Copart Inc (CPRT) 2013 Q2 法說會逐字稿

Good day, everyone. Welcome to the Copart, Inc. Q2 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, CEO of Copart, Inc. Please go ahead.

Good morning and welcome to the second quarter earnings call for Copart. I will turn it over to Will Franklin, our CFO, for opening remarks, he will pass it back to me, and then we will open it up for questions. Will?

Thank you, Jay. Good morning. Before we begin I would like to make the following comments. I would like to remind everyone that our remarks will contain forward-looking statements. Including statements concerning our views of trends and our business. These statement are neither promises nor guarantees and are subject to certain risks and uncertainties to cause the final results to differ substantially from those projected by our statement and comments. We expressly disclaim any obligation to update or revise these statements and comments. For a more complete discussion of the risks that could affect our business, please review managements discussion and analysis and the risk factors discussed in the 10-K, 10-Q, and other SEC filings.

With that, I will now begin the comments on the quarter. I would like to go over the financial results and make comments about our recent acquisitions. During the quarter we announced the expansion of our business into Brazil with the acquisition of Central de Leiloes. These include five locations in the Sao Paulo area. The Brazilian salvage and insurance markets are structured very similar to the United States in that the insurance companies settle with their policy holders, gain possession of the damaged asset and then have a need to monetize that asset.

In Brazil, the settlement process between the insurance companies and policy holders takes far longer than in the US. Consequently, the ability to store cars is even more important.

In addition to providing storage we have found that the insurance company in Brazil are looking for the same value from their salvage provider as those in the United States. Namely quick pickup, cars left at the repair shop incur storage fees and tend to loose parts. They want assets protected from both theft and weather. Transparency. They want to know at every step of the process, the location, status, condition of the car and the title work.

Analytics. They want sufficient information to make the right salvage decision. Make sure they salvage the cars that should be salvaged, and repair those that should be repaired. They want data about the settlement and salvage process. Days and yards returns by make, model and year, Adjustor performance, and many other metrics.

They want a collusion pre-process. They want to know that they are selling the car it's true value, unfettered by buyer or seller collusion. And finally, the returns. Insurance companies want to give their car to the company that can sell it for the most money.

These are exactly the values we provide the insurance industry in the US. We expect to compete and to expand our market share based on our ability to provide these values, and because we have the capital to support expansion. We chose the Brazilian market for our first emerging market expansion not because of our ability to provide value to the insurance companies, but also because of the [inaudible] dynamic growth. We measure growth potential in a market not by growth in part but by the growth in auto insurance premiums which have been growing 15% to 25% a year as the emerging middle class gains ability to finance and purchase a car.

While we are excited about the opportunity in Brazil we do not expect immediate material contribution to our EBIT. Much like our entry into the UK, it takes time to introduce our systems and processes, and to gain the scale needed to move the market. In the UK it took nearly three years for it to be a meaningful contributor to our financial performance. We expect similar maturation process of our Brazilian business.

Also, in the quarter we announced the acquisition in Germany of Wreck Online Marketing, or WOM. This is an online selling platform for salvage cars. The insurance market in Germany is structured differently from the US. In that market the insurance companies pay the policy holder for the difference between the pre-accident and post-accident value of the car. The insurance companies generally assist the policy holder with the disposition of the car, but are not responsible for it.

Our ability to pick up, protect and store the car does not provide the value to the insurance companies. Nevertheless, The ability to obtain higher return was for the auction cars, does. At higher auction proceeds reduce the payout to the policy holder.

We believe the ultimate introduction of our technology and buyer base will increase the returns yielded by WOM, and increase its competitiveness in the market. We believe the model, in which the insurance company is responsible for the disposition of the salvaged car, is the preferred model from the policyholder's perspective and ultimately, market competition will drive insurance companies to adopt that model. We intend to contribute to that process.

Our revenue for the quarter was $266.2 million compared to $227.9 million for same quarter last year, an increase 16.8%. Growth in revenue was driven by both increased volume and increased revenue per car. In North America we grew 9.2% in volume.

We estimate three fourths of that came from incremental Sandy cars. The balance came from growth in market share. We estimate incremental volume from Sandy to be over 50,000 cars. We sold through less than half during the current quarter.

Most of he remainder of the Sandy cars will be sold in the third fiscal quarter. In North America non-insurance volume declined slightly as the hurricane had a negative impact on normal use car trading activity in the northeast region. That is an important region for our non-salvage business.

We also saw an increase in revenue per transaction as gross proceeds per car increased both year over and sequentially, consistent with trends in used car and commodity pricing. Internationally our growth was driven by volume and came primarily from our acquisition in Brazil and the UK market remained relatively flat.

Revenue per car down slightly as cars for Brazil command a lower yield. The purchase car sales increase was primarily due to supply mix in the UKas purchase car volume to 33% of total volume as compared to 29% in the same quarter last year.

Unit same store sales in North America, excluding the incremental Sandy units, was 2%, and was negatively impacted by the disruption in non-insurance car sales in the north east as well as the general impact Sandy had on driving activity in the surrounding areas. Internationally, unit same store sales were flat.

Hurricane Sandy required us to incur abnormal cost to process the additional volume. In addition to normal cost to process the additional Sandy volume, we estimate that we incurred an additional $20 million in abnormal cost. These incremental costs obviously comprise the majority of our $30.1 million increase in yard operations expense. The balance of the increase was driven by non-Sandy volume growth. As the average cost to process a car, absent the incremental cost from Sandy, actually declined. This is consistent with expectations as our fixed cost structure generally yields more efficient operating cost per unit at higher volumes.

General and administrative costs grew by $6.7 million over the same quarter last year. There are three primary drivers for the increase. First, is the expanded administrative infrastructure required by international operations which resulted in an increase of $1 million.

The second, is a $4 million increase in technology and development cost as we expanded our resources to develop new products like new mobile app, and to support the mobile operations throughout the world. Also include in the $4 million increase are the incremental costs associated with the roll out of our new ERP system which we have previously discussed which will allow us to operate worldwide on a common platform, and provide scalability and functionality that we currently do not have.

It now also includes the out souring of our technology infrastructure and internal support. This means in general our enterprise computers, servers, routers and also the help desk, will be provided by others. Out souring this technology will also provide scalability and functionality we do not have, and will reduce costs. We expect to incur incremental costs associated with these projects to continue throughout fiscal 2013 and into 2014. These costs will fluctuate from period to period depending on the phase of the roll out.

During the second quarter these incremental costs were $1.8 million. In addition to the incremental costs associated with out sourcing of technology and functions, we have accelerated the depreciation of our data centers in Reno and Las Vegas in anticipation of their expected shut down in fiscal 2014.

This acceleration resulted in an increase in depreciation of $2 million in the quarter will continue until the second quarter of 2014. Finally, during the quarter we incurred $1.4 million increase in marketing expenses much of it associated with the design of new auction products.

We ended the quarter with $49 million in cash, accounts receivable inventory and vehicle [inaudible] costs increased on a sequential basis as we grew inventory. During the quarter we consumed $22 million in operating cash flows as we funded the large growth in inventory in accounts receivable associated with Sandy and made two estimated tax payments.

We extended over $57 million for our expansion into Brazil and Germany and other capital expenditures. Included was almost $12 million to buyout two leases. We currently own over 76% of the land on which we operate. We have purchase options for most of the leases we do not own and intend to exercise those options when it makes economic sense.

During the quarter we had no open market share repurchases. We have almost 48 million shares remaining on our current repurchase authorization. That concludes my comments. I will now turn the back over to Jay Adair, our CEO for further comments.

Thanks, Will. Great update. There was a lot of information there. What I have done on my portion of the call is I am going to focus on Sandy. I will give you an update on mobile and just quickly comment on what you heard about recently.

In the last call I informed you that at the 21 day mark the Sandy affected yards had received over 50,000 assignments. That experience of handling hurricane Sandy which basically was all of November, December, and January for us. We had three full months of handling Sandy and cars affected from the hurricane. It was huge.

We ended up with over 15 temporary locations to store vehicles. Over 350 additional acres we had to bring in, and over500 sub haulers. I won't get into all the details becauseI think everyone is pretty familiar with how much went on.

The important part of this is that we did a great job in handling the capital but we learned a lot about how to handle future catastrophes. This is different from Katrina. The storm waters came in and receded quickly as opposed to a cap not of the scale or catastrophe taking longer for the waters to clear and for the claims to come in. This is one of those catastrophes that happened so quickly.

What we have seen so far in the vehicles we have sold in the quarter, and the vehicles we have sold in February are a couple of thing. One, we have higher returns as Will talked about, but we are seeing higher returns on the Sandy affected cars. The second thing I think is a big deal is we have been first to market on those vehicles.

When you are setting up a bunch of sub lots without our virtual auction technology, without BB2 and that ability, you have got to wait until you have enough vehicles and then you've have to set up auctions where you physically would have an auctioneer come in and people show up. Because of the virtual technology we were able to hold auctions Monday, Tuesday, Wednesday, Thursday and Friday in New York.

This is an auction that is typically on Wednesday. Instead of waiting for auctions to be every Wednesday we have been able to hold auctions Monday through Friday right out the gate as soon as we got cars. Because we are a virtual company, we don't have the restriction of trying to deal with setting up areas for people to come for a live auction. We are able to set it up virtually and hold those auctions right out the gate. You want to be first to market with the product. There is an interest in the vehicles, and a demand for the vehicles, and it will allow higher returns for those initial vehicles that come to market.

The second thing is our clients want those vehicles sold, they want to close the claims and they want to shrink that cycle time as much as possible. That has been the case. As Will stated we anticipate the majority of the vehicles that are left over from hurricane Sandy will be sold in the quarter we are in now that ends in April. That is the update on Sandy. There may be questions regarding the hurricane. We will try to answer those.

With respect to the REIT. It recently became public that Jana Partners, a firm managed by Barry Rosenstein, who was a director with Copart from September of 2007 to December of 2009, bought shares of Copart and recommended in an investor letter that potential value could be achieved were Copart to convert to a REIT. We are currently investigating this option internally but have no comment at this time. We will not answer any questions on the subject on today's call. I want to make sure that is clear.

Last point I want to talk about is mobile. We launched our mobile App at the end of the quarter. We are really excited with the results. I wanted to share some of those with you.

In the first two weeks of launching the mobile app customers downloaded over 30,000 applications or 30,000 versions of the app. A lot of you have downloaded Apps on your Droid or your iPhone before and you check out the app and immediately delete the app. You think why did I bother? That has been the exact opposite case for us. More than 30,000 but out of the total number of Apps that have been downloaded, over 90% of our users continue to use the mobile ap on a daily basis. That is a really big deal. That shows that the stickiness of the product and desire for the product.

We were the first in the industry to have an iPad App that allows you to join and attend live auctions. We are excited about that. It is an iPad and iPhone app that we've launched with the virtual auction technology you can go in and you can watch the auctions.

We couldn't do this before. We did not have mobile a product to allow you to do that. If you came to our website and you clicked on the auction, we required you to become a member. Now, that is not the case. You can come in, everybody on the call today can download the iPhone app or the iPad app and start watching the auctions immediately.

That has really bumped our attendance. Another statistic that I think is very powerful, over 10% of auction attendance is now from our mobile App. Over 10%. This is an App that has been out less than two months. This is to me just incredible numbers. New member registration is up 10% since the launch of the mobile app. Again, another very big statistic.

Total participation, looking at Q2, 2012 versus Q2 of 2013, total number of participants in our auctions is up year-over-year of 30%. We are seeing really big improvements there, and this is really first generation for the App. I was asked, and I said this recently,I was asked back in the late 1990s at a conference, how big can the internet become in Copart's life? How many cars do you think can you sell online? At the time we were 2% or 3%. I remember thinking, we may get to 10%, not knowing we would go eventually go 100% internet, that is how I feel about the mobile application.

The mobile App is really going to user experience change for us. Obviously, it is mobile and that is great, but the ability to flip through multiple auctions and we are going to come out with releases in the future that will really make that easy. It is exciting stuff. I wanted to share those numbers with you. I would be happy at this time, Melissa, to open it up for questions.

(Operator Instructions) Robert Labick, with CJS Securities.

Good morning. Thanks for that new color on the international sales, I want to stick with that first. Can you give us a sense of the total revenues from the three new international markets you put in there? Also, I would like to know if you could outline your next steps? Are you going to buy land in each of these? How long might that take? What is the process to build up these markets over the next few years.

It is not a meaningful amount at this point. Germany is internet revenue,compared to the amount per transaction it is very small. Brazil is still growing so it is not a meaningful amount. I don't know that we can break that out at this point on a per country basis.

I will comment on the process. We have acquired some land, as Will stated on the call, and I think it is pretty clear that our preference is to own the facilities. We think they are critical because of the zoning but it doesn't mean we will only buy. We may lease with an option to purchase down the road. So, we will be doing that in these markets. This is really, right now, a technology play for us. We talked a little bit about it in Will's opening remarks, we have got to get over drive completed. Project over drive we are at half time. It is a three year process. We have got 18 months left basically for over drive to quit. In the process of doing that we've come out with mobile App and upgraded a number of systems in the Company, but one of them is the operating system that we have got for our location. We have a great operating system but it is not localized. IT says it speaks three languages English, Canadian, and American. We need a system to be localized for the different markets like Portugal and Brazil. When that comes out we will integrate those facilities to bring our auction technology and reporting and everything else that Will talked about that our clients want, that will bring that tech and those needs to those markets and that will speed up the process. We made those acquisitions. As Will said it is similar to the UK. It took us a year to integrate the UK when we first stepped into that market. Now we talking about new technology to be installed and then converting hearts and minds of customers to seeing these benefits and basically make the changes.

That is very helpful. Switching gears back to North America. Obviously Sandy disrupted a lot in the quarter. You still have strong volumes, any sense of the tail winds this year from the lack of winter last year or where do you expect industry volumes to be going?

The volumes seem higher. It may be weather related. Our experience whether it is a major earthquake, or hurricane event, our experience is that it slows volumes down it disrupts the marketplace, and stops people from driving and doing what they normally do. It's a catastrophe and they get into that mode. Our experience is that it negatively impacts markets typically. But we are seeing volumes up across the country so I am not sure so much that it is weather or isn't weather. I just know that two fundamental things are happening right now. Returns are up and volumes are up.

Thanks very much.

Now we'll go to John Lovallo, with BofA Merrill Lynch.

Thanks for taking the call. First question is for you, Will. The $20 million of other items that you identified in yard ops that weren't specifically called out in the release, can you give more color on those? Are those items you do not expect to repeat?

Absolutely. The large element of those costs is additional sub haul. We brought in about 550 sub haulers from as far away as Washington state to help us address the additional Sandy volume. We moved 300 people from other parts of the Company including the UK in that area to help address the volume. We opened up 17 temporary facilities over 350 acres and that was expensive land, and all of those are well above the normal cost that you would expect with processing these cars and the way the accounting works. You can't put those costs up on the balance sheet, you have to flush them through as a period cost. Therefore, you have this choppiness in reporting the results of these types of storms so that is what led to the $11.9 million loss is the processing of these incremental cars.

Above and beyond that $11.9 million, did I misunderstand that there were about $20 million of other charges that you were speaking of?

They were included in the $11.9 million.

Okay, great. If we look at $1.8 million in SG&A and the $1.4 from the international operations, from a modeling standpoint, is that a reasonable run rate to think of these items?

We look at the IT, and we break it in different components. Internally, we look at what we call "keep the lights on". That is to run, provide services internally, to run the auctions at our current level with our current international footprint. Based on those assumptions we are spending $8 million more this year than we would expect to spend in 2015, and we will have incremental costs in 2014 as well. When those costs will present themselves in the quarter is the problem we have in predicting. It depends on the nature of the activity taking place. Some is capitalized and some not. Then it doesn't have that large impact in that quarter.

That is helpful. If I could finish with Jay. Are you seeing a trend in the industry with national insurance companies starting to lean more towards using multiple vendors?

They are already with multiple vendors. If I can rephrase the question. We don't see a trend where people doing business nationally are splitting that with multiple vendors. If the industry tends to be split, or customers are doing business with multiple vendors and occasionally you will see an insurance company choose one supplier for all of their business. It is pretty rare, it is not something that happens on a frequent basis. We have talked about it in the past. We have well over 100 national contracts for supply but a lot of those are very, very small insurance companies that are not multi-state. They may just be doing business in two or three states. Some are large like Allstate Insurance or we handle all of their cars. I wouldn't say there is a trend either direction. Clearly there is not a trend from national to multi vendor.

That is very helpful. Thanks a lot, guys.

And we'll now go to Scott Stember, from Sidoti & Company.

Good morning. Jay, you made comments about how the returns on the Sandy vehicles are higher. Are you referring to traditional vehicles coming in or are you referring to versus Katrina.

No, I hadn't thought bit that way. That is a good question. I was referring to traditional salvage vehicles that we process. Most of these vehicles were not wrecked they were flood damaged. They brought more money than traditional damaged vehicles. I was not referring to Katrina.

And that considers the saltwater damage to the drive train and so forth?

Pardon me?

That would consider the water damage from saltwater?

How would I consider it?

No, those comments that you were saying, also factors that in there, you are saying?

We have sold saltwater damaged cars a lot of times. Katrina was. That is nothing new per se for us to sell product like that.

On the share repurchases, obviously there was nothing that happened this quarter. Was that just a function of the acquisitions that have been taking place to deploy the capital towards that and towards Sandy.

If you think about Will's opening remarks without me getting into the details we spent a lot of cash in the quarter. We finished with less than $50 million in cash. We take a conservative approach towards our balance sheet as most investors know at this point. That was the reason.

That is all I have at this time. Thank you.

And Bret Jordan with BB&T Capital Markets will have our next question.

What was the total volume of Sandy cars you wound up recovering in the process of processing? I think you said at 21 days you were over 50,000. Your commentary was that you saw over 50,000 in total, was it materially over 50,000?

The way you break out a vehicle as a Sandy loss, you base it on date of loss. There are vehicles that come in later so it is hard to determine. We are comfortable it is over 50,000 cars. We don't want to get into trying to narrow it down tighter than that.

Trying to read the commentary the $0.06 negative impact from Sandy in the quarter with the expectation that the recovery in the current third quarter will offset the expenses, do you see Sandy net/net being a profitable experience? Or will the third quarter recovery still be less than the expenses attached to the second quarter.

We have historically said, and it hasn't changed, that we don't make money on these CAT's. That is the case for everybody on these CAT's. When you end up having a CAT, it is not a pleasant experience.

One last question. What percentage in the quarter was buyer fee versus the seller side of the transaction?

We have only disclosed that the buyer fees in North America are more than half. That is consistent this quarter.

Thank you.

Next we'll go to Bill Armstrong, from CL King & Associates

Good morning, guys, I was wondering if you could break out the revenue from Brazil and Germany since those are new markets for you for this quarter?

I don't know if we will break them out by country. They are less than $5 million during the quarter.

Less than $5 million combined?

Yes, combined. All international excluding Canada and the UK.

Okay. Getting back to an earlier question as far as the returns that these Sandy cars bring. Earlier this morning LKQ said they were not buying them because they weren't worth much because of the mechanical and the electronic parts get fried in these saltwater catastrophe's and basically they don't have that much parts value. And also insurance auto auctions are saying they are relatively high value so we are trying to reconcile those two perspectives.

I would say for the most part you are going to have an older vehicle that gets flooded. You realize that. It is not every car. For the most part these cars are out of their price range. These are vehicles that are going to be highly desired by exporters so the international community bids heavily on these vehicles. Yeah, I can't really comment on their statement, Bill, but I can tell you what we are seeing. This is stuff that is probably outside of the majority of them are outside the demand for the dismantle or buyer. There are some that the dismantle -ers will buy in that range. I would say the majority are outside of that range.

I want to add in addition to Jay's comments. We did have an uplift in international activity for the quarter. 25% of the volume and over 30% of the value of everything sold went to buyers registered outside of the country.

Is it your understanding then that maybe higher than usual percentage of those cars that are going to the international buyers may be are being repaired and put on the road in those other countries?

My guess would be they will definitely repair them. You are talking late model. Older stuff it is probably going to be parted out. A lot of these vehicles are repairable. There is no question about that.

Okay. Thank you.

I will add that we are selling them on salvage titles, and they will be branded. There is no question they have been damaged. You know to think that they are not reparable would be wrong. Many of them are repairable.

Thank you.

(Operator Instructions). Our next question from Gary Prestopino, from Barrington Research.

Good morning. Jay, could you possibly size the markets in Brazil in terms of units on an annual basis?

Yeah, well first of all, somewhere between 100,000 and 200,000 vehicles. Second, I would say the majority of Brazil markets is Sau Paulo. Third, it is a monster market in terms of growth. That was the reason for us going down there. It is a high growth market. You are seeing an emerging middle class that are buying vehicles. The average selling price of vehicles down in Brazil is very, very high. They have some pretty aggressive import duty laws that are in effect. The vehicles that are in Brazil are vehicles that when they are sold, they are selling for more than they would in the US. Those are really the three factors that got us excited. As Will said, it takes us a few years to get into a market, to get the profits in place, like it did in the UK. So, it is not the largest market right now but it is a high growth market. It will become a very large market in the future.

What about Germany?

Germany is a very mature market. It is the opposite. Not high growth market but it has 600,00 to 700,000, somewhere in that range, total loss vehicles in that market. That gets our attention. I will put it that way.

My understanding is they don't pull the cars in Germany. That is why you have a couple of online auctioneers working this market, is that correct?

Yes, we are one of them. Our model does that. What we will be doing in that market, we will continue to use our product and innovate in that market with that product. What we will do is test that market to see if there is a desire to not lead the vehicle with the insured like we do in Australia, the US, Canada, South Africa and Brazil. These are markets where they are not pushing the vehicle to the insured. In Germany you end up being told this is the value of the car now and before the wreck, and they pay the difference and let you keep the car and assist you through disposing of it. Is there a desire to strip that away completely and allow us to liquidate the vehicle and just pay the insured directly and then they don't have to deal with the buyer of the vehicle and disposing of it, etcetera.

In terms of the mobile App that you have got out there and you are talking about some of the up take on that. Is there any way to delineate between existing members or auction users versus new? Are you bringing in new participants through the mobile App or is it a shift between using a laptop or desktop to do the auction versus the mobile application?

Let me gather that data for the next quarterly call. When we have the next earnings release I will comment on a full quarter of mobile activity and talk about the impact of new members and give you some color on that. I don't have that in front of me. That would be good points to bring up in the next call.

Thank you.

Next question from Craig Kennison, from Robert W Baird.

Thank you for taking my questions. Jay, with respect to Brazil and Germany, what sort of insurance relationships did you inherit when you moved there and to what extent are you able to add to those relationships as you grow?

Well, with respect to Germany and Brazil, those acquisitions got us into the marketplace and got us in with different from each markets. In Brazil, I would say, we know everybody. We ended up making such a large acquisition in the market. We know the insurance players in that market. In Germany that is not the case but we are working to make that the case. We got into that market through the acquisition of WOM, we got a number of clients and contacts and we are working further to get to know everybody in the marketplace. In one, we are just introducing in Brazil we are introducing platform our technology, our auction, everything Will mentioned. All those points that they want. In Brazil we are talking about a real change in the way the marketplace would operate and so we will introduce that at some point to see if there is a demand for our services in that market.

That is helpful. As a follow-up would you prioritize on your international growth plans getting more density in Brazil and Germany or opening up new footholds in other countries?

Well, what I would like to see first is our technology implemented. Before over drive comes to an end in 18 months we will be implementing our operating systems and things we have talked about. I would like to get that done and like to get the countries we are doing business in converted and then we can look at further expansion. We may make a little further expansion internationally. I don't want to make you think we wouldn't do that but we don't want to get really spread out into another ten countries, as an example, until we have the existing company implemented with our tech.

Thanks, and finally, Will, could you comment on your expectations for CapEx this year?

There is so much uncertainty that surrounds our CapEx spin. We have looked at yards in Los Angeles and southern California for years and years. We haven't been able to find one. If we did find one we would spend $25 million to obtain that. There is no way to predict that. It is difficult for us because of the uncertainty and nature of these negotiations to determine when we will spend money.

Okay. Thank you.

That concludes the question and answer session. I would like to turn the conference back over to Mr. Adair for any additional or closing remarks.

Thanks, Melissa. Great questions. Appreciate you coming to the call. We look forward to reporting the following quarter. We will get some information on mobile bidding for that call and vehicles sold to new members. Thank you for attending the call. We appreciate it.

That concludes the conference for today. Thank you for your participation. You may now disconnect.