Copart Inc (CPRT) 2014 Q1 法說會逐字稿

Good day everyone and welcome to the Copart, Incorporated Q1 fiscal 2014 earnings call. Just a reminder, today's conference 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, Debbie. Good morning everyone, and welcome to the first quarter conference call for Copart. Before I start, I will turn it over to Will Franklin, our CFO, for Safe Harbor statement and then we will go ahead and give you an update on operations and some G&A and other factors before Q&A. Will?

Thank you, Jay, and good morning everyone. 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 risks and uncertainties that could cause the 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 or comments.

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 turn the call back to you, Jay, for initial comments on our first quarter's results.

Thank you, Will. Good morning, again. As we talked about in the fourth quarter of the year, Copart completed the acquisition of Quad City's Salvage Auctions, QCSA, and had our first full quarter in the first quarter. I want to jump into some of the increases that you have seen in both G&A expense and in revenue and operating costs, so can get some clarity about where we think we will be in the second, third, and fourth quarter of the year.

Let's look at G&A. We finished Q1 with $38.5 million in G&A expense as opposed to $27.3 million for the same quarter a year ago. That's an increase of $11.2 million. That $11.2 million is basically divided into three buckets. International is up $1.7 million, and that is associated with our expansion in the last year into Spain, Germany, Dubai, and Brazil. That expense will be ongoing as we develop those markets further and grow further in those markets as part of our strategy for growth.

As we look at the next bucket, let's look at information technology. On the IT side, Copart had an increase in the quarter of $4.7 million. This is associated with our move -- our final move out of California. As we talked about in 2011, we began a project called Overdrive. The whole concept was about really transforming our Company both from an operational, from a services level, moving out of California to Texas, and upgrading our operating and computer systems.

That Project Overdrive will come to completion in July of 2014 and with it comes a brand new website, with it comes a mobile application, and we are continuing to work on a new operating system that will run the Company. That has been delayed.

We are currently really have two things that are going on. We have got new systems. Let's use our website as an example. We're running the old website and we have the new website both up and running. We are carrying duplicate systems in many cases, and eventually when we finish that transition, we will be down to one system for the web, one system for mobile, one system for operating the Company, and that will eliminate costs.

The other big factor that we have is the move out of California. So in this last quarter, we started transitioning folks from California into Dallas, and by the second quarter, which ends a January 31, 2014, we will have that completed. There will be no further technology employees in California. They will all be based in Dallas, Texas, and so there are a lot of expenses associated with severance and moving, et cetera, in the quarter.

Will will give you color on how many of those are nonrecurring, what amount of those, and quantifying the nonrecurring nature of those expenses. I just want you to know that $4.7 million, the vast majority of that is from a standpoint of either the move or from a transition, will not exist in the future. That's expense that we expect to have eliminated when we finish this transition process.

On the QCSA front, that's the third bucket, we had G&A of $4.6 million. The majority of this will be eliminated as we start the integration, so when we purchased QCSA, we committed to our customers that we would not begin an integration for six months.

In the second quarter, we will be implementing the integration of the Company, and so the vast majority of that $4.6 million will be eliminated as we integrate the Company. There are also one time costs that are in there that Will will talk about, as well. That integration, to give you further color, we talked about it last quarter, but that integration will begin in Q2. It will continue into Q3 and should be finished by the end of Q3, but there will be some costs that run into Q4.

But we are very confident at this point that there will be no further integration of QCSA in fiscal 2015, so from August 2014 on will be done with the integration of QCSA and there will be no more costs associated with moving personnel out of California when we look to the new fiscal year, as well.

Let's look operationally. Inventories continue to be up. Inventory was up 20% again in the quarter even with the increase, $41 million in revenues. Revenues for the quarter finished at $279.9 million. Of the $41 million, $17.2 million of that was revenue associated with QCSA. There was literally no margin brought down to the bottom line on that $17.2 million.

The fact that we have not integrated any of those facilities yet means we are literally filling a car 100 miles past one of our own locations so that we can keep everything that is QCSA on its own, everything that is Copart on its own. Once we integrate the companies, that will cease to be the case so those vehicles will be going to facilities that are maybe five miles away from the car instead of 100 miles away. So you are going to see, as we talked about on the G&A front, a bunch of savings.

You'll see the same savings on the operational front as we eliminate towing expense and other costs that we have associated with facilities. Best color I can give you on that is we would accept similar margins. These are going to be incremental vehicles flowing through to our facility so should be similar margins once it is integrated to Copart as we have seen with Copart on existing business.

The rest I will leave for Q&A. I did want to mention that we acquired one auction facility in Montreal, Canada recently. We now have five locations in Canada, and with that, I will turn it over to Will Franklin for financial review and then we will open it up for question and answer.

Thank you, Jay. As you can see, total revenue grew by $41 million. Purchase car revenue grew by $9.8 million. Sustain and QCSA acquisitions, both of which closed in our fourth quarter of last year, contributed $6.4 million to that growth.

Purchased car revenue in the UK and the US grew by $2.1 million and $1.3 million respectively. The increases resulted primarily from the growth in our direct purchase program. In this program, we purchased cars primarily from the general public and resell them for our own account.

Service revenue increased by $31.2 million. The increase resulted from growth in our international operations, which included acquisitions last year in Germany, Spain, the United Arab Emirates, and Brazil. These totaled approximately $4.1 million, growth in the UK of approximately $500,000, our QCSA acquisition of $12.2 million, and growth in Copart US of $14.4 million. The growth in Copart US came primarily from increased volume resulting from growth in both market share and overall market size as we have seen an increase in salvage frequency.

In the US, volume grew by almost 7% as we saw increases from both our insurance our non-insurance suppliers. Non-insurance car volume represented approximately 20% of our total Copart US volume. In the UK, total volume grew by approximately 10% and resulted primarily from market share gains.

The yard operations expenses were up $27.9 million. The growth came as a result of our international expansion, the QCSA acquisition, and its associated integration cost, which totaled approximately $9.1 million, the growth in Copart US volume, and the growth in Copart US inventory. Copart US inventory was up 20% on a year-over-year basis.

Included in the yard operation expenses for the quarter are approximately $800,000 in severance and lease termination and relocation costs. These costs will continue into our second and third quarters of this fiscal year.

General and administrative costs grew by $11.2 million over the same quarter last year. The increase was due primarily to, as Jay mentioned, the additional cost tied to our international expansion which totaled $1.9 million and will continue. A $4.6 million increase associated with the QCSA acquisition, of which $1.1 million was lease and employment termination costs. These restructuring costs will continue into our second and third quarters.

We expect the QCSA general and administrative cost to be approximately $1.5 million per quarter when fully rationalized, and additional spend of technology of approximately $4.7 million, of which $1.5 million was tied to relocation of our technology group from California to Texas. These costs will also continue into our second and third quarters.

Also included in the $4.7 million increase are an estimated $1.5 million in transitional or duplicative costs associated with SAP rollout and the outsourcing of our technology infrastructure and level one support. These costs will continue into next fiscal year.

In total, we incurred approximately $2.9 million of severance, lease, and relocation costs that are reflected in our G&A. We ended the quarter with over $77 million in cash. We expended $21.6 million for capital assets, capitalized software development costs, and the buyout of one lease. 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 will turn the call back over to you, Debbie, for the Q&A session.

(Operator Instructions)

Robert Labick, CJS Securities.

Good morning. Congratulations on a strong sales quarter. I wanted to start with sales. Both this quarter and last, you discussed that total inventories are up about 20%. And last quarter, we talked a little bit about the apples-to-apples inventory growth as part of it and then also some cars staying on the yards a little bit longer due to processing time from the insurance company side. Can you give us a sense of the organic or apples-to-apples inventory growth in the quarter and how is the processing time? Is it normalizing yet? Where does that stand? Do you expect that excess inventory to flow through at any point? How should we think about that?

As we said on the last quarter, we felt about half of it was associated with improvements in inventory and half of it was associated with the cycle times on those vehicles. I don't think there is an inherent trend and cycle times are just getting longer and longer. There are some reasons why some of those vehicles hadn't moved based on the supply, where they came from, and I expect those vehicles will start moving in the quarter that we are in and subsequent quarters, Q3 and Q4. If we want to think about real inventory growth, it is probably closer to the 10% number.

Okay. Great. Well, I mean that is still obviously a fantastic number. The primary drivers, I think you said were both share gains and then the industry itself growing. Is there anything else behind that?

I think it is important understand the 20% number. We got all the costs associated with that inventory build. When that number does become more indicative of our growth, more towards the 10%, we're going to have all the revenue associated without the expense when we sell those vehicles off. That will be the improvement.

To your second point, Bob, it really is just that it's an environment where the market is. We're seeing some market share gain and we are seeing some improvement in the overall market. Vehicles are older today than they were five years ago. New car sales have been down for the last five years and now starting to trend up. But all those factors, as we have talked about back in 2009, if you recall, in some of those conversations back in 2009 after the 2008 crash of the market, when we talked about in 2009, if vehicle sales stayed at these low ratios, which they did, that we would see vehicles aging, which they have and then we would see vehicles becoming more probable total losses which is what we're seeing today. So the overall market, we believe, is just expanding.

Okay. Great. And then on the QCSA side, the revenues were strong in the quarter, certainly versus I guess what we were looking for there, and I know you're going to begin the transitioning going forward. Can you talk a little bit about some of the best practices that will be transferred between Copart and QCSA, you know, things you have learned from them and things you can impart on some of the yards you might keep of theirs if they are in the right places?

Sure. Well, we're not going to be breaking out QCSA in every quarter, just so you know. The integration will start this quarter and then into Q3 and we will just be talking about revenue. You can see this is $17.2 million. You have got a real run rate of the revenue so that you have got that visibility. We won't be breaking that out in subsequent quarters, we'll be talking about the Company as a whole as we integrate.

The one I talked about on the call was towing. Another one would just be all the duplicate facility expenses. They were running over 20 facilities that are right next door to our facilities, or I shouldn't say next door but in the same markets as our so we may be driving right past one of our facilities to go to their facilities. That is the towing side. The other side is that you have got all the benefit of not having that facility expense.

There is that component. We have learned from both sides. They had some technology functions that we have now integrated into our Company and will be launching at the integration on our website for our sellers so there has been improvements there. There has been some improvements in just the way that they interact with the sellers. It has been new from some of the ways than we have done it. We have implemented some of those and then we have got a number of things that we do from a best class or best practices standpoint. We have got better cycle times and more efficient on the tows. We've got a much larger buyer base by a much bigger factor. We will expect higher returns on those vehicles as they get integrated.

It is just a number of areas where we have seen benefit on both sides and we have been able to integrate those benefits on Copart when they have got something that they do better, we have taken advantage of that. So like I said, the technology piece. Really happy about it. I think, I know we're going to be very pleased as we get into Q3. Q2 is still going to have a lot of cost in it but you will start to see some of these benefits coming in and Q3 and Q4 are going to look really good compared, once we have got all this integration completed.

Great. Thanks very much.

John Lovallo, Bank of America Merrill Lynch.

The first question is just a point of clarification in terms of the revenue, I'm sorry, the inventory build. Are you guys seeing more pressure from -- are you guys more pressure from insurance companies to pick up vehicles more quickly to save them cost at the impound yard?

That has always been the case. We tease because 20 years ago, it was the standard was four-day pick up and today they want 24-hour pick up. Now they push for same-day pickup. We are always seeing push towards that. We have been able to improve year after year on cycle time and I suspect there is a point where you can't improve anymore, you can't hit zero. At some point, we even will stop seeing that improvement but with technology, it's allowed us to improve even further. We have got some tools that we use in our technology front that allows us to pick up vehicles in hours as opposed to next day. We are always going to see a need for that because yes, the impound yard is a big expense.

Okay. That's very helpful. On the pricing front, if we do see a pullback in used vehicle prices, is there an opportunity to potentially raise auction fee prices to keep the fee revenue flat, if you will?

Yes. We do not talk about pricing on calls, John.

Okay. Fair enough. If I could end with one other. In the past, you guys have clearly repurchased a lot of your shares. There's been a little bit of a lull partly due to the REIT situation, I would imagine, and then maybe QCSA, but going forward, do you see yourself going back into the market to repurchase a fair number of shares?

We don't talk about share repurchase on calls either. (laughter) You are zero for two there, buddy. (laughter) But no, we don't talk about share repurchase. We, historically, you can see where we have bought, we do have an authorization to buy plenty of stock and we have had a history of doing it, but as I've said on calls before, we tend not to lay our play-book out on when we think we should be buying stock back.

Okay. Thanks very much, guys.

Ryan Brinkman, JPMorgan.

I understand you don't talk about share repurchases. Perhaps I could try to approach it from a different angle. How do you currently feel about your financial leverage, which you know, has been declining as you continue to make contractual payments on your debt and your earnings expand?

We have got less debt than we had a couple of years ago. Again, we just don't get into those types of discussions on a conference call because it is not a CEO decision. That's a board decision. When we get into how much debt we think we should have, we talk about that at the board level and then we make a release and let everyone know what we are thinking and what we are doing.

Okay. Great. Thanks. Then could you maybe just give us an update on your international operations outside of the United Kingdom? How have some of your recent acquisitions been tracking relative to original expectation, for example in Brazil or the United Arab Emirates?

We are really happy with them. There's a lot of opportunity in those markets and we want to move quickly but you don't want to move too quickly or get too aggressive, so it's one of those things where we are integrating our process, our procedure, and our systems, and it feels very similar to the UK. We came to the UK, pickup times were triple what they are today. Returns were 30% if not more than -- less than what they are today, and so we see those markets as very similar to the UK and the potential in the opportunity being very similar to what we were able to do in the UK. We are happy about what is going on internationally. It is good stuff.

I see. And so is your intention to use these international acquisitions to form kind of a beach head in some of these markets after which you would then expand organically or do you see yourself continuing to make multiple acquisitions in the same international market or aren't there really people to acquire in some of these?

In some of the markets, there is no one to acquire, that's fair enough. And then in other markets, there are still acquisitions to be made and we would be open to that.

Okay, then last question. Just some more help. At what time do you expect the QSA margins to be up to the Copart levels and what are the steps that remain to get there? Thanks.

Yes, fourth quarter, we're going to be integrating second and third. Margin should be up to par fourth quarter, and then as I said on the call, there will be some carryover from expenses in the third quarter that could go into the fourth quarter, but if you take that nonrecurring factor out, we will be there in the fourth. Come first quarter of the year, there shouldn't be any carryover expenses.

Very helpful. Thank you.

Bret Jordan, BB&T Capital Markets.

A couple quick questions. I guess we look at QCSA and sort of how in the future when we have adjusted for the dip in the overhead, and the buckets, could you give us some color on how the gross margin profile of the charity or toys business compares to the core insurance category? Was that diluted to the overall mix?

Yes. Sure. I won't give you the actual numbers but toys is better than salvage because they tend to be higher sale price, higher margin units, charity, or less than insurance. If you think about the profitability of segments, if you will, or supply in our business, at the top of the food chain would be rental cars, dealer cars, non-damaged stuff. Then you would move down into damaged vehicles. Then you would move down into charity vehicles which typically are not damaged but they have really low valuations in terms of profitability per unit.

Okay. And then a question on the market share comments. I guess trying to figure out what real inventory growth is versus share growth versus the underlying, the slowdown in the processing. Where do you see the share coming from, and I guess what do you see being the driver of market share shifts right now in the market?

Well, there's been a consolidation in the market in the last year. Quite a few of the large suppliers, large insurance companies have made a decision to go with two vendors or three vendors and eliminate doing business with 17 vendors, as an example.

So this is the outcome of the RFP process we saw a year, 18 months ago.

Say that again?

This is the result of the RFPs that we were seeing 12 or 18 months ago.

Sure. And we are always looking at RFPs. I mean that's pretty regular but there was a pretty major shift in the last year that pushed a lot of business towards two or three suppliers or auctions and eliminated -- where they eliminated doing business with some of the smaller players that are out there. The other side is just as we said, the markets -- the industry is expanding. It is getting bigger.

Right. And I have one question, I guess on the QCSA. Is the charity volume going through vehicle revenues or is that going through service revenues?

Both. It goes to both.

Okay. And then one last question. Your next Board meeting, is that the mid-December? I guess I was reading the proxy. It looks you may be extending your $1 a year contract. Is the next meeting the 16th?

For the Board? No. The shareholder meeting is, yes, the 16th.

What is the next Board meeting?

Next Board meeting is next week.

Okay. Thank you.

Gary Prestopino, Barrington Research.

Will, did you give a total volume number for the year -- for the quarter, year over year, that you were up? I don't recall. Do you ever give that number?

No. I didn't. I gave the US and I gave the UK separately because -- (multiple speakers)

A lot of questions have been answered, but just can you maybe make some comments on how you are doing in the dealer and the public markets? Obviously, adding to QCSA, you have got a lot more salvage vehicles in the mix but yet you are still doing about 20% of non-salvage so that is obviously growing at a pretty good clip. Maybe could talk a little bit about that.

You are spot on. That is exactly what has happened and they have continued to be able to improve that part of the business and I anticipate that will be the case. The non-insurance business is a very large segment for us. We handle a very small piece of that. We have got a really good sales team that are working that now. That business has existed now, this is its sixth year that we have had a dealer division and a direct division. I expect that they will continue to do well for years ahead. I don't see that coming to maturity for a while.

Could you maybe share what the volume growth is there, year over year? Is that too intrusive?

Yes. We don't break out volume, Gary, but we do break out the percentage of the business. As you said, it is about 20%.

Okay. How many dealers are you dealing directly with now? Can you tell us that?

Thousands. I don't know the exact number. It's thousands of dealers.

Okay. Thanks.

Craig Kennison, Robert W Baird.

Just to follow on to Gary's question on the non-insurance side, Jay, I would think that your platform would be particularly strong in the buy here/pay here market. Do you have a specific initiative to get after opportunities there?

We are. I tend not to like to talk about all those segments because again, we have got a lot of competition out there. We work all those angles, so rest assured in that. I won't get into each market out there like buy here/pay here that we go after but we are involved in all of those markets as potential supply for vehicles.

Thanks, and then I know you are investing in a new website. To what extent do you think that is a game changer on the consumer side where you have maybe had a lot of hits on your website but maybe it's not as intuitive as you would like it to be?

It's a big deal. I don't have the numbers in front of me but I did talk about them on the last quarter. But it is double digit growth year over year and people attending auctions, auction attendance, it's double digit growth in new registration. It's a big deal. The old site, which is currently the existing site, you have to sign up, you have to register to join an auction, and the new site, which is currently beta, and will be replacing the old site in the coming months once we have worked out everything that we want to make sure that it goes out completely bug free and stronger than the existing site.

In the months ahead as we launch that, you don't have to register to be a -- attend an auction. You can jump in, watch an auction. And so you learn much more about our business when you see the vehicles sell. We sold a Ferrari, an F50 Ferrari, last -- what two weeks ago, something like that, that sold for $455,000. We put a video of it up on YouTube that got over 100,000 views. You can just type in Copart F50 Ferrari. You can find it. It's really easy to find, and you can watch the auction. We posted the auction up on YouTube as well.

So that kind of stuff where the visibility of what we do and then being able to come into our site and actually watch auctions and not have to register. That registration process for people can be a pretty big barrier and we have eliminated that. That is just one example in the new site. If you go back a year ago, we did not have auction access on our mobile site. Today, you can watch an auction from your phone. Over 10% of our auctions are attended via mobile. I know those are some big numbers and you think about what we are selling every day, how many people are attending. Over 10% of the attendance is coming in through the mobile platform as opposed to the web. Those are just improvements that we think are going to be a big deal going forward, Craig.

Thank you, and then final question just on the international strategy. It is my understanding your business really tends to flourish once you have achieved enough scale like in the US and the UK, but on your more recent international investments, you have got let's say sub-scale investments in Germany, Brazil, Spain, Dubai, Canada. Why spread it out like that instead of consolidating and really getting that scale that tends to drive at better economics?

Well, we have got the teams to do it. We have been investing in bringing people on over the last four years so that we would have the personnel to expand into multiple markets. We have got the cost associated with it. There is no question about it, but we look at that as short-term pain, long-term gain. We will have some of that expense that we are carrying while we are in markets without enough scale, and I think your point is well taken. We will then start to build scale in those markets and instead of having one market come on and then go to another, we will have four markets coming on in that we will expand from there into multiple markets. We just feel like it is in the long term a much better strategy to getting across the globe.

Great. Thank you, Jay.

(Operator Instructions)

Bill Armstrong, CL King & Associates.

Most of mine have been answered but can you remind me, do you disclose same store sales anymore?

No, we didn't but same store sales are up 7%.

Oh, 7%. Okay.

In North America, yes.

That is just North America, not the UK?

That is Copart US.

Got it. Thanks.

Gentlemen, with that there are no other questions in queue.

All right. Thank you, Debbie. Again, thank you everyone for attending the call. Would look forward to talking to you next quarter when we report on the second quarter for Copart. Happy Thanksgiving and we will talk to you then.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day.