that's an investment today that's going to be paying off years out as opposed to the rest of the investment is really focused on we're spending money today and that's going to drive additional volume in the future. I can't really give you an amount. I can just tell you it correlates.

Well I mean, if I go to your Web site am I going to see this investment spend? Is there something new or some new initiative?

Primarily people and additional leads. Getting more volume out there in the field.

Okay. And it's more geared toward non insurance rather than on the insurance side?

Yes.

Okay. Okay. Thank you.

You're welcome.

And a question now from Ryan Brinkman with Goldman Sachs.

Hi, good morning.

Good morning.

The decision to lever, to repurchase shares in the quarter, how significant of a break should we view this in terms of how you think about the capital structure? And what level of debt to EBITDA do you think might be most ideal going forward?

Well, it's a big deal because we haven't done it in the past decade. We haven't really that I can think of had any debt on our balance sheet. Last time I can think of debt really off the top of my head was about 1995. So it's a significant change in how we view our capital structure and what our capital structure should look like. And I believe that that's associated with our belief in the future, and obviously that equates to we want to own more of the future. So we've made those decisions to do that.

And as far as what comfort level do we have for debt to the EBITDA and what ratio I really can't say that on the call. That's something we discuss at the board level. And that changes. That's really based on factors that exist today. And I can tell you we were less comfortable back in 2008 when the auto market was going through a lot of struggles and a lot of trouble. And today we're more comfortable. So it will change quarter to quarter, and we'll look at that quarter to quarter as we go as a Company.

Okay. Thanks. Then just kind of given the news in the last couple of weeks, could you remind us of how you are impacted by higher fuel costs? For example, as towing costs rise? How is that shared between the towers, between the buyers and sellers of the vehicles and you guys?

Well, it's really impact -- it's just absorbed by us. Regardless of our revenue structure, it doesn't really matter what the revenue structure is, whether it's a percentage or fee or purchase. Regardless of that we absorb the -- obviously absorb the tow costs. So if fuel prices go up then tow costs go up and we absorb that cost.

Okay. Good. And then just last question, you talked about the one-timers affecting gross margin rate and the accounting and the real estate. And you talked about, too, the investments that you're making to drive non insurance business. What about Allstate? If you were to try to isolate that, kind of trading price for volume potentially? Was Allstate dilutive to gross margin rate during the quarter?

We really just don't get specifically into pricing.

Yes.

And what we charge and that kind of thing. It's a pretty competitive market out there. So as we have said in previous calls, we're really happy with the growth with that account. It's a big deal. The number two writer in the country. And we're excited about that. We're excited about the fact that insurance grew regardless of the Allstate growth. So we're in a growth mode right now both on all the insurance segments and then we're in a growth mode on non insurance. So very focused right now. We could cut the spending and we could not spend money and we could obviously improve margins. But big believers in making investments right now in growing our future.

And you're still confident that the Allstate deal will ultimately be highly accretive to gross profit dollars?

We think it was a fantastic deal.

Okay. Thank you very much.

You're welcome.

Thanks, Ryan.

From RBC Capital Markets let's go to Scott Ciccarelli.

Hi, this is Patrick Palfrey, sitting in for Scott Ciccarelli today. Thanks for taking my questions. Just a housekeeping issue first. The $1.8 million you received from the favorable tax settlement in the UK, were there any costs associated with that revenue?

They've been previously recognized. There's none specifically with the settlement.

Okay. Thanks. That's helpful. And then I guess looking at your same-store sales growth, it was up 8.4% during the quarter. You said it was driven by volume. I was wondering if you can give any additional insight into revenue per transaction? Was it up or down or flat?

Well, I answered that. It's very similar to what it was the same quarter last year.

Okay. Thank you. And then I guess just one additional question if I may. I was just wondering if you could talk about any impacts, if there were any, from weather in the business during the quarter. I know that we had seen some pretty severe weather.

It's really hard to know. I mean, volumes are up and inventories are up. And we can go out and look at existing accounts that we haven't changed any volume with and we can try to get a benchmark there. But did they gain market share? Did they lose market share? It's very hard to try to determine or predict what's going on there. I think it's safe to say there's been some decent weather across the country. And we're all aware of that. And so we think part of the quarter is affected by the weather that we've seen.

Okay. Thank you for taking my questions.

You're welcome.

Thank you.

And let's move on to Gary Prestopino with Barrington Research.

Good morning, Jay, Will.

Good morning.

Hi Gary.

Is Allstate now totally integrated? I mean, are all of the cars now coming to you? Was that reflected in the Q2 numbers? Or are you still -- is there still a lag with getting that entire contract wrapped up into your system here?

No, Gary, I think we entered the quarter below our expected run rate, and we ended the quarter at our full run rate.

So you ended the quarter at your full run rate. Okay. And then Jay, when you're talking about some of these investments that you're making in non insurance, you talked about people and technology. But I was under the impression that on the people side -- first of all, are you adding sales people? Or is it support people? Or what?

Both.

Okay. I was under the impression that you were using more independent agents and just paying them commission. Has that changed in that you're adding sales people now because of the success you're having in the market?

No. But independent agents are considered sales. They're out there driving sales.

Well, why would that be an investment in an individual, then? I'm a little fuzzy on that. That's not actually the Company, is it?

Well, there's an operational cost to paying them to go out. But they're great people, Gary. You're confused on why they would be people?

No. No. I just would not think that you would have to make -- if they're not -- if they're independent reps that you're just paying them a commission, I guess that's the way I'm looking at it.

Well, there is a cost to getting people on board in that role. No different than the insurance industry. When an insurance company brings on a new agent to sell insurance, they'll often have to carry them for a period of time to get the book of business rolling.

Okay. But suffice it to say you're growing it, you're happy with where you are and where you're going with this.

Very happy.

Okay. And then lastly, going forward should we use about 71 million shares on a fully diluted basis? I thought I heard Will say that that was the share count at the end of the quarter?

Well, no, the share count on an undiluted basis was 70.2 million. The dilution contingent on the value of the stock, obviously is the stock becomes more valuable you have more dilution.

Okay. Thanks.

You're welcome.

Thanks, Gary.

With that we have no further questions at this time. I'd like to turn things over to the Company for any closing remarks.

All right. Thanks, Peter. Again, thank you everyone for attending the call. And we're pleased with the results. We look forward to reporting to you on the third quarter. Thank you very much.

And now we conclude our conference call. Thank you very much for your participation.