Copart Inc (CPRT) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the Copart, Incorporated third-quarter fiscal 2013 earnings conference call. As a reminder, today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Mr. Jay Adair, Chief Executive Officer of Copart, Incorporated. Please go ahead, sir.

Yes. Thank you. Good morning. As you can tell, I'm a little hoarse from a pretty heavy week of talking a little too much, so this morning, I'm going to turn it over to Will Franklin, who will go through his prepared remarks and then he'll turn it back over to me. I'll go through some of the stuff on our deal and then I want to point out as well, I've got Vinnie Mitz, who is our President, on the call today to answer some of the questions because as you can tell, I need to let my voice rest a little bit. So with that, I'm going to turn it over to Will. Thank you.

All right. 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 risks and uncertainties that could cause final results to differ substantially from those projected or implied by our statements and comments. The Company expressly disclaims 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 Management's discussion and analysis and the risk factors contained in our 10-Q, 10-K, and other SEC filings. With that, I'll begin to give some comments about our financial results for the quarter.

Total revenue grew by $33.5 million. Vehicle sales revenue grew by $9.7 million. About 50% of the increase came from growth in purchase car activity in North America. The balance came from changes in mix in the UK. Service revenue increased by $23.8 million. We estimate incremental Sandy volume represented $12.8 million of that increase. The balance came primarily from an increased volume from market wins and volume from growth in the overall salvage market. In North America, revenue grew by over 13% -- excuse me, volume grew by over 13%. Approximately 50% of that came from Sandy. We estimate that approximately 90% of the incremental Sandy volume was sold by the end of the quarter.

Despite the continued growth in our dealer program, total noninsurance volume declined as a percentage of total volume due to the significant growth in insurance cars from Sandy and market wins. Revenue per car was down marginally from same quarter last year, due primarily to the declining used-car pricing and commodity pricing. The impact was offset by significant growth in inventory, as we recognized tow-in revenue and titling revenue around the time of the assignment, usually 50 to 60 days before the car is sold.

In the UK, volume grew by almost 4%. We had a change in mix between cars sold on a principal basis and cars sold on agency basis due to the normal fluctuations in volume supplied by the insurance companies and due to a direct purchase program initiated in the UK this year. Purchase car volume grew from 30% to 34% of total UK volume. Both net revenue per purchase car and average service revenue per agency car remained relatively consistent with the same quarter last year.

Yard and fleet costs grew significantly due primarily to the incremental cost associated with Sandy, as the direct and indirect cost of processing the Sandy volume virtually absorbed the incremental revenue. In addition, we added the incremental cost of the international operations and we added resources to continue the growth at our dealer and direct purchase programs. Further, due to recent seller contract activity, volume was redistributed between yards in our national network, requiring additional transitional cost.

Finally, on a year-over-year basis, our North American inventory grew by almost 21%. When vehicles are added to inventory, we incur and recognize the majority of the total cost to process the car. However, the majority of the revenue is recognized in the quarter in which the car is sold.

General and administrative costs grew by $5.1 million over the same quarter last year. The increase was due primarily to additional costs tied to international expansion, which totaled $1.4 million. The additional costs associated with product and technology development, like our new mobile app and the rollout of our ERP system, which totaled $2.7 million, and increased spend on marketing and professional services. In addition, we 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 and will continue until the second quarter of 2014.

We ended the quarter with over $139 million in cash. In the quarter, we generated almost $130 million in operating cash flow. We expended $28.6 million on CapEx, including a lease buyout of $8.6 million. During the quarter, we had no open market share repurchases. We have almost 48 million shares remaining in our current repurchase authorization. That concludes my comments. I'll turn the time back over to Jay Adair. Thank you, Jay.

Thank you, Will. Also in the quarter, we announced the acquisition of QCA Holdings. QCA owned Quad Cities (sic - see press release "Quad City"), Desert View Auto Auctions, and Crashed Toys, a specialty division of the company, selling jet skis and motorcycles and specialty product of that nature. We're excited about it. The Company has 39 yards currently covering 14 states and processes well over 100,000 units a year. Their top customers are State Farm, Progressive, Farmers, Erie, Penn National -- so they've got a wide breadth of customers. And the most exciting part is their management team. The company has been around for over a decade. And has been very successful in competing against ourselves and Insurance Auto Auctions. And so this acquisition brings that whole leadership team into the Company.

John Lindle, who is the CEO of the company, said it best when we were talking to customers, that he had a choice of merging with one of the other large players or hooking up with another private equity company. And after he saw what Copart is working on, what we're doing, he said there was no question in his mind he wanted to hitch his horse to Copart. And that's really exciting for us. We're looking forward to all the things that they do and learning about that and integrating it into our Company. Some other points that I would just make about the company is that John will remain CEO of Quad Cities and we're going to be sitting down with all of our customers and finding out what they like best about Copart and what they like about best about Quad Cities in raising the bar in terms of the level of service that we bring to all of our customers. So it really is a win-win across the board on that.

We also announced, or I should say, we also acquired in the quarter -- or not in the quarter but in the recent months -- Gainesville Salvage in Georgia. And that gives us another location in the Georgia market. So I'm sure there's a ton of questions. As I said, Vinnie Mitz, our President is here and so he's going to step in and do some of the questions as well. And at this time, I'll turn it over to the operator for questions.

(Operator Instructions)

Bob Labick, CJS Securities.

Congratulations on exciting acquisition announcement.

Thank you, Bob.

Just wondering if you could maybe give us a little more history of the acquisition, how long you were talking to them, was it an auction or a negotiated deal? Why did they sell now? You talked a little bit about why to Copart but why now? And obviously we'd love to know any of the terms of the deal or how big they are and then that kind of stuff, if you would tell us that?

Sure. This is Vinnie. The deal came together very, very quickly. After some recent national RFPs, market share throughout the country had been settled and redistributed. And the owners of Quad Cities, including John, were looking what was best for their strategic future. And they were looking to team up to continue and accelerate their growth and actually were looking for a partner who would be able to help and assist in the growth of their company separate from a normal acquisition integration. And that opportunity came together very quickly once we agreed philosophically how to handle the transaction with just a matter of working out the financials so it only took probably three to four months for the whole thing to come together.

Hello Bob, this is Will. Let me add just a little color to that, too. Quad City is a serious player in our space. We compete with them all the time and we lose to them. The insurance companies use them because they like what they do so we think this is a win for us to be able to understand what they do well and incorporate that into our offerings as well.

And could you maybe give some specifics on what they do well -- better than Copart and how you can bring that to the rest of your yards?

Well that's exactly what we're doing right now. We're in a period where were going to be analyzing all their process and then we're going to be looking at what we want to incorporate so we don't plan on changing anything for the foreseeable future right now until we get all that figured out.

And Bob, this is similar to what happened in the UK. We went into the UK and we took what they did really well and what we do really well and combined to arrive at the best offering that we could provide. And that's exactly what we intend to do with QCSA.

Okay, great. And then the terms of the deal. Any additional information you'll share with us on that?

No. Not at this time. Obviously, there will be some disclosure in the 10-Q and other public filings but at this time, we will not talk about the specific terms of this deal.

Okay. Understood. Then just quickly onto the quarter, the very strong inventory build, 21%, can you maybe give us some color in terms of how much of that's related to you had the sell-out Sandy cars, so you were building inventory, how much was the easy comp from winter and how much was really growth that you're seeing and where we should expect that growth on a go-forward basis?

Well, it's interesting, that's a good question. So some of it is Sandy obviously. We've got about 10% of Sandy cars remaining in inventory. The majority of that comes from market wins so we've been successful in the last 12, 18 months. And expanding our presence in the market. But we're also seeing growth in the market in an overall basis. So 2009, '10 and '11 we basically had headwinds in every element of our market measurement. So when we look at our market, and what drives it, we look at basically four different elements. We look at the number of cars on the road. We look at how often are those cars involved in accidents? Of those cars involved in accidents, how often are they salvaged as opposed to repaired? And then finally, we started looking after 2009, at unemployment, because unemployment drove uninsured motorists. So while uninsured motorists may be involved in an accident, we didn't necessarily get the car because they didn't know about Copart or salvage pools. So for three years, every one of those drivers have been negative. And now they're starting to turn. And so we're seeing the best of that and you're seeing that reflected in our inventory.

Okay. Great. And then one last one and I'll jump out, in terms of the increased yard and fleet, you mentioned this but I just wanted to check, you said roughly $12 million, $13 million in sales from Sandy and roughly that much in incremental Sandy expense? Is that accurate? And then also can you quantify maybe the incremental yard expense from that 21% inventory build as you said because you're getting all the towing expenses upfront in this quarter, so we can get a normalized yard expense on a go-forward basis?

It makes it very difficult to get a normalized yard expense on a go-forward basis. Historically, we used to put all of our costs on the balance sheet and then release them in the same period in which we recognized all the revenue. And that's no longer the case. So it's very difficult to predict our yard and fleet expense until you are able to predict our growth and changes in inventory. So getting back to your specific question, from Sandy we said last time that we didn't expect any more losses from Sandy. And we think that that's what we saw in this quarter. So of the roughly $13 million in Sandy sales, almost none of that came through as a benefit. It was all absorbed by direct and indirect cost and we'll have some of that cost continue into our fourth quarter. So we still had people displaced, we still have properties that we're leasing and some of that's going to flow through. In terms of revenue, the impact of a changing inventory, we'll just leave it with the comments we've already made in that we recognize the majority of our expenses when we pick up the car and the majority of our revenue when we sell it. And they can be one or two quarters apart.

Okay. Great. Very helpful. Thanks so much.

Scott Stember, Sidoti & Company.

Can you maybe talk about with the Nationwide contract, I know that as of last quarter, we were -- the second quarter on a full run rate basis, are we on a full run rate basis apples-to-apples going forward from here with that contract?

Yes. This is Vinnie. We are absolutely fully integrated with Nationwide. And that is apples-to-apples run rate now.

Okay. And just shooting over to the acquisition you guys announced last night, the Quad City, could you maybe talk about how they process their business? Is it more of a purchase versus an agency type of model? And how much of it is a [fip] or percentage deal versus not or fixed -- maybe just talk about some of the details there?

Sure. Sure. They have different divisions as does Copart. They have a charity division which strictly processes charity cars with sales to the public. That's the brand Desert View Auto Auctions. They do some purchase cars, similar to Copart direct. And the vast majority of their insurance work is on the agency business, exactly the same as Copart. And of course, the specialty division are all individually negotiated contracts but also all on agency.

Okay. And last question, can you maybe just give an update on how things are going down in Brazil and some of the other areas that you entered over the last couple of quarters?

Yes. All the investments we've made internationally are considered strategic investments for the future. We are in the process of consolidating the operations into the Copart model, implementing our operational procedures, and looking forward to growth. Right now there obviously is a cost drag on them as we go through that process but the investment in the future is hopeful. We are extremely excited about it. We see a great growth opportunity in the international markets. And benefit is yet to come, obviously.

Great. That's all I had. Thank you.

Bret Jordan, BB&T Capital Markets.

A couple quick questions. As we look at the acquisition and the productivity of these sites compared to your core business, could you give us a feeling what the volume is being done and ideally, by line, between Quad City and Crashed Toys and the Desert View? Just so we can try to figure out how to model this in versus your existing business?

Sure. The charity business is about 60,000 automobiles. Crashed Toys represents a minority business, less than 5,000. And the rest is the insurance business under Quad Cities.

Okay. And as you look at this, is it -- incremental G&A is going to be built in, it sounds like you're keeping a lot of the existing management team, given their skills, is this -- if you look at the impact on your aggregate margins, do you see a lot of near-term overhead reductions? Or is it going to run as a stand-alone business side-to-side with Copart?

No. At this point it is stand-alone. So there's no leverage there. And as you can tell, they run fewer cars through more facilities. So it's not as efficient as ours so it will have an impact on our overall margin.

Okay. And then a question on the core business and the inventory growth, year-over-year, up 21%, how does that compare to prior quarters? Is that an acceleration of the inventory growth? And if you could carve out Sandy versus core inventory growth in that description?

Even excluding Sandy, that's better growth than we have seen in maybe 12 or 16 quarters.

Okay.

So we're very happy with it.

On a [well over] basis, if were to go back into Q1 and Q2, what would the growth rates have been there? Are we accelerating significantly out of the first half?

Yes, so --

It seems like we're on a cyclical recovery here -- is it a ramping cyclical recovery?

No I don't think so. We've hit a run rate that I don't anticipate to grow any more. If you exclude Sandy, we are about 16% up in our inventory. And I wouldn't expect that to accelerate.

Okay. Great.

It's a really big number. Let's call it what it is. It's a really big number so to expect that to go to the 20% is unreasonable.

Okay. Great. I appreciate it. Thank you.

Bill Armstrong, CL King and Associates.

Just to clarify, then, three months ago you said you didn't expect any further losses from the Sandy vehicles and it sounds like that was in fact the case, then? That you were roughly breakeven on those vehicles in Q3?

Yes, Bill. That's exactly right.

Okay.

Go ahead.

No, no, go ahead.

No I was just going to reiterate, we modeled this out and were fairly close in our expectations, and in fact we're about breakeven this quarter.

Okay. Could you discuss pricing trends, vehicle pricing trends, during the quarter and maybe subsequent to the quarter, excluding Sandy? I'm not sure if you're able to break that out but overall pricing trends in the salvage lane?

It's real simple. Our pricing is linked to commodity pricing and used-car pricing so if you see those -- movement in those indexes, you can see what the impact will have on our pricing. But we had just very little change over the last year.

Very little change in pricing or in the trend?

Very little change in pricing.

Got it.

The elements that it affected are commodity pricing, used-car pricing, like we've already talked about it, the other element is product mix so to the extent we sell more noninsurance cars then we have an increase in revenue per car, to the extent we process more charity cars then we have detrimental impact on our overall average revenue. And it's hard to predict all of those elements.

Right. What was the noninsurance percentage this quarter?

It was under 20%.

Is that -- that sounds like it's less than last year or --?

It is. It is. But we didn't have Sandy last year. And we didn't have the market wins that we had on the insurance side.

Right. Right. Okay. Okay, thanks. That's all I had.

(Operator Instructions)

Craig Kennison, Robert W. Baird.

Regarding the inventory build, how much of that non-Sandy growth -- you said it was 16% -- is a function of deferred activity because you were so busy processing Sandy cars?

That's -- I wouldn't even know how to measure that. I don't think any. Zero.

Okay.

I can't think of anything that we didn't sell because of Sandy activity, because those are different processes. We --

Okay, you didn't --

We have auctions going on in Florida when there's a hurricane going on in Florida.

Yes. With the -- part of the power of [BB2], our sales platform, is it doesn't impede volume enhancements. As soon as we can plug volume into it, we can sell instantaneously. It doesn't rely on a physical sale and a bunch of logistics to get cars sold. So in Sandy, even though we had 16 different sub lots, we were able to sell Sandy cars every day from different sub lots in multiple sales per week. They weren't relying on buyers getting to facilities to attend sales and auctioneers and the hard-core logistics of it. So we didn't have any delay in sale because of Sandy at any other facilities nor at the Sandy locations.

Okay. Thanks. And I know these catastrophes are a money loser for the event itself, but you also often take that opportunity to follow-up with your insurance partners and maybe win bigger deals because of the service you provided during the catastrophe? Is that the case? Are you seeing any impact on the good side?

We can comment as those discussions are ongoing and absolutely, did we get a generally positive, an exceptional review actually out of our Sandy performance? Yes. As part of our recent Advisory Board, we did a full cat wrap-up on our Sandy handling. And even improvements we can make in the plan for subsequent events. And that was received with a tremendous amount of positive feedback from our clients. So building and improving that plan and working with the industry has been a tremendous benefit, yes.

And then regarding your capital structure, I know you keep a solid balance sheet with a lot of cash, has the philosophy on capital structure changed at all? And would you consider introducing more leverage to the model if the share price, for example, were to become attractive?

Yes. Craig, we talk about capital structure all the time. But we're -- our policy is to make no comment. And when I say talk about, I'm talking about at the Executive and Board level.

Understood. And then last question, just cleaning up on the acquisition, I assume those all closed post-quarter?

That's correct.

Thank you. Thanks very much.

Gary Prestopino, Barrington Research.

Quad Cities, you talking about what they do best, what you do best, is the plan to totally put them on BB2 or are you going to allow them to maybe do a hybrid model with actual auctioneers?

Well, Gary, the good news is we don't have a plan yet. But the plan is to come up with a plan, by actually sitting down with both Management teams and both Management groups and figuring out what's going to be best for our customers. The point is they've been an attractive option in the marketplace. They've been growing as a stand-alone independent when many others haven't been. So clearly they're doing something that's attractive to the marketplace and we're certainly not going to rush into some mass integration and lose that uniqueness. There is a customer perspective here we have to take into account and really look hard at why they've been able to grow in this hyper-competitive market. So we don't know --

Do they have Internet auction capabilities right now? And what percentage of their cars were being pushed or sold over the net? Do know that?

I do not have that number handy but yes, they do have that ability.

Okay. All right. Good. It's a great acquisition for you guys. And then I just want to talk about just the way I look at it, just the erosion in the gross margin overall, almost similar to Q2. Is a lot of that attributed to those Sandy cars that basically went out with no gross margins in the sales? Or is that really attributed to the fact that you've changed your accounting somewhat and since you are building inventory, you're expensing that all upfront and then we should see a better gross margin in Q4 and maybe into Q1 of next year?

Yes, well if you ask me the size of the impact, the different impacts, I would say that Sandy had the largest impact, the next would be the increase in our purchase car revenue, so that's why it's hard to predict our gross margin percentage because whenever we increase our purchase car revenue, it's going to have a detrimental impact on that. And then third would be, like we described is just the change in our inventory volumes.

Okay. Thanks, Will.

Bret Jordan, BB&T Capital Markets.

Just on the last quarter conference call, you did comment that you were reevaluating this REIT prospect and can you give us an update on where that stands?

Sure. And just like the comment I gave to Craig Kennison, we talk about capital structure at the Executive Board level all the time but we just don't make any public comment unless we have a conclusion or something to share. So we have no comment.

Is that stuff ongoing or is that -- so there's no conclusion reached on that process yet?

There is no comment until we have something that we're ready to publicly announce to everyone.

Okay. Thank you.

And this concludes our question-and-answer session today. I would now like to turn the conference back over to Management for any further or closing remarks.

Okay. Thank you. Thank you for your participation in our call. We look forward to Q4 and reporting our Q4 and full fiscal-year results on our next call. Thank you very much for attending.

And this does conclude our conference for today. We thank you once again for your participation.