Copart Inc (CPRT) 2013 Q1 法說會逐字稿

Good day, everyone, and welcome to the Copart Incorporated Q1 fiscal 2013 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, Jennifer. Good morning, everyone, and welcome to the first-quarter call for Copart. We've got some updates that we'll give you this morning. I'm going to pass it over to Will first for a financial update, then I'll go through some of the operational things happening within Copart.

Will?

Thank you, Jay, and good morning, everyone. Before we begin our comments, I'd 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 statements and comments. Key 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-Q, 10-K, and other SEC filings.

With that, I'll now provide a few brief comments about our financial performance for our first quarter of our 2013 fiscal year. Consolidated revenue grew from $225.6 million to $238.9 million, or 5.9%. The growth was primarily driven by increased unit volume in North America. Volume in the UK remained relatively flat, despite the impact of the continuing recession, which is leading to fewer accidents and a higher likelihood that cars involved in accidents will be repaired rather than salvaged.

The growth in North America continues to be broad based. We benefited from the additional volume provided by the exclusive contract we entered into with Nationwide in our third quarter last year, but we also saw growth in the insurance segment, excluding Nationwide, as well as the non-insurance segments of our business. Volume from non-insurance suppliers grew by almost 9% over the same quarter last year, but remained at 20% of our total volume, due to the overall growth in our insurance volume. By the end of the quarter, we saw the volume from the Nationwide contract reach its full run rate.

Same-store sales on a consolidated basis and expressed in units was up 5.5%. In North America, same-store sales in units was up 6.2%. The increase was driven 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 relatively flat, as the detrimental impact of lower used-car pricing and commodity pricing on a year-over basis was offset by beneficial mix of products sold and supplier contracts. Yard operations expense remained flat on a year-over-year basis at $88 million, despite the growth in volume, as we continued to reduce cost and to spend more efficiently, particularly in the operations of our non-insurance segments.

Our gross margin grew from $95.2 million to $105.4 million, or almost 11%, and our gross margin percentage grew by 190 basis points, illustrating the operational leverage in our business. General and administrative costs were $27.3 million, compared to $26 million for the same quarter last year. The growth was due to increased costs associated with expanded international operations, and the incremental cost associated with the roll-out of our new ERP system. We expect to incur incremental costs associated with the roll-out of the ERP system throughout fiscal 2013 and the first part of 2014. These costs will fluctuate from period to period, depending on the phase of the roll-out. We expect to be fully integrated by the end of calendar 2013, at which time these costs should decline.

Our operating income increased from $65.4 million to $74.4 million, or almost 14%, and our operating margin percentage grew by 210 basis points. Our tax rate for the quarter was approximately 36%. We expect 36% to be the approximate rate for the entire year, excluding discrete tax events. The increase in our estimated tax rate is due to the change in our international structure, our revised expectations regarding the ultimate settlement of certain state tax issues, and our uncertainty of the continuation of certain federal tax incentives.

We ended the quarter with over $131 million in cash. On a sequential basis, accounts receivable increased as we grew inventory, and income taxes payable grew as we made no estimated tax payments in our first fiscal quarter. During the quarter, we generated $75.3 million in operating cash flow, as net income and non-cash expenses generated approximately $53.9 million in cash. While movement in the balance sheet, primarily growth in taxes and accounts payable, generated another $11.4 million.

We expended $48.1 million for the acquisition of businesses and other capital assets, including $17.2 million for lease buyouts and $20.1 million for the purchase of land. We currently own approximately 75% of all of our land. Finally, during the quarter we expended $13.9 million for the repurchase of 500,000 shares of our own stock.

That concludes my comments. I'll now turn the call over to Jay Adair, our CEO, for further remarks on the quarter.

Thank you, Will. Again, good morning, everyone. I wanted to start the conversation with Hurricane Sandy, and give you an update on the impact of that superstorm. We have mobilized for the storm in a bigger way than I've ever seen historically. The biggest event that I've seen prior to this would have been Hurricane Katrina. So, I wanted to start by giving you some comparisons to show you the difference between the storm that affected the Northeast, and the storm that hit Louisiana and Mississippi in 2005.

For one, the size of the storm. While smaller in the Northeast as opposed to the intensity of the storm in Katrina that hit the South, while the storm is not as, or was not as high on the scale in terms of degree of intensity, the population density of the two markets are night and day. The population density of -- obviously of the Northeast is so much higher than the South, so I'll give you some statistics here that I think will play that out.

The second thing that I would say is that what we saw in Katrina was massive flooding of a city that stayed under water until the water was pumped off. What we saw in the Northeast was a storm surge that came in and left, and so, the ability to know whether or not there is a claim came much quicker. And the ability to know whether we had claims in Hurricane Katrina took much longer to find out, A. B, the cars had been sitting in water for days in Hurricane Katrina. In Hurricane Sandy, it was simply an increase in tide and level of water, and then a decrease and it was out. So, these vehicles have not been sitting in water for days, which means the quality of the vehicles is much higher.

So, here are some stats that I think you'll find interesting. Hurricane Katrina, after three days, we received 359 assignments. In Hurricane Sandy, after three days, we received over 6,000 assignments. Hurricane Katrina, after seven days, just over 1,000 assignments came in to Copart. Hurricane Sandy, after seven days, over 17,000 assignments. After 14 days, Hurricane Katrina, over 4,000 assignments. Hurricane Sandy, after 14 days, over 40,000 assignments.

So, where we sit right now, we're just over 25 days of real impact on the storm, and if you look at the 21-day mark for Katrina, we were just under 10,000 assignments. The 21-day mark for Sandy is over 50,000 assignments. So, to say that it's five times larger, using those numbers right now, I don't think is an overstatement. This is an unbelievable experience.

I flew in to Jersey and Philly last week, and hit all of our locations in that market, went into New York this week, and got back last night, and hit all of our locations in that market. In Hurricane Katrina, we were dealing with eight locations that were impacted, and we created two sub-lots to hold additional cars, because we didn't have room. In Hurricane Sandy, we have 19 locations that are affected, and we have 11 additional sub-lots that we have added to bring in business. We've already picked up -- and this is a phenomenal number -- we've already picked up over 30,000 vehicles associated with the superstorm. Again, at this point in Hurricane Katrina, we just had over 10,000 assignments. We've actually picked those vehicles up. We have over 60,000 vehicles that have been assigned to us at this point.

So, we worked through the holidays, through Thanksgiving, all of our yards were staffed. We have been running full speed since. I mean, these are 24-hour operations. The trucks are running at nighttime to tow out of New York City, because the traffic is too heavy during the day. We've got trucks running in the day. We've got trucks running at night. So, it's just a phenomenal experience to see it, to see locations that have 10,000 cars on the ground, unbelievable.

And the quality of the cars is very high. As I said in the very early part of these opening remarks, these are vehicles that have been flooded, but they've got a lot of usable panels and parts, and so we expect the returns to be strong on these vehicles. We've seen that already. In the initial sales that we've had, these vehicles are bringing far more than Hurricane Katrina, because they haven't sat in water for well over a week.

So, we've got our teams working every single day right now on picking these vehicles up. We're picking up unheard-of numbers of cars on a daily basis, 2,000 cars a day in the affected area, which is just a phenomenal number. So, we are on it.

I get asked often -- what's the profitability? This was one of the questions that came up seven years ago in Hurricane Katrina. We're not focused on trying to make a profit right now. We are shipping in, or have shipped in loaders. We've gone out and bought entire dealerships out of all their trailers, their travel trailers, so that we have places for drivers to live. We've gone in and rocked and developed entire yards, and spent over $1 million rocking a facility. So, we are right now focused on making sure that we exceed our customers' expectations.

I've never seen a storm like this in my life, but this is where Copart shines. This is what we do well. And this is one of the reasons a lot of our customers do business with us on a regular basis, is because every 7 to 10 years, when one of these superstorms hit, this is when we step up to the plate.

The logistical work that's happening right now, to think that cars come in two at a time on a truck and to walk into a facility with 10,000 cars and to realize that 5,000 truckloads had to come in and be unloaded with loaders and placed in row locations and inventoried is a phenomenal effort. It's unbelievable. I really can't express how impressed we are with the team and their effort and the work that everybody's doing, and how appreciative we are of everyone who's been working night and day to get this done for our customers. So, it's a big deal.

We'll be selling off some of this inventory in the quarter that we're in. We're starting to hold 1,000-car sales now in New York, and primarily, just if you're wondering, the vast majority of the volume came out of New York. New Jersey is probably 20% of the volume, and New York is closer to 80% of the volume that we've been handling. So, really impressed with that, and we'll be selling off a small amount of those vehicles in the current quarter, Q2. We'll be selling off the majority of those vehicles in Q3, and then there will be a tail of vehicles that will be sold off in Q4. And that should conclude all of the impact of Hurricane Sandy. I don't think there will be too much being sold off in the new fiscal year. I wanted to give you that update on Sandy.

I also want to talk about CapEx in Q1. We spent approximately $48 million. $13 million of that was comprised of one major lease buy-out that was done on a facility that we've had for over a decade. The rest of that was a new location. That facility, the lease buyout was in California. The rest of the locations, we acquired a new location in Chicago that will be coming online in the future, a new location in Kentucky that will be coming online. We did a lease buy-out in Columbus, and we did a lease buy-out and an additional expansion in Tennessee. So, that's CapEx for the quarter, on stores, new stores, and buy-outs.

As far as companies and new locations that we opened up, we acquired a company in the United Arab Emirates, in Dubai. That's our first expansion into the Gulf Cooperation Council, or as you'll hear us refer to it on the call, the GCC. That includes the UAE, but also some other countries including Saudi Arabia, and we believe that market to be over 100,000 vehicles in size. So, that will be expansion there. We also announced recently that we have acquired a large company in Brazil. That gives us five locations in that market, as we start to expand across Brazil. And we announced that we expanded in Germany.

Both the GCC and the Brazil acquisition are traditional businesses, like Copart has in Canada, the UK and the US. The acquisition that we made in Germany is an online-only platform, and that basically opens us up to that market, gets us into the market where we can start to interact with clients and show them the options that are in front of them. We believe that market to be in excess of 600,000 vehicles.

So, that is it for my prepared remarks, and I'll go ahead and turn it over for questions at this time, if you would, Jennifer. Thank you.

(Operator Instructions)

We'll go to John Lovallo with Merrill Lynch.

Jay, I'll start with you, if you don't mind. Just another question on Katrina, I'm sorry, on Sandy. If we look back at Katrina, I think one of the challenges that Copart faced was that you had to relocate a lot of employees to help with the processing of these vehicles. Are you seeing the same type of efforts put in place now or do you have facilities that are closer to where the impact was?

You can't have enough of your team on-site in a cat situation like this. So I was in Long Island yesterday and we had folks from Albuquerque, Sacramento, Andrew is from Boston, I mean, just think off the top of my head. We had people from Portland, all over the country, so we have shipped people in that are working in -- our facilities aren't big enough for the amount of people that we sent in. So we've got modular office space that we bring in that's being powered off generators, and we've got a cat trailer that's hooked up that's satellite linked to the Company. So it's that kind of degree. In addition to that, all of our facilities are open on the weekends, Company-wide, to help clear cars. You're trying to get ahold of insureds to find out where the vehicles are and a lot of these cars are -- they think the car's in one location, and now the car's been impounded or the car got washed down the street, and isn't in the same spot that it was supposed to be in.

So the degree of complexity that exists in a cat situation like this is just unheard of. I can tell you that Katrina was the biggest I'd ever seen. Before that I would say it was Andrew in 1992. And this is far and away bigger, no comparison. You can't even begin to compare the two. It is that much bigger an event. So it is an all-on effort, even the UK is helping us out in the process. We've got every single resource in the Company being utilized. We're shipping in loaders from around the country. We're shipping in loader-operators to move vehicles from around the country. So it's a full-on effort.

That's very helpful. Just one last one on Katrina. I keep saying Katrina, on Sandy. During Katrina, I believe that there was some delay in title transfer because I think of backlogs at some of the state agencies. Just given some of your comments earlier, it seems like this may not be the case. Would you comment on that?

That's a great question, because one of the things that's nice about New York is it's a state that's easy to -- they have an 907A process, so it will be transferred very quickly. We'll be able to move the iron. Like I said, we're already seeing a 1,000 car sale today in Long Island. We'll have an 1,100 car sale tomorrow in Newburgh. The nice thing about New York is that the vehicles are going to move very quickly. They'll be a little slower to move in Jersey, but thankfully, there's not near as many vehicles. So we're going to see the process of these vehicles being moved very quickly compared to Katrina, which is a good thing, because the volumes so far are far and away higher. I don't know. People have asked me how many units you're going to get. We're well over 60, now. I don't know where the number's going to come in at. I'll report on that in the next quarter.

Okay. Thanks very much.

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

Very exciting stuff on the international expansion, and thank you for some of that color there. I was hoping you could maybe tell us a little bit more, maybe in terms of when we should start seeing revenues, and maybe roughly the total revenues. You probably don't want to break it out by country, but maybe an aggregate of the three, and this is agency versus purchased. With the UK, it took a couple years to ramp to material profit contribution. What are your expectations for these markets?

So Brazil is not a purchase scenario, so we're processing vehicles on a fee. Very similar to the market we have in the US. There's a lot of work to be done. This is a high growth market. This is a market that we're seeing an emerging middle class that's getting insurance. Because of that, you've got this really high growth rate when it comes to insurance.

So the biggest challenge we have right now is facility space. We've got five locations. We just bought a facility in the quarter we're in now, which is literally a piece of dirt that we're greenfielding, because the five facilities we bought are already full, and don't really have room for future growth. The biggest challenge we have in Brazil right now is the market is growing so fast that we have to have room to store the vehicles. So we've got revenue down there. We'll be talking about that in future quarters. But right now, I'm not really thinking about that so much as, we're thinking internally about how to get those vehicles switched over to more of our model. So right now, it's not on VB2. We'd like to introduce VB2 to that market like we did in the UK. We'd like to make sure we have the logistics channel for storage because that's a huge challenge right now, but just a huge opportunity.

In Germany, it's an online platform so there's really -- it's very simple. It's very easy. You don't have the logistics issues that you have in the rest of the markets that we do business. So I don't see a whole lot of difficulty with our current platform in Germany. Really what we want to do is build relationships there and then start to introduce those customers to looking at data from the UK, from the US, and seeing if there's a possibility to do business the way we do it in of other markets and see if that makes sense to do it that way in Germany. That's really the opportunity that exists there.

Great. That's very helpful color. Just quickly in the US, the same store sales, the unit volume was very strong, obviously even excluding Nationwide. There's been some anecdotal evidence out there that claims may be flat to down this year, but you obviously have very strong insurance volume gains. Can you maybe talk a little bit about what you're seeing out there, and how you're getting that strength?

Was that for me or was that for Will?

Either one.

Okay. Yes, I would say that up until Hurricane Sandy hit, yes, claims volumes have been flat to down. Now it's kind of a -- you get kind of a dual effect going forward, because not only do we have all the claims that are going through associated with Sandy that we've got to process, but it puts a strain on us as an industry, it puts a strain on the insurance industry, so we usually see even more total losses going forward because of that. I think that will be the case. Historically, claims have been relatively flat to down. There's a number of factors that we could discuss on that. We're up because we've had market share gains in the past two years, and that's been the reasons for that growth.

Why the market share gains? I think Hurricane Sandy is a prime example. There's one of many reasons. I could talk about VB2 and the returns. I could talk about a number of other areas, Bob. Hurricane Sandy is just a prime example. Putting the full force of Copart to work in a cat situation like this is really a big deal, and these cats, they just seem to be getting -- I feel like we think we've got it figured out and we have a cat like this and we go wow, there's somewhere -- we start the Monday morning quarterbacking process and talk about how we could do the next cat even better, and how we could improve it. It's getting to be where they're so big, I think it's going to end up having a division of our Company that literally is waiting for the next superstorm to go ahead and launch in these things because it really brings the full bear of our whole Company to play. All of us are involved in it.

It's just been -- in the past, it's been market share gains. If we look forward into Q2, Q3, Q4, this is going to be obviously a big year for us. I would imagine it will be a big year for the industry just because this cat, not only is it significant volume already, it's continuing to come in. We haven't seen it drop off that much. I mean, we've had an over 1,000 car assignment day just in the affected area this week. As long as we keep seeing that kind of volume come in, it's going to be a big, big year associated with the cat. It's going to be a big year around the country because you're putting strain on the industry as a whole for resources, and so if you're borderline fix and total, you're probably going to total the vehicle. There's really the effect of both those going forward.

Okay. Great. Thanks very much.

We'll go next to Bret Jordan with BB&T Capital Markets.

Couple of quick questions. One, has anything about the costs associated with Sandy, you made a comment about not focusing so much on making money on this recovery volume so far, but it sounds as if you've got tremendous assets deployed and the volume sell-through comes in the third quarter. Is it margin dilutive, I guess, from an overhead standpoint, to bring all these cars in in the current quarter? We sort of think about this as a real driver on Q3, but maybe a detractor from current?

It should have some negative impact in the current quarter that we're in right now. I would expect that, simply because we are deploying so many resources and we're towing vehicles at enormously high tow rates. Tow rates will triple and quadruple in a cat situation like this. That's very common.

One question, on the GCC volume, you're talking about 100,000 unit market. Is that, is there a window to think about in time to reach that type of volume? Is that a three to five year? Is it longer term, or where do you see the growth rate there?

Three to five makes sense. That's how we look at the market.

Okay. Great. Thank you.

We'll go next to Bill Armstrong with CL King and Associates.

Good morning, Jay and Will. Most of mine have been answered, but just on Brazil, I was wondering if you could give us maybe a sense of the size of the market down there, and what sort of managerial or operational challenges that might present to you, managing something that's so far away.

We're in Sao Paulo now. That's the largest market for us, Bill. And we're not even in Rio yet. It's a large market. Based on our estimates, around 200,000 vehicles currently, but it's a high growth market. It's growing at low double-digit growth every year right now, due to insurance company, insurance coverage that's coming in to play, and as the market gets more and more familiar, and again, this is something we've seen in the past, we introduced VB2, and we've seen returns go up, it actually causes the total loss ratio to go up.

It's a high growth market. It could be, five years from now, we could be looking at a market that's 300,000 to 400,000 units, something like that. It's going to be a play for us, kind of like the question that Bret asked earlier. It's a three to five-year play for us, and it's going to be somewhere in the 10 to 15 locations to properly cover the market, and when we've done that, then you're looking at similar volumes to the UK would be my guess, that we end up handling.

Okay. And I guess why Brazil, compared to, I don't know, Mexico or some other types of markets?

Sure.

Like what's the a attraction of Brazil out of all the markets you have available to you?

Yes, well, Mexico's a high population, low insurance market. Most people are driving around without insurance. Brazil is a high population with a much higher insurance penetration, and so you want to pick a market where you're going to have a chance to process vehicles. You don't want to pick a market where people drive cars and don't have insurance. And in Brazil, not only do they have a lot of insured vehicles, so that we have a market we can immediately jump into, but it's a high-growth market, and so it's very attractive to us.

Makes sense. Okay. Thanks for that color.

Thank you. We'll go next to Gary Prestopino with Barrington Research.

Just looking at what you did in the UK, it looks like you had a pretty significant expansion in the gross margin there, actually the difference between the revenue and the cost of vehicle sales. Is that more or less just a function of the currency impact with the pound getting stronger versus the dollar?

No, there was very little FX impact on these financials.

So you're just getting a better yield on the car as you're selling it?

No, actually the absolute contribution on the purchased car remains about the same. Just a lower selling price, which increases your contribution percentage.

Okay. And then in terms of Brazil, as well as Germany, Jay, is there right now significant competition in both of those markets? Is it a fragmented market, each of them, where you have an opportunity to continue to buy other companies, similar to like you did in the UK?

Brazil is like the UK and the US. It's the same model. And yes, it's highly fragmented, so you know how that goes. With respect to Germany, the model doesn't exist. Right now, vehicles are sold online and they go directly from shops to end user, and so there's a number of reasons why we think that there's issues with that model. A number of reasons why we think there's an opportunity to improve returns from the logistics that take play to having absolute sales where the buyer knows they're going to end up buying the vehicle as opposed to bidding and maybe getting the vehicle 1 in 100 times. What we've done is we entered the market through the platform that is being utilized out there today. We have another large competitor in that market, and what we'll be doing is looking at that market to see if there's an opportunity to introduce some new ways of selling vehicles in Germany.

Is your platform in Germany just exclusively used to sell vehicles?

Yes, our platform right now, yes, it's used exclusively to sell vehicles, yes.

Okay. Thanks.

(Operator Instructions)

We'll go to Fla Lewis with Weybosset Research & Management.

Just interested, looking at the international expansion, which you've done rather cautiously before, starting with the UK, but now Germany, Dubai and Brazil, does this mark -- is our confidence higher, and we're ready to go after more foreign markets, or is this enough for now?

We're going to continue to expand into foreign markets. We had to have systems in place and so part of that reservation in the past was getting some of the process and the system in place, and we've got more of that today. So I'm not saying look forward to three more markets expanding in the next quarter, but I am saying, we're going to continue to grow in these markets and then we'll be looking at other markets as well.

Anything in particular in mind?

Sure. I'd be happy to tell you on the call.

Okay.

We won't be disclosing that on the call today. Thanks.

Couldn't help but wonder.

Sure. I understand.

Thank you.

At this time I'd like to turn the call back over to Mr. Jay Adair.

Thank you, Jennifer. Well, again, we appreciate everybody coming on the call, and again, as we said in some of the remarks, we look forward to reporting on total units for Hurricane Sandy and total impact, and we'll just keep working on that for the next month, and making sure we pick up all those vehicles and get that processed for our customers. So at this time, again, want to thank you for coming on the call, and we look forward to reporting on the next quarterly call. Thank you.

That does conclude today's conference. Thank you for your participation.