Copart Inc (CPRT) 2011 Q3 法說會逐字稿

Good day, everyone. And welcome to the Copart Incorporated fiscal 2011 third-quarter earnings conference call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Jay Adair, President of Copart Incorporated. Please go ahead.

Good morning. Thanks, Corrina. Threw me off with the title there, but that's okay. So, I'm CEO now; that's the proper title on that. But again, my pleasure to welcome everyone to the third-quarter conference call for the Company. Before we start, I'll turn it over to Will Franklin, our Chief Financial Officer, for some brief remarks. Thank you.

Thank you, Jay. Before we begin our remarks, 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 the final result to differ substantially 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 Discussion and Analysis and the factors affecting future results contained in our 10-Q, 10-K, and other SEC filings. With that, we'll turn the call back to Jay Adair to begin the comments on our third-quarter results.

Thanks, Will. Again, good morning, everyone. As I like to say, I think the results speak for themselves. We've had a really, really impressive 2011, a great year. A lot of change has taken place in 2011. I look back, and I think of Copart in chapters. We talk internally about the different events that have taken place over the years with Copart -- from being founded in 1982 by Willis Johnson, to being a Company that went public in 1994, embracing growth and growing to building a national network, and then taking on the role of technology and leading the industry in technology, with first online platforms and vehicle imaging and online bidding, et cetera.

It's pretty standard today in the industry; everyone has an online presence and online bidding platform. And it's fun to look back and look at all of the changes that have taken place over the last couple of decades in our industry and in our Company. And 2011 is just that -- it's a year of change. A lot of things are happening. When I think of '11, I think of the fiscal year, and I also think of the calendar year. Fiscal year, starting in August, was an amazing period of time for us. We looked at our stock price, obviously felt that we could -- we were going to see a lot of growth and a lot of positive moving dynamics in the Company. I'll talk about some of that today, but we took advantage of the fact that we had cash and the ability to borrow money at some really low rates.

And so, I'll just give you a quick update on the cash flow for the Company. Year-to-date, we've generated $200.7 million in operating cash flow. Will and I have made an effort this conference call to not try to cover some of the things that are already publicly out there or that we're going to be talking on. So, we try to cover separate items in the call, and we're going to be fairly brief, and then we'll open it up for questions. Because again, as I said, the results really do speak for themselves. So, in the $200.7 million in operating cash flow, just give you a little color on that. Over $27 million of the cash has been used for land and lease buyouts. Over $35 million has been used for acquisitions, primarily in the UK.

We've bought back over $601 million worth of stock in the fiscal year, and that represents 15.8 million shares or an average purchase price of $37.85 -- so under $38 a share. We finished the quarter with $192.1 million in cash and approximately $387.5 million in debt. Looking at results of the Company, we've been able to lower G&A, as we talked about in the first quarter that we announced. We have finished the quarter with $24.8 million in G&A spend, as opposed to $26.3 million one year ago. This also includes transition costs that Will will talk about, and we'll be happy to give you more flavor on that if there are questions.

In addition, as I talk about moving from California to Dallas, we announced this year that we will be opening up three process centers -- one in Hartford, one in Dallas, and one in Fairfield. We also announced that we sold our corporate building and that we will be moving the home office to Dallas, Texas. This is bigger than just moving the Company. This is about repositioning the way that we're handling process, we're repositioning the way that we think about our corporate office and about the intellectual property that really is the corporate office. So, we're going to be coming -- as we do this, we're going to be becoming a much more nimble, quicker-to-move Company.

We're going to be building a process center in Fairfield this year. We'll be building a process center in Dallas next calendar year, probably in the February to May time frame. This calendar year will be the Fairfield process center, so there will be a slight amount of depreciation or CapEx associated with that, very small though. And we'll be moving into a new corporate building next year in Dallas around the summer time; and again, not a lot of CapEx there, because that will be a lease opportunity.

The -- just looking here, thinking out loud. The 2012 year, in addition to that, when we think fiscally, will be the year that we implement new computer systems for the Company. So, we're in the process now of doing all of the groundwork so that in 2012 we can implement all brand-new systems that will operate our facilities both here and in the UK -- so, both North America and UK. This will be a big, big shift in our ability to perform going forward. It will also impact the results and the changes that we'll be making online. So, look forward to fiscal 2012 seeing the results of what we're doing right now. It's more than moving the Company. It's more than process centers or buying shares back. What we're working on today will have impact in 2012 in terms of technology, both internally at our facilities and online with our web platforms.

So, I'd like to think of 2011 as really the start of this huge change. It's another chapter that we've had, just like we've done in the past, with building a national network, going public, embracing technology. This will be the set up for a lot of change that's going to take place in 2012 as well. So, we're very excited about the results of the Company, excited about the direction, and look forward to -- I'm going to turn it over to Will, but we look forward to answering any questions that you guys may have. Thank you. Will?

Thank you, Jay. Let me make a few brief comments before we open up the call for questions. Consolidated revenue was $236.8 million, compared to $220.3 million for the same quarter last year. The growth in revenue was driven primarily by increased volume. Overall volume increased in most segments. In North America, we experienced growth in both non-insurance cars and non-Allstate insurance cars. In the UK, total volume grew by over 17%. Same-store sales grew by 6.5%.

In the UK, we continue to transition contracts from the principal model to the agency model. 36% of the total units sold during the quarter in the UK were sold on the principal model, compared to 50% for the same quarter last year. Excluding the impact of this transition, same-store sales would have grown over 11%. General and administrative costs, excluding depreciation, were $24.8 million, compared to $26.3 million for the same quarter last year. The decline was due primarily to refinement to our marketing spend and reductions in headcount. We ended the quarter with over $192 million in cash.

On a sequential basis, vehicle [pulling] cost and deferred revenue decreased as we sold off winter inventory. In the quarter, we generated approximately $107.8 million in operating cash flow. Capital expenditures for the quarter were approximately $14 million, and included the buyout of two facilities leases totaling approximately $4.8 million. We also had two acquisitions -- one in the UK and one in North America, that combined totaled over $35 million.

Finally, during the quarter, we expanded approximately [$60] million for the repurchase of 1.44 million shares of our common stock. At the end of the quarter, we had approximately 68.9 million shares outstanding, undiluted. That concludes my comments. Now we'll open the call for questions, and turn the call back over to you, Corrina.

Thank you. (Operator Instructions) Bill Armstrong, C.L. King & Associates.

Just kind of a housekeeping question for Will. Were there any revenues and expenses associated with the accounting change for ancillary services, as there has been over the last couple of quarters?

Yes. It's much less than it has been in the -- certainly first quarter, and similar to the second quarter. There was about $1.6 million that we would have otherwise recognized in this quarter, and about $1.5 million in expenses that we would have recognized in this quarter but for the change in accounting. Had about a 30-basis-point impact on our margins.

Got it, okay. The gross margin on vehicle sales where you're the principal, well, it looks like it was about 14% versus 21% a year ago. Could you discuss that, please?

Certainly. The margin on an absolute basis was very similar. What we're seeing is that we're selling more expensive cars in the UK, but they also have a higher associated cost with those cars. So, you're seeing a reduction in the margin percentage, but not in the margin dollars -- excuse me, pounds, in this case.

Got it. Is that a -- kind of a function of the location of the auctions you're operating, or what's driving that?

Nature of the contracts and the quality of the cars that are being sent to us.

Okay, and are you seeing any change in insurance companies' behaviors, in terms of the percentage of damaged vehicles that are declared total losses, as wholesale prices continue to rise?

Good morning, Bill.

Good morning.

This is something we look at, but we talked about this dynamic before. You have used part pricing, lifetime quality. You have aftermarket, you have the cost to repair. All these dynamics are a piece of it. And, of course, used car pricing. We're seeing highest ASPs that we've ever seen. So, just to give you a little flavor on even the current quarter, May finished up with record average selling price. So, from that perspective, obviously, as we drive a higher average selling price that's going to create more total loss vehicles. The negative of that would be rising fuel prices and increased cost to repair and that kind of thing. So, at this point, it's hard to really pinpoint which piece of that is driving. I can just tell you that volume's up right now, but a lot of that is probably catastrophe-related as well. I mean, there's quite a bit of weather going on right now across the country.

Got it. Okay, thank you.

You're welcome.

John Lovallo, Bank of America.

Couple questions for you. In terms of the acquisition market, how would you characterize that at this point? Does it still look fairly robust?

Well, I don't think its been fairly robust in terms of acquisitions for a couple of years, and probably won't be. Most of our growth right now is coming from segment growth, looking at -- non-insurance growth continues to grow. I mean, we've had a huge increase in volume this year on the insurance side, and yet we've been able to continue to grow the -- keep that percentage about the same, because we continue to grow the other segments of the business, et cetera. That's really much more of our focus domestically. When we look over in the UK, we made another acquisition that was a large acquisition in the UK, but that's a market where we have a good network now. I think we're in place, and I don't really foresee a lot of acquisition growth there.

The next steps in terms of acquisition will be more international play for us. And so, you can think about our growth strategy, we're looking internationally and we're looking in the UK and North America, in terms of segment growth. So, we'll continue to grow insurance, but we have to really look at non-insurance, and then thinking internationally. So, we're in the process -- I talked a little bit about it on the opening remarks, but we're in the process of putting all new systems in that will allow us to speak multiple languages and deal with those challenges ahead. That's the strategy right now and that will be -- rolling that out in fiscal '12. And then, from there, we'll talk more about the impact that will have.

Okay, fair enough. In terms of miles driven, they've -- it's pulled back a little bit in the past month or so. Have you guys seen any effect at the auctions?

Well, as I said to Bill, the -- really what we're seeing right now is higher ASPs and more units. And that is probably the fact that fuel is up -- and yes, miles driven is down, but there's so many other factors out there right now that are driving the dynamic the other direction, that we're seeing more volume. So, I'm sure it's having a negative effect; we're just not seeing it, because we have a lot of volume coming in associated with the weather and other factors.

Great, and if I could sneak in one quick last one here. If you could just remind me, the split between sellers who are on the fixed-fee basis versus the percentage incentive program. And is there much of a yield difference between the two?

Actually, it's about 50/50; and the yield is -- they're approaching the equivalent yields. So, we're somewhat more indifferent to that at this point than we have been in the past.

Great. Thanks very much, guys.

All right, thank you.

Scot Ciccarelli, RBC Capital Markets.

Could you guys give us any more color on the incremental sales impact from Allstate? Obviously, they've been a pretty big addition over the last couple quarters, and just trying to figure out how much of the unit growth that you saw came from Allstate.

Well, obviously, Allstate was a significant impact in North America unit growth, and there's a number of different ways to measure the value of that contract. We've brought in some additional units at a price that may be below our average; but when we analyze the contract as a whole, it has been very beneficial, and we continue to expect it to become more beneficial as time progresses.

I guess what I'm trying to figure out is, you're talking about the unit growth, and Allstate was a significant contributor. So, is -- trying to get, I guess, to the core unit growth outside of the Allstate impact. If you could give us some more color on that, that would be great.

Well, I tried to allude to that in my comments. We've actually had growth in non-Allstate insurance cars in a market that we think in terms of volume is flat at best, so we're pleased with that result. And we -- like we said, we've also had growth in our non-insurance business.

If you're asking for us to break out the Allstate as opposed to other clients, we don't do that, Scot.

No, I understand that. I guess I'm just trying to do the compare/contrast versus your biggest competitor, who continues to have unit growth despite the loss of Allstate. And I guess I would have expected a little higher unit growth out of you guys, unless there's not much ASP movement. But you're suggesting that we're dealing with all-time high ASPs. I'm just trying to reconcile the various data points, Jay.

Yes, I've got you, right. Yes, we've had record ASP and record average selling price -- I'm sorry, record ASP, average selling price, and record units, and you're just trying to figure out how much of the revenue is coming from each. I get you. I hear what you're saying. It's just at the end of the day, we don't break that out.

Okay, maybe we'll follow-up afterwards. Can you outline kind of the key drivers to the lower yard operations in the quarter? I mean, that turned out to be quite a bit better than I was looking for. And typically, we see a bit of a seasonality spike in the third quarter; and yet, if I look at yard operations in dollars, we were actually down sequentially from the first two quarters. Can you kind of outline what the key drivers were there?

Sure. Other than transportation, because transportation costs are up right now with fuel prices -- other than transportation, we're continuing to see improvements as we get more and more efficient at our home office and out in the field. So, I would expect, other than just enormous volume growth coming in, something that I don't predict, but -- which, by the way, we're seeing a little of that right now with caps. But if you put volume and [caps] aside, you look at this inside of a test tube, the prediction for the future would be that we would see continued improvement in that, as we are able to run more units through the facilities and see margin improvement on that.

I believe that will be what we'll see in fiscal '12, is as revenue grows, we're going to be able to hold the expenses at bay. Maybe slight increase in field operations; and then, home office, the goal is to actually reduce home office expense. But the caveat I would say there is you don't see any one-time, below-the-line, kind of non-recurring expenses with us. We haven't done that in the past, and we didn't do that in this quarter. And so, we're incurring all the costs associated with moving the Company and severance and everything else, and yet we're continuing to be able to reduce the G&A at the same time.

Right. Okay, that --

If you're looking at our yard operating expenses on a sequential basis, keep in mind that we had the change in revenue recognition, that had a huge impact on our first quarter. We accelerated the recognition of about $8.8 million in operating expense, and our second quarter is about $3.4 million. So now, we're starting to hit a normal run rate with respect to operating cost on a per-vehicle basis.

Yes, I was also looking at it on a year-over-year basis, where it wasn't much of an increase. So, going forward, to summarize, should we be looking at kind of flattish, in terms of dollars for yard operations?

Well, I'd love to be able to give you a definitive answer to that. The part we don't know is volume going forward. So, right now we're seeing a ton of weather, we're seeing a lot of volume coming in, and we have a lot of people that are deployed right now to handle those cars. And, of course, costs will go up associated with that. But again, I'd say if it's in a test tube, and we look at this kind of in a vacuum as all things being equal, we should be able to leverage going forward as we put more vehicles through the system, both in insurance and non-insurance growth. Incrementally, the margin on those should be better, and we should be able to have a slight incremental increase, and I would expect that in 2012. We'll see what happens, but I would expect in '12 that revenue growth will occur, and you'll see margins improve.

Got it. All right, thanks a lot, guys.

Craig Kennison, Robert W. Baird.

Hi. This is actually Mark in for Craig. Thanks for taking the question. A couple of things. First, Allstate acquired another auto insurer recently, I think it was Esurance. Do you have a sense for the salvage volume or the market share associated with that business? And then, also, would Copart automatically win that volume, based on the terms of the Allstate agreement?

Yes, I do have a sense for it, because we have all of their business. And so, at this point, there's no change, because they bought them and we already have a relationship with them, and we'll continue to have a relationship with them.

Fair enough, thanks. And then, secondly, what is your appetite to buy back stock in the open market, given you had the opportunity to buy back more shares at the tender price earlier this year? And has there been any change in the thinking regarding the priorities for cash?

Well, I mean, without sitting here and explaining everything we're going to do, the best way I can think of looking at that is -- obviously, have been very bullish on the Company and the future of the Company, to the tune of buying $601 million worth of stock back in the last three quarters. And in the most recent quarter, just over $60 million worth of the -- what's our average price?

$43.

$43. So, without giving you more than that, I think you have a feel for how we feel about the Company.

Great. That's all I have. Thanks again.

Thanks, Mark.

Scott Stember, Sidoti & Company.

I have 11% of same-store adjusted increase that you gave for the whole Company. Is there any way to give us a framework of how North America did versus the UK?

No, we don't break that out. We look at it on a consolidated basis, and that's the way we report this information. We did indicate that the majority of that came from volume, but also there's contribution from revenue per transaction.

Okay, got you. And could you talk about the non-insurance business? In the past, you've given some statistics about the growth there.

Yes, what's the --?

It's slightly under 20%.

You've given the growth from a sales perspective.

In the third quarter, we drove insurance volumes significantly; and therefore, it dropped below 20% this quarter.

Yes, the insurance business is quite seasonal, in terms of picking up vehicles through -- from basically November, December, January, and then selling those vehicles off in February, March, and April. The non-insurance business is not seasonal -- relatively consistent volume that comes in quarter after quarter. So, yes, when you have a big blowout of units, as Will just said, then you're going to have a reduction in percentage; but in total units, it's up.

Okay. And remind us again the areas with the non-insurance, but you're really moving the needle -- is it Copart dealer services, banks, or is it all of the above?

Well, we think of the non-insurance in terms of probably eight or nine segments; but the biggest drivers of that would be our consumer model, our dealer model, and our VDC -- our Vehicle Donation Cars. Those would be the biggest drivers, and the secondary drivers would be fleet, finance, and rental car volume sources.

Okay, and last question is on the cost front. Could you talk about how much more you have to go with ratcheting down, I guess, in NASCAR spending? And also, with this new (technical difficulty) IT system, maybe talk about the expense implications for 2012?

Yes, well, it's not really a marketing thing. At this point, we have a consistent marketing spend in this year, and that will continue into next year. Really, the cost savings is the fact that we're doing business so differently today. It's not a Copart dynamic; it's a world technology dynamic. It's something that exists in the world today, the way that we do business. But we'll be looking at handling process very differently going forward through the centers, and really changing the structure of the Company.

The technology that we had -- or that we still had that we'll be replacing, is technology that's over a decade old. Its been great technology, it's brought us along to where we're at today, allowed us to consolidate locations and have online bidding, and you can pay for a vehicle anywhere, you can assign a vehicle anywhere. But the technology that's coming is going to be much leaner, lighter, more nimble, easier to change, a lot less resource that will be needed to make improvements and to have reporting technology. So, there's a lot of savings that will be coming out of that, as well as the process-driven bits and pieces of change. So, as we look forward, there's really two dynamics that we have to look at -- one is, we have the costs associated with a move like this.

It's a big transition for a Company of our size, so there's costs associated with that, and then there's going to be all the benefits because of the changes. Neither of which you hear me talking about is marketing spend. So, the marketing cutbacks that we've made are done. They're in place, and everything going forward in terms of additional savings is going to be associated with process and technology and the way we do business, that will be offset by the cost of moving. So, we'll be looking at improvements in '12, and really a full run rate probably fiscal '13.

Got you. That's all I have. Thank you.

Thanks, Scott.

Thank you.

Tony Cristello, BB&T Capital Markets.

Jay, as a follow-up on the spending, when I look at your positioning today, I think I definitely get the read that the industry's in one of the better positions it's been in some time. And what you're trying to accomplish here is now lay the groundwork for the next five to 10 years. And, I guess, what I want to understand is -- one, is the investment that you're going to make an investment to drive efficiency and cost savings and productivity, or is it an investment that's going to drive volume and top line and market share gains?

That's a great question. It's both. So, we're focused on eliminating systems and process that are funky or that take a lot -- if we have people that are cranking out Excel reports every day when that technology, that information is going to be at your fingertips with an iPad, we need to take advantage of that. iPhones didn't exist five years ago, so obviously, iPads didn't exist five years ago. We're in a new technology age today, where people expect mobile computing, data at their fingertips, mobile bidding, so that's the path we're headed down. That's going to drive efficiency.

It's also going to drive unit growth, because the more transparent you are, the more information that you can give your customers, the more likely they are in choosing you, because if they can see they're going to get a higher return, they can see what their results are going to be. If they have all the tools at their fingertips, they're going to be more apt to use you. So, we look at it as both -- it's going to drive efficiencies, but it's going to drive unit growth, as well, going forward. And it is -- I can't disagree with you on it being a five- to 10-year plan, but I would say it's more -- it's going to be a lot quicker process than that. I anticipate today that our team will have everything that's been kind of laid out in fiscal '11, which ends in two more months, will be implemented in fiscal '12.

By the time we finish fiscal '12, we should be -- with process centers, with the home office move, with the new technology that's running our systems, with the new technology that's running our systems in the UK and the US and our facilities, improvements to our website. So, when we look into fiscal '13, this is going to be a year of implementing those new technologies with our customer base, getting them used to it, getting them comfortable with having that information at their fingertips, and then driving more non-insurance and insurance volume. And it's really -- when you think of our growth, I break our growth out very simply. We have growth domestically in insurance and in non-insurance. If I look back 15 years ago or 10 years ago, we had growth domestically in insurance. We were a Company that sold damaged cars for the insurance industry.

Today, we don't look at it that way. We're a technology Company that liquidates vehicles for a number of different segments. Insurance represents about 80% of that volume, non-insurance about 20%, give or take, on a given quarter. And we've had enormous growth in insurance and units, so you're not seeing that percentage shift much. But that number will shift more in fiscal '13, fiscal '14, and fiscal '12 as well. But I mean, it will shift more as we move into those -- more and more into those segments going forward. And then, the second piece of the growth is going to be -- I'm wanting to say non-domestic, but non-markets that we're currently in -- the UK and North America are great markets. They represent our Company today, and we need to start looking at where can we expand into other markets and leverage our technology, leverage our buyer base. And this is all a game about cross-pollination.

Every time we open up a new site -- and you go back to the '90s, we would open up a location in the East Coast. The East Coast had never met any Copart -- had never seen Copart before, and we came to the East Coast. But the Midwest had, the Midwest started to become aware of product on the East Coast, the East Coast buyers became aware of product in the Midwest and off the West Coast, et cetera. The same thing happened abroad -- so, as we open up in core markets, we have customers that become aware of our other locations. There is a ton of cross-pollination benefit, as well, that drives returns; and as you drive returns, you drive more units. And I really have to -- before I finish this, I know it's kind of a long-winded answer, but I really have to push the Allstate piece as well here.

Allstate made a decision to go with Copart nationally, and they're happy with that decision. They are extremely happy with that decision, and its been a very good decision for them financially. That's great for us and that's great for them, because it's a win-win for both of us making money. But it's also great for us from the standpoint of it's a -- it's really a great example of why other customers should look at making the decisions that they've made recently, versus the other approach to this -- they make the decision, they don't like it, and they decide to change. That's not the case. They made the decision and they like it, and they're happy they made the decision. So, without putting words in their mouth, I can just say it's great for us to be able to use them as an example when we meet with other clients. And I think that's another area where we're going to see additional growth, because we have that fabulous example that we can illustrate to other customers.

It seems like -- so fiscal '12, it sounds like the investment in this sort of inflection point year, if you will, then you sort of springboard into fiscal '13. And I'm just wondering -- a couple follow-up questions here. One, how should we think about the timing with the quarterly progression of inherent costs associated with this transition? And I know you guys don't give guidance, but maybe if you can sort of give us at least some boundaries to use in terms of where those costs might be coming in and how we should think about that over the next 12 months.

And then, second, when we think about everything from adding -- investing in personnel, which you've talked about, as well as been switching over to this new system and technology, what steps do you put in place or implement to ensure that training and the switchover -- that there's no disruption to, one, your customers and your auctions? And then, two, that you're able to make sure that you have successful training, so that there's a pretty easy transition over?

Yes, well, that's an easy answer. We have a great team that -- a lot of people have gone through conversions like this in the '80s and the '90s and then the 2000 period. I remember in the '80s and '90s, a lot of transition associated with systems, because you had systems from the '70s and you had to update. And then, what we've seen on technology is, it really has not changed for a lot of companies -- where the web has changed completely, a lot of companies have done the Y2K thing in the '90s and then not implemented a lot of change in the 2000s.

We're in a different stage today. Mobile computing today is the standard. We all have iPhones and Google, Droids and that kind of thing; and you have to have information, you expect to have information at your fingertips, you expect to be able to bid. And so, we have to make these changes that will put the improvements in. And the good news is, we're very comfortable with it, because we have a great team that has done this before. We went through this change in '97. We did a great job of changing the Company over to only systems then. We'll do a great job doing it this time. I'm very comfortable that that will happen, not worried in the least. In terms of cost, you really have operating costs and capitalized costs, and I'll let Will talk on the capital front.

I can just tell you on the operating front, there's a lot of costs associated with doing this kind of transition, and you cannot worry about trying to cut every little cost out when you're [growing]. There's nothing more important than doing a transition like this and making sure that it doesn't impact negatively internal or external customers. It has to be smooth. It has to be easy. That's the first priority. After that, then you start to take advantage of your systems that have more efficient ways.

We may have people today that have to do a bunch of workarounds and things, because the system wasn't designed to do some of the things we're doing with it today. The new system will be, and they go -- wow, this is great, I love this new system, and it's so much more efficient. And so, we become more efficient, and as we grow additional units, we may be able to do that without incurring additional costs. So, there's -- operationally, there's going to be costs associated with this in fiscal '12; and operationally, I would expect to see those costs starting to come off a little in '12, but more so in '13. And then, you have capitalized costs, which I'll let you do.

Certainly. As Jay said, they're part of the costs that are going to find their way to our income statement. And, by the way, we had about $800,000 of those costs in our G&A this quarter, and we'll continue to see some incremental costs associated with this transition in the next several quarters. On the capital side, we expect the total capitalizable cost to be in the low tens of millions. That's not insignificant; and in fact, we have that reflected in this quarter's CapEx. Those costs will find their way through our income statement through amortization, probably starting at the end of fiscal 2012.

Okay, so that's very helpful. But is it more of a front-loaded expense here, as we move into the beginning of fiscal '12, and then it tails off as we go through? So that by the time we get to the third or fourth quarter, you would have already anniversaried a chunk of it? Or is that how we should think about it?

That's what we anticipate, absolutely. Especially with respect to the capital cost.

Okay, very helpful. Thank you.

Thanks, Tony.

Ryan Brinkman.

A lot of my questions have been answered. But just sort of in keeping with the conversation on technology, could you elaborate on the Copart Sell My Car iPhone app released recently? Which I think is very creative. First of all, what has been the initial response thus far? Secondly, it seems like from what I could read of it, that you would be selling these vehicles on a principal basis, which I know is a bit of a departure for you in North America. Is that true? And then thirdly, do you see -- how do you think about the risk to this business, given that you'll be essentially buying vehicles for your own account, which you have been unable to inspect buying vehicles within 10 minutes, from what I can understand?

Yes, right. Well, the app has been obviously positively received, and it's really the start. As we kind of play in that space, it's the beginning. The evolution that will take place now is -- what other things can we do for our customers that are out there? Typically, these are customers that have never heard of us before. They're learning about us, they're going online, they're going to the App Store at Apple, and they discover Copart. And the best way to impress your customer is to take the risk.

The best thing you can do is say -- look, here's a number we'll give you on the car right now; as opposed to -- why don't you bring it down, why don't you try to run it through the auction process, and you may or may not meet their expectations. You may or may not have somebody that's out there supporting and talking about you, versus detracting. So, the best thing you can do is say -- here is the number that we'll give you for the car right now. That's why we are principal on that model, and then resell the vehicle. What that really creates is a ton of word of mouth.

Yes, it's a driver for volume. Yes it's profitable. But it also creates awareness for the Company -- and in some sense, I think of it as free marketing. You liquidate your vehicle. You sell it. You get a check immediately. You're happy, and you tell your friends about it; and some of your friends may sell more cars with Copart, but they also may buy more cars at Copart. And that's the driver for us, Ryan. It's all about awareness and driving returns up and getting additional volume.

Ryan, let me add that the working capital associated with this program is really less than what you might expect. We're holding the cars for about 12 days, and the average purchase price is not that great, and we're not incurring obsolescence risk. I mean, we've made a decision to sell the cars as soon as we can, and not try to [speculate] in the market.

If you think about the insurance purchasing like we did in the '90s, you have a 60-day lag, 90-day lag on those units. That's an enormous lag, to buy a car today and sell it in 90 days. We saw 25% of the sale price evaporate in 2008, and it's not unheard of for sale prices to move 5% or 10%. So, that's risky. Buying cars and selling them a week, two weeks later is much less -- clearly much less, and we can adjust; as soon as we see that markets are moving, we adjust the purchase price up or down.

Okay, great. Early in the call, you talked about the record ASPs in the month of May, I think it was. Was this a gathering tailwind throughout the quarter for you, or was it steady state? Did you see any kind of an inflection point around the March 11 earthquake in Japan, like some had speculated?

Well, February was less than March, March was less than April. So, we definitely saw an improvement in ASP month after month in the last quarter. And then, May has beaten them all. Its been the best month yet.

Okay.

And we could speculate all day long. I always prefer not to. I think it's a lot of moving parts here. I think it's a demand curve that's created by a large buyer base. I think it's the price of scrap metal is higher right now. There's a lot of moving parts that are helping push that. There's not a lot of -- there's been a lot more scrappage than there has new car sales, so there's -- used car pricing is up, and there's a lot of factors that are helping, including the dollar. So, I always prefer not to speculate, I'd just like to say it's definitely up. And at this point, when we look out -- Will and I had a conversation about it yesterday, and we really don't see a reason for that to change in the near term.

Okay, and then, last question -- you alluded to what are essentially one-time items running through your G&A, associated with the headquarters move, that you are unlikely to call out as such, just given your history of, I guess, conservatism. And Will did state, I think, that there were $800,000 of systems costs in there. I'm curious as to whether you're incurring any -- maybe not severance as of yet, but perhaps some stay pay expenses in the quarter. And if so, what those could have looked like in 3Q?

Ryan, that figure I gave you was primarily stay pay and severance costs.

Okay, so $800,000 is probably the extent of it. Okay. Thanks, guys.

You're welcome.

Thank you.

Jason Ursaner, CJS Securities.

Just following up on the last question, in terms of growth in domestic non-insurance volume and individual car owners representing a more important source of volume -- I understand you're making the changes to your platform to handle that, but other than some of these awareness and marketing activities, do you think you really need to make changes to your brand at all to really embrace the change at the buyer base level?

Yes. That's an easy answer, yes. And we'll be doing that. We're working on that currently. You'll be seeing that in fiscal '12. You won't really be seeing that in the current quarter, but you'll be seeing some brand -- some big improvements to the brand. Look, we are without a doubt known for damaged cars. And if you ask anyone in the body shop industry, the recycling industry, the insurance industry, they know Copart. And they immediately think of Copart and that damaged car brand. When you get into the other segments -- we met with a Company yesterday that has a fleet of vehicles that needs to be disposed, never heard of Copart before. So, there is a brand disconnect there on some of those segments, and we'll be making changes through that.

And a lot of that is the user experience. A lot of your brand -- there's two ways of saying it. You can say that the brand, what people do in the Company defines the brand; or you can define the brand, and then that's what you want people in the Company to do. And that's a process that we're going through right now. It will be changing in 2012, and the user experience will be changing, so that when you come to our website, we show you and interact with you based on whatever segment it is that you're -- whatever channel it is that you're coming in to the Company. So, short answer is yes. Long answer is all that detail.

And then, just more industry-related for insurance. Obviously, we've mentioned the record average selling prices. As this trend continues, and it's offsetting a relatively flat, possibly deteriorating volumes in the overall salvage industry, how do you think about the balance from an internal hedge point of view, given the composition of your fees? Is it a tradeoff you'd like to see continuing?

I'm not sure I understand the question. I'm looking at Will to see if he gets the question.

Are you asking whether we would rather have more volume or higher ASPs?

Yes, given the composition of your sellers' fees versus buyers' fees now, how you think about the balance of higher used car pricing impacting industry volumes.

Can we take C, both?

Obviously, it depends on the magnitude of the change that you're comparing. But in general terms, this environment is beneficial to our [volume].

Maybe just asking it another way for the US, can you talk a little bit more generally about the growing importance of buyers' fees to your business model? And maybe what opportunity you see in the marketplace to absorb higher fees over time?

No, we don't get into any of that kind of discussion in terms of pricing and such on the calls, but -- for obvious reasons. But if ASPs go up, it's a really good thing for us. Now, higher ASPs will drive additional volume. At the same time, because there's higher ASPs, there's higher demand right now for used cars. And so, that causes ACVs to go up as well. Depends on -- are the ASPs being driven because used car pricing is going up more, or are -- is used car pricing going down and ASPs going up? And obviously, you're going to get a lot more volume.

So, right now we are seeing higher used car pricing; and so, there's demand for used cars, and that's because we didn't sell enough new cars in '08, '09, '10, and even this year. Now we're seeing that go up -- '08, '09, '10, you look at each one of the years, it continues to go up in terms of new car pricing. This is a lag. We saw this in 2000. I remember '99, the price of fuel was below $1 a gallon. And when we saw price of fuel drop below $1 a gallon in '98 and '99 -- I think I was in Atlanta when I saw it -- and immediately everybody is out buying brand new Chevy Suburbans and big SUVs. We're now selling a high percentage, a double-digit percentage of SUV-type vehicles. Those are great vehicles, they have huge ASPs. They're wonderful vehicles to sell, as opposed to lower-end units.

So, there is -- this is a business that clearly has a lag, and it's hard to predict where we're going to be three, four, five years from now. But my guess, if I were to guess today, is that we're going to have a higher average year of vehicle. And as cars get older, they become more likely the total loss. So, I would expect that the frequency is going to increase as the average vehicle gets older -- and it is, in fact, getting older. We were looking at data yesterday for the last three years, and the average vehicle year is getting older. The average vehicle we sell is getting older, and yet the ASP is up; and that's supposed to go the other direction. But that's because of a bunch of other factors we talked about. But let's look out '12, '13, '14, '15, we're going to see the average vehicle in the US is going to age, and it's going to become more likely to be total loss, so we'll see more units because of that.

Okay, great. Thanks for the details.

You're welcome.

(Operator Instructions) Bill Armstrong, C.L. King & Associates.

Just a quick follow-up. Could you tell us what the UK revenues were for the quarter?

No, like I said, Bill, we don't split that out. We talk about the Company as a whole (inaudible).

Okay. Did I hear you say, Will, in your opening remarks, that UK volumes were up 17%? Did I get that right?

Yes. Yes, you did.

So, that would be principal and agency combined?

That's correct.

Got it. Okay. And then, in terms of the overall cost of the new systems rollout and headquarter move, what -- I guess most of it is going to be in fiscal '12. What do you think the total cost of these two very large projects will work out to be?

Well, I was just -- I was going to repeat what Will said. He gave the low tens of millions. You have costs associated. We've sold our corporate office. We bought a new processing center. We will be building a new process center on some land we own in Dallas. We'll be leasing a new corporate building. We'll be implementing the new computer systems. So, there's a lot of moving parts here. Low tens of millions is $30 million to $50 million, somewhere in there, is that right? Okay, I'm getting a head nod from Will.

That's capital and non-capital costs of transition.

$30 million to $50 million? And is that going to be mostly -- so, that sounds like that will be mostly capitalized?

Most of that will be capitalized.

Okay. That's helpful, thank you.

You're welcome.

You have no further questions at this time.

Well, in closing, I just want to thank everyone for coming. I also want to thank all of our employees on Team Copart. We are really working hard right now. There's a lot going on. And I want to thank everybody that's out there that's listening to the call, that is working right now on the caps in the Midwest, and working on the transition [frameworks] and all of the other things that we're doing. So, you guys are doing a great job and we appreciate it, and I also want to thank you all for coming on the call. We look forward to reporting on the fourth quarter and the fiscal year 2011, as we enter into the new year. Thank you so much. Bye.

Once again, this does conclude today's conference. We do thank you all for joining us.