Copart Inc (CPRT) 2012 Q4 法說會逐字稿

Good day, everyone, and welcome to the Copart Incorporated fourth-quarter fiscal 2012 earnings 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, Chief Executive Officer of Copart Incorporated. Please go ahead, sir.

Thank you, Casey. Good morning, everyone. Welcome to the fourth-quarter call for Copart and a wrapup on our fiscal year 2012. Will and I are in two separate locations today, as we've done in the past. I'm going to turn it over to Will now for opening remarks, he'll pass it back to me, and then we will open it up for question-and-answer. So with that, it is my pleasure to turn it over to Will Franklin, CFO.

Thank you, Jay, and good morning. Before we begin our comments, I would like to remind everyone on the call that our remarks will contain forward-looking statements, including statements concerning our views of trends in our business. These statements are neither promises nor guarantees and are subject to certain risk and uncertainties that could cause the final results to differ substantially from those projected or implied by our comments.

These risks include trends in average selling prices for cars and other factors that can affect our gross margins. For a more complete discussion of the risks that could affect our business, please review the Management's Discussion and Analysis and the risk factors contained in our, 10-K, 10-Q and other SEC filings.

I will now provide a few brief comments about our financial performance in this, our fourth quarter of our fiscal year. Consolidated revenue was $226.6 million compared to $215.4 million for the same quarter last year, an increase of 5.2%. The growth in revenue was driven primarily by increased unit volume in North America. Volume in the UK remained flat and continued to be challenged by the lingering recession in the region.

The growth in North America was broad-based. We began to see the incremental volume associated with our exclusive contract with Nationwide, which we entered into in our previous fiscal quarter. We expect incremental volume for this contract to reach full run rate by the end of our first quarter of fiscal 2013, and to be fully reflected in our second quarter's results.

Volume from noninsurance cars grew by almost 5% over the same quarter last year and represented 21% of all cars sold during the quarter. Same-store sales on a consolidated basis and expressed in units was up 6.6%. Excluding the impact of Nationwide, it would have been up 4.4%. In North America, same-store sales in units was up 8%. Excluding Nationwide, it would have been up 5.4%.

The increase was driven, we believe, by continued growth in our market share for salvaged cars from insurance companies and our continued expansion into the domestic used-car redistribution market.

On a consolidated basis, revenue per car was up modestly, as the detrimental impact of lower used-car pricing and commodity pricing on a year-over-year basis was offset by a beneficial mix of products sold and seller contracts.

The total number of purchased cars sold decreased by 14% as we continued to migrate contracts from the UK from the principal model to the agency model. In the UK, purchased cars represented 29% of the total volume in the current quarter compared to 39% during the same quarter last year.

Yard and fleet expenses grew from $81.8 million to $85.9 million, or 5%. The increase was driven by the growth in the volume of cars sold.

Our gross margin grew from $89.6 million to $99.4 million, or 11%, and our gross margin percentage grew by 230 basis points.

General and administrative costs, excluding depreciation, were $26.4 million compared to $23.7 million for the same quarter last year. The growth was due to increased costs associated with expanded international operations, which will continue, and the incremental costs associated with the rollout of the new ERP system. During the quarter, we estimate those costs to be approximately $2.4 million. We expect to incur incremental costs associated with the rollout throughout fiscal 2013 and the first part of fiscal 2014. These costs will fluctuate from period to period, depending on the phase of the rollout. We expect to be fully integrated by the end of calendar 2013, at which time these costs will abate.

Our operating income increased from $63.5 million to $69.5 million dollars, or 9.5%, and our diluted earnings per share increased from $0.29 to $0.35 per share, or almost 21%. Our operating margin increased by 120 basis points over the same quarter last year.

We ended the quarter with over $140 million in cash. Accounts receivable, inventory and vehicle pooling costs all increased on a sequential basis as we grew inventory. During the quarter, we generated over $32 million in operating cash flow, as net income and non-cash expenses generated approximately $64.3 million in cash, and was offset by cash consumed in our balance sheet, primarily for the growth in inventory and the payment of deferred taxes. We expended $28.5 million for the acquisition of businesses and other capital assets during the quarter.

Finally, during the quarter, we expended $65.6 million for the repurchase of approximately 2.8 million shares of our own stock.

That concludes my comments on the quarter. I will now return the call back to Jay Adair, our CEO, for further comments. Jay.

Thank you, Will. Again, good morning, everyone, and welcome to the call once more. We are really excited about the events and the things that took place for Copart in fiscal 2012.

At the beginning of the year, I announced the overdrive effort that we have undertaken. We are now one year into a three-year process to transform our Company. Part of that overdrive experience was moving out of California, and I'm happy to announce that we have exited the headquarters that was in Fairfield, California completely and given the building back to the owners. We now have moved into our brand-new headquarters in Dallas, Texas, and are excited about that first part of the transition taking place. So if you have time, come see us in Dallas. We will be furthering our work in the next two years as we implement new technologies, as Will discussed in his call.

We also in the year sold off both airplanes that we had. We have talked about that in previous calls, but being based in Dallas, we don't have the need now to have aviation. We can get everywhere we need to get from DFW.

In the year, we took an $8.7 million impairment associated with our move to Texas, and that included the planes. In the (technical difficulty) quarter, we recognized an additional $1.2 million loss, and that is reflected below the line and not in G&A. I want to point that out -- call that out for you, because that is the last of that since the planes are officially sold off.

In the year, we acquired four new locations. Two of those locations were in Alberta, Canada, one location in Calgary and one location in Edmonton. And then we have a new location in the south end of Atlanta and a new location in Mebane, North Carolina, which is between Greensboro and Raleigh.

On the expansion side, we bought out existing leases or purchased new land so that we can expand existing locations at five facilities.

And then finally, I just wanted to mention that for the year, we purchased $203.3 million worth of stock, or approximately 9 million shares.

With that, rather than going through any other points, we will open up for questions and try to touch on any points that you may have on the call.

Casey, if you would please take questions at this time, that would be great.

(Operator Instructions) Bob Labick, CJS Securities.

Good morning. Congratulations on a nice quarter and year. First question, obviously, international expansion has been a big theme for you guys recently, and the move into the UAE looks like a nice location.

Can you talk a little bit more broadly about what Copart can bring to a new geography? Obviously, your advantage in North America is the land, logistics, technology, supply base and buyers. But going into a new area, what are the big advantages Copart brings?

I'll go ahead and respond to that. If you don't mind, too, for folks that are asking questions, if you can point them out to whether the question is for Will or myself, that would be great. But be happy to comment on that, Bob.

Dubai is our second largest market. The UAE is the second-largest market that we sell to, outside of the US, the number one market being Mexico. And so for us to get a footprint in there, yes, we get to sell cars, and we are holding -- we've had three auctions now in that market. So that's great and that allows for growth, that allows for us to go out and reach out to all the insurers there and process their vehicles.

But it also allows for us to approve buyers in that market, to take payments in that market and to assist in the shipping process, which is something today, the logistics of that is being done through vendors to the buyer base or by buyers directly. And now that we've got a facility, we've got storage, we can actually assist in not necessarily the actual shipping, but once it is shipped from a US location to the Middle East, we can then take that the vehicle and store it at our location for them and assist in that process.

So it just allows us now to expand throughout the Middle East and into those markets. And it's part of our strategy to deploy in a number of international markets, which I bring up the last point, which is really important. We are a unique company in that we get a benefit by having a global footprint. A lot of companies -- I give the analogy of when Wal-Mart opens up in the UK and they've got Asda, buyers at Asda probably aren't going online and buying product at Wal-Mart in the US. But for Copart, when we open up in a market like the UK, we start selling motorcycles in the US. So there is an opportunity as we open up in multiple locations around the world to cross-pollinate the buyer base between markets.

Okay, great. And then I'll stick with you, Jay. You've had a lot of success with the noninsurance market growth, volume growth. What are the key areas going forward in that market, and how big can noninsurance be for Copart?

Well, we've talked about those key points in the past. We go after all facets of the noninsurance market, whether it be TPA or charity or dealer business. And we are going to continue to go after that. We have been successful, and I really think the limit is quite high. It is an enormous market compared to the size of the total lost vehicles in the US or the UK or Europe or any market.

So it is one of those books of business -- what excites me about it, is one of those books of business where we've had some really great growth in the last year on the insurance side, and yet that business has been able to maintain a 79/21 split. So they've been able to keep the growth going on even though the insurance has been growing (technical difficulty). So that's good stuff.

Great. I'll let others ask questions. Thanks very much.

John Lovallo, Merrill Lynch.

Hey, guys. Thanks for taking the call. Jay, I'll start with you. I think over the past quarters, you had mentioned potentially giving an outlook on CapEx. I was wondering if you guys are in a position to do that.

Yes, John, it's funny, because we met this week talking about it, and we may give some CapEx guidance in the following quarter. It just felt way too difficult; the range was so wide for us. And really that boils down to you just don't know what deals you are going to get done, and so the range was so wide that we just felt like it wasn't a good idea.

I'll leave you with this. We spent a little over $200 million last year on buying our shares back. We look at our cash position and the return on our cash as a factor on the return we can get from buying our own Company back. And so we are not going to go out there and deploy capital on things that are not a good use of capital. We're not going to go after businesses that don't make sense, and we are not going to go out and expand yards that don't need the expansion.

So we've got great capacity today, but we are expanding some yards just to maintain that capacity, and we are looking at targets out there. And if we can get a better feel for it in the next quarter or the quarter after that, then we will give you guys some guidance on that. But otherwise for now, we have decided to hold off because the variance is so wide.

Okay, that's helpful. And Jay, one more for you. G&A last quarter, I think you had mentioned kind of the $25 million, $26 million per quarter run rate. Is that still reasonable for 2013?

The factor that will change in 2013 is we are really transforming our Company from a technology standpoint. We've got technology that will continue to run the Company for the next year or two or three. But for us to take advantage of the world we live in today, both on a (inaudible) level and on a cloud-based computing level, all the technology that is out there, we have got to really transform our Company to that next point. So there is going to be G&A costs associated that are one-time, and so we expect G&A to be higher than that this year.

But candidly, the good news is that it is a one-time duplicative cost that is associated with running two systems at the same time. And once that one system is in and it's running and it's functioning, the other system would be shut down and those costs will go away.

Great. Very helpful (multiple speakers).

I'll just add to that. When that happens and we've got a feel for what that expense is going to be, Will is going to call that out, so that you know exactly what parts of G&A are considered nonrecurring.

Very helpful. And Will, I'll end with you. Just on the share repurchases in the quarter, I think it was 2.8 million shares. Now, the share count didn't drop by quite as much. I'm just wondering if a large portion of this was offsetting dilution from stock comp.

No, it's just that you don't get credit for the entire quarter. When you purchase a share during the middle of the quarter, you apportion the benefit throughout the quarter. So you'd only report it -- if it was purchased in the middle of the quarter, you would only get 45 days' benefit, or half the benefit of the shares purchased during the quarter.

Got you. Thanks very much, guys.

Scott Stember, Sidoti & Company.

Jay, this question is for you. Going back when you guys got the exclusive Allstate contract, there was some margin compression right out of the gate, just given the reset on pricing on existing business. Could you maybe talk about the potential impact on that on the Nationwide contract in the quarters coming up?

That should be past us now. That happened in Q3 and Q4 with Nationwide, because you obviously -- you adjust on price and then you start handling additional volume. You've got the cost of increased receivables as you are picking up vehicles and not selling them.

And as Will stated in the call -- I didn't comment on it because he covered it pretty clearly -- that Q1, we will achieve by the end of the quarter a full run rate, and then in Q2, we will be at what we believe a full run rate for that Nationwide agreement. But we are handling additional cars now, so that should be past us as far as a compression. That is in Q3 and Q4,

All right. Great. And maybe just looking out, I know that there's a couple large players in the industry and large contracts have gone back and forth. But could you talk about the future of gaining additional business from a large contract again?

If I had a crystal ball, I'd share it with you. I just -- those are just things you just don't know. And we are working really hard over on this end, and we fully believe in our team and our technology and our people's ability to deliver. And we are passionate about what we do. I think people that meet us figure that out pretty quickly.

So work on this is going to be around for a long time. We are not interested in doing something differently. This is what we do. This is what we love. And hopefully over time, that will generate additional business, but that is just a big unknown. You never know.

Okay. And just the last question. Maybe just touch base on Copart Direct, trends that you are seeing there and the potential going forward.

Yes, trending up, and we've employed some new process on Copart Direct that is causing that to trend up, and we believe that will trend up even further.

That is part of the CDS business. It's part of the TPA business. It's part of the charity business. So that is all considered noninsurance volume. But it is trending up and so it is helping us maintain that spread, even though we are gaining insurance cars.

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

Craig Kennison, Robert W. Baird.

Good morning. Thanks for taking my questions, as well. Will, I'll start with you. The Nationwide ramp, I appreciate the color you provided. Can you give us a sense for what percentage of the volume you had this quarter and what percent you might have next quarter before you are fully ramped in Q2?

Percent of what volume?

Percentage of your expected total Nationwide volume.

No, I really can't. We are seeing the increase, like we said, in the assignments. I think the only color that we will provide is what we've already said, is that by the exit of our first quarter, which is October, we expect to be at full run rate. So there will be some incremental benefit in our second quarter, but right now, I'm not going to express it in terms of percentage.

Okay. Fair enough. And then, Will, also with you, with Hurricane Isaac, any material impact at all on volume or your cost structure?

There is a lot of things that affect our volume. Weather was not detrimental this quarter like it was last quarter. But remember, we sell a lot of cars throughout the nation, so bad weather in one area doesn't necessarily indicate an expected increase in volume nationwide. So while we did have some benefit, it is not something we would call out specifically.

Thank you. And Jay, as you think about some of the international market opportunities you have, to what extent do you need to rely on your insurance partners to pull you into a market versus you choosing to get there and pulling your partners in?

That's actually a great question, Craig, because you hit on a really important point there. If there is an opportunity to acquire an existing company in their market then we will do that. But if there isn't and we have to start up in that market and maybe convert the market over to our model, then that relationship and relying on partners is paramount. And the good news is we got really good relationships with our customers. We've got their interests set as our number one priority.

And so the only reason that we would invest in a market and spend capital on a market is because they believe and we believe that there is an opportunity to improve the returns in that market and go in and give it a shot.

And so we fully expect that in the years ahead that will happen. There will be some markets where we're not going to be able to open up or to acquire existing locations. And when that is the case, we will go in and provide our services from a startup position; which, by the way, we've opened up well over 30 locations across the country as startups and relied on existing customer relationships. So we know how to do that part of it.

Great. Thanks. I'll quit while I'm ahead.

Bret Jordan, BB&T Capital Markets.

Good morning. A couple of quick questions. And I guess to put the UAE in perspective, it was the second largest foreign market. But what kind of volume was being done in the UAE? And I guess to some extent as we look at the incremental SG&A contribution this quarter, is that inflated because of transaction costs getting into that market, and does it moderate going forward into 2013?

Well, it's not just that market. We've got costs right now associated, international expansion in a number of markets that we've been carrying now for over a year. So part of it is the UAE in the quarter, but it's not all UAE.

And we've never made it a habit, Bret, of breaking out units on a per market basis. So we won't start doing something different than we've done in the past. But as we said, it is a number two market internationally for us. So it is a big deal to be in that market.

Okay. I guess if you look at the UAE as sort of shovel-in-the-ground outside North America, does that preclude you from moving to other non-North American markets in the nearer term? Is Brazil sort of still on the concept stage, or does this -- do we sit back and work on the UAE for a while before doing anything else?

I won't speak specifically to any other particular market, but they are all open right now. It doesn't preclude us from going into other markets.

Okay, and I guess any thoughts on scrap pricing outlook into the early winter months here, just sort of big picture stuff? Maybe is that Will?

Was that for Will? Sorry.

It's either one of you, whoever has got better -- whoever's got the better crystal ball.

Go ahead, Will.

I don't have any information other than the market. So you can look at commodity futures and I agree with whatever they say.

Okay.

Bret, I speak to the smartest buyers out there and I know nothing right now about commodity pricing. It is absolutely impossible to figure out where it is headed. We talk to our friends out there and they are like, I have no idea.

Okay. And I guess one last question, and this is on the Project Overdrive. You've talked about $1.2 million of cost below the line. Was there anything still left in the quarter on SG&A related to that conversion that rolls off? Is there anything above the line that was extraordinary this quarter?

No, I think we called out the ones that we consider incremental and (multiple speakers) in the future.

All right, great. Thanks.

Bill Armstrong, C.L. King & Associates.

Good morning, Jay and Will. I guess most of my questions would be for Will. On the SG&A, you had $2.1 million of international and the ERP system costs. Were there any costs from the headquarters move during the quarter?

Not meaningful, not meaningful. And we stopped calling those out. I mean, it is in the low hundreds of thousands of dollars. That $2.4 million is specifically for the ERP system, and does not include anything for international because those costs will continue.

I see, okay. You might have said this in your opening comments and I might have missed it. But what were the average selling price trends for insurance vehicles during the quarter compared with a year ago? Up, down, flat?

They were down moderately.

Okay.

You can look at used car pricing and commodity pricing and that will be a fairly good indicator of where our ASPs are heading, on a segment by segment basis. That ignores the impact of mix. So as we bring in more of the -- enter into more of the used car redistribution market, our overall ASPs are enhanced.

Right. Okay. And then finally, it looks like you have done somewhat of a restatement in your breakout between service revenues and vehicle sales. I was wondering if you could just walk us through that.

Sure. There is certain revenue -- and it is not a big number -- it is $2 million or $3 million a quarter of revenue that, as we reviewed it, we thought it was more appropriate to be reflected as purchased car sales. It has to do with scrapped cars and dismantled cars and parts sales in the UK.

Okay, so the UK vehicles.

Yes.

Okay.

It is not the whole cars; it is the parts and the crushed cars in the UK.

Got it. Okay. All right. That's all I had. Thank you.

(Operator Instructions) Edward Hemmelgarn, Shaker Investments.

Will, this is a question for you. Do you expect any beneficial impact in terms of -- over the next year or two -- of reduced tax rate from the move of the corporate headquarters to Texas from California?

No, I don't. I think we are about as efficient as you can be on the state tax side. I think there are some benefits that we will see as we expand internationally and develop more of our revenue outside of the United States. But I am certainly not in a position to quantify that going forward. I think using a 34.5% rate is probably appropriate for modeling purposes at this point.

Okay, great. Thanks.

Thank you, and at this time, we have no further questions.

All right. Thanks, Casey. I appreciate everyone coming on the call, and we look forward to reporting the first quarter to you very soon. And again, thanks for being on the call. Will, I'm going to give you a ring at the end of this call, okay?

All right, Jay.

Thanks, guys. Bye.

Thank you. Goodbye.

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.