Copart Inc (CPRT) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to the Copart Incorporated fourth-quarter FY14 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, Tiffany. Good morning, everyone, and welcome to the fourth-quarter call for FY14. Before we get started, I'm going to turn it over to Will to do a Safe Harbor, and then he'll go ahead and give you an update on financials. I'll give you an update on the Company, and then we'll open it up for questions.

With that, it's my pleasure to introduce Will Franklin.

Thank you, Jay. Before we begin our comments, I would like to remind everyone on the call that our remarks will contain forward-looking statements, including statements concerning our views of trends in our Business. These statements are neither promises, nor guarantees, and are subject to certain risk and uncertainties that could cause the final results to differ substantially from those projected or implied by our 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 the management's discussion and analysis, and the risk factors contained in our 10-K, 10-Q and other SEC filings.

With that, I will begin with some brief comments about our financial results for the quarter. Total revenue grew by $23.8 million, or 9%.

Purchase car revenue declined by $9.3 million, which was driven primarily by reduced direct purchase activity in both the UK and North America. In addition, there were fewer cars processed for insurance companies on a principled basis in the UK.

Service revenue increased by $27.7 million, or 13%. Excluding the residual Sandy sales activity in our fourth quarter of last year, the increase would have been 14.4%. The increase resulted from growth in our international operations, which includes Germany, Spain, United Arab Emirates, and Brazil, of approximately $1.5 million; growth in the UK of $8.7 million, which was tied to market wins; and growth in North America of $17.5 million.

In North America, on a same-store sales basis, and excluding the Sandy activity, volume grew by 4.6%. In the UK, our same-store sales unit volume increased 19.3%. All growth came from market wins, and growth in the overall market. In North America, non-insurance car volume grew by 5.4%, and represented over 20% of the total volume.

Yard operation expenses increased $16.2 million. The growth was driven by increased volume, and an increase in the average cost to process each car. The growth in processing costs were driven by a general increase in sub-hauling and employee cost, including benefits; increased pass-through costs, like vehicle titling cost; and costs associated with additional services provided to the sellers. In addition, costs were impacted by increased residual QCSA integration cost, and growth in our international activity outside of the UK, as these operations are in their developmental stages, without the benefit of scale.

General and administrative costs remain relatively consistent with the same quarter last year. We expect to see a reduction in our quarterly G&A expenses on an absolute basis by the end of this fiscal year, as we rationalize costs associated with our prior technology strategy.

We ended the quarter with over $158 million in cash. We generated $55 million and $263 million in operational cash flow during the quarter and the fiscal year, respectively. During the quarter, we had capital expenditures of $18.2 million, primarily for yard expansion, technology and equipment.

Finally, 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 remarks. I'll now turn the call back over to Jay Adair, our CEO, for further comments on the quarter. Jay?

Thank you, Will. And just so everyone's aware, Will and I are in different locations today. So, when we get to the Q&A section, if you can specify who you want to answer the question, that would be great.

We started the year with the acquisition of QCSA, and Desert View Auto Auctions, and Crashed Toys, right in the fourth quarter. So, FY14, a big part of the year was integrating those three companies into Copart, and I'm happy to report that, at the end of the fiscal year, we have done that. QCSA was fully integrated into the Copart locations: Copart systems, technologies and culture, at this point.

DVAA, the Desert View Auto Auctions, we've integrated onto our systems, but it is a stand-alone business, with its own locations. It is run by Joe Mulcahy. He is -- and his team -- really are the head of the cherry division for Copart. So, their focus is to really think about how to differentiate us from a cherry perspective, handling those types of cars.

On the QCSA side, the team that was part of that company is now part of Copart. We have taken a number of things that they did to differentiate themselves from both Copart and our competitor in the marketplace, and implemented those inside of Copart. A lot of their best-of-class practices are now -- have become policy at Copart, and have become differentiators for us going forward. And we've got that team now in the leadership roles within Copart, and helping us to grow the Business. That's all real exciting stuff that occurred in the year.

That growth, plus new volume, really is the driver on the 9% revenue growth in the fourth quarter. And Will gave you some of the numbers, so there's no sense in really repeating that.

What I would specify is that you see an increase in G&A costs -- and G&A, literally for Q4 of 2013 to Q4 of 2014 are relatively flat, but they were high throughout the year. So, there's a focus going into FY15 to work on operating costs, both in the field, and to work on yard and fleet -- I'm sorry -- to work on G&A at the home office to reduce those costs.

There are some yard and fleet expenses, as Will just discussed, that are not going to be coming down. But there's other expenses that we think we can achieve some additional efficiencies on. So, there will be focus there. We're really not in a position to give estimates on what that's going to be, because it's something we're all working internally on, seeing if we can find additional efficiencies in the field.

At the home office, same sort of story. We clearly know there are some areas where we can cut some costs, so we're working on that.

If you look at the last three years, there was the move out of California; there was the technology approach. A number of these things added one-time costs to the Company, and we really don't want to get into a position of trying to call out every single quarter. The point is this: 2015 -- this fiscal year -- will be the last year where we see any kind of non-recurring, one-time expenses, both in the field and in G&A.

Additionally, we announced in the last quarter that we had changed our strategy on our technology. Net income and EPS for FY14 were substantially, and adversely, affected by $29 million in capitalized software development, an impairment that we took in the third quarter of 2014. In particular, the impairment reduced EPS by $0.15. And I mentioned this in our last call, that the impairment related to our discussion not -- or our decision, rather -- not to proceed with replacing our legacy enterprise software system with a new SAP-based system.

In our Form 10-K, we'll also be disclosing pending litigation we initiated against Sparta Consulting related to this impairment. So, let me give you a little color. We hired Sparta Consulting, which I believe is now called KPIT, to implement the new SAP system. And KPIT had originally agreed to deliver the complete SAP-based replacement for our enterprise system, with a targeted final deployment of March 1, 2013.

By September of 2013, the project was not close to completion. Over the life of the project, KPIT failed to meet key contractual milestones, and the coding consistently failed user acceptance testing.

As a result, we determined that KPIT had not delivered, and could not deliver, under its contract with Copart, and we terminated with KPIT. We also concluded that most of KPIT's work was of no value to Copart, and that the most appropriate and cost-effective option was to scrap the project.

As a result of this decision, we were required under applicable accounting rules to take a $29-million impairment charge in the third quarter of 2014. We are also currently in litigation with KPIT over its deficient performance under the contract and related misconduct.

The litigation is now pending in federal court in California, and Copart intends to fully pursue its remedies regarding KPIT's failure to provide the SAP-based system required under the contract. We will update you concerning developments in the case, as appropriate, in our future SEC filings. This is not something that we plan on discussing much more going forward, but we wanted to make you aware of this.

It goes in line with what we discussed before, that the SAP system, when we took it over and got more involved in looking at trying to have that as the replacement for our existing operating systems, that it was just not going to work. There were a lot of reasons why we didn't feel that it was the right strategy for Copart. That's where we're at on that.

We are currently working on modifying our existing systems, such that they will work internationally. The systems are great domestically. They're integrating those systems today with SAP financials, because we are removing, or replacing, the JD Edward systems with SAP. And all that's all good. We're happy with every part of that. There's nothing there I can say that isn't going the way we thought it was going to go.

But we went into this thinking that we could replace our systems with an SAP product. And the cost, and the delay, and the failure, and a number of areas there just made it the wrong strategy.

So, we've got a new system that we're working on integrating with our existing systems, and that will allow us to go international. There's going to be some delay till we get that done.

Okay, let's talk about marketing update for a bit. We launched our mobile product in FY13. In FY13, 8% of total auction attendance was through mobile. That number, by the end of FY14, jumped to 23%. So, 23% of all auction attendance now is being done on our mobile app.

Those that use the app daily represent 85% of our customers. So, it is obviously a product that's been embraced by our customers.

Again, we go back to the days of live auction, and you had to get physically to the location. Along came the Internet, and yet now you've got to have a laptop in front of you. So, with the mobile app, literally you open your phone from anywhere with a signal, and you've got access to our auctions. So, it really is about as friction-free now as it can get.

In 2014, we saw a 248% increase in inventory searches related to mobile. So, they're not just attending auctions, they're doing searches. And then we saw a 122% increase in the number of new registrations -- members actually coming on through mobile, and accessing the system. That's good news on the mobile front.

CrashedToys.com went live in the fiscal year, as well. We've got that specialty division that we brought into the Copart family a year ago. We are heavily focused now on differentiating on all toy-type product -- everything from motorcycles and boats to exotic vehicles. That is all live, and you can check it out at CrashedToys.com.

Then, finally, I would just give a couple final comments here. In July, we saw member registration topping over 1,000 per month, just for Crashed Toys alone.

And, if we compare July 2013 versus July 2014, we saw a 29% increase in total new member registration across the Copart family -- across the Copart Company. So, a real big increase this year in number of new members coming into the site, and getting those converted.

We really view our marketing team as a differentiator in the space. It's about finding customers that want to buy the product we're selling. And then it's about, once you've got those members, making sure that they can find a product that we've got for sale. Having all the right filters, and all the different ways that you can look for product, is critical. Again -- big differentiator.

And then the final point I would make is that a third of all new members that came to Copart were referred to Copart from people that already know about the Company, which is good news. It's nice that the number is that large. On the flip side of that, it was two-thirds of the new members that we signed up in the year didn't know who we were. So, again, that push to get more and more and more customers out there to become aware of us is front and center, with respect to our focus.

All right, Will's talked about the cash numbers. He talked about the debt. I'm not going to repeat all that.

With that, I'd like to open it up for questions. Tiffany?

Yes, sir. Thank you. Bob Labick, CJS Securities.

(Operator Instructions)

Good morning. Thanks for taking my questions.

Hi, Bob.

Jay, I know you just said you don't want to get into the weeds in terms of some of the expenses, and helping us down there, in terms of [$]500,000 relocation, this or that. But, I was hoping you could take a step back and just give us a sense on the gross margin on the service side, even from a macro basis.

Over the course of the year, you've had QCSA, and you've been pulling out costs. But, consistently it's been higher than we've modeled.

I'm just try to get a good sense of where the operating leverage lies on a go-forward basis. I know blending in international makes it harder, but if you could take a step back and just talk about operating leverage on a go-forward basis as we see sales growth?

Yes, sure. I would just throw out there to you, Bob, that it's not going to be back at the same operating margin that it was prior. That's not just at QCSA, or it's not a QCSA thing.

It's just that the market that we're in -- we've just got increased costs. Labor costs are up, fuel costs are up. So there's a number of costs that are up across the board.

But then, some of it is the integration and putting the two companies together. We anticipate it's going to come down, and I appreciate your comments.

It's just, I don't think it's wise. Will and I discussed it this morning, we just don't think it's wise to try and lay out every single expense that we've got.

We anticipate in the next year, we're going to get the operating margin -- by the end of FY15, we're going to get our operating margin to as good as we can get it. It's not going to take more than four quarters to do that.

And we're going to get our G&A where it needs to be, and then that will be it. I don't see on the horizon another large acquisitions to put with the Company domestically.

It's going to take us about a year to get those transitions completed. Trying to single out the actual expenses is just really tough to do.

Okay, fair enough. Then, looking ahead at the US side.

Obviously, you've had some great wins in RFPs in the last couple of years -- last year, and some national account wins. What are the -- your share's pretty high -- what are the drivers for domestic growth going forward from here?

Well, it's still to push non-insurance. I mean, the Insurance market -- I would call it mature at this point. We're -- we and our competitor are handling the majority of the volume domestically, and the real growth is to push for non-insurance volume.

The other driver, I would say, is just the overall market increasing. The market really got slowed down back in 2008, 2009.

And so there's -- I would say -- fundamentally, off the top of my head, two drivers. One is, ASPs going up.

And we may see ASPs increase in the future, because I think they're -- while they're at a record high, I think they're lower, because we've got an aging fleet, and there weren't as many new cars. So, as they start to sell more new cars again, I think that's going to -- I know that's going to increase the quality of vehicle we sell, and ASPs are going to go up.

The other driver is because we haven't sold so many vehicles new, we've got an aging fleet, and we're seeing unit volumes increase. We will see, from the data that we've looked at, an increase in the number of units in the next year, two year, three year out. As vehicles get older, they just become that more likely to total.

So those are the drivers on the Insurance side. And then on the growth for Copart is non-insurance volume, which is about 20% of our Company today. And we want to, obviously, make that number larger.

Okay, great. Thanks very much.

You're welcome.

John Lovallo, Bank of America.

And this is Liz Suzuki on for John. A question on acquisitions. Are there any particular geographic markets that Copart is particularly focused on?

Domestically or internationally?

Either.

Yes, right. I would say, internationally what we're trying to do right now is finish some integration work that's got to be done with systems. And then we'll be looking at expanding into markets that we think fit our model, where we think it will be easiest to implement our model, or easiest to make acquisitions in those markets.

And then domestically, as I said, the market's pretty -- it's mature at this point. I don't think there's a lot of core business acquisitions in the salvage arena domestically. I just don't see it as we sit here today.

Okay, so most of the opportunity is international, then?

Correct.

And just a quick one on -- regarding the tax rate. 30.9% -- it was pretty low in the quarter. What was the cause of that? Should we expected to return to closer to 35% going forward?

No. It shouldn't return to 35%. It was a unique quarter, inasmuch as we had some discrete tax adjustments that reduced our rate.

But, no. It would be -- I would say -- just a little north of 34%. I would expect that. And as international becomes a more meaningful side, part of our activity, I would expect that to decline.

Great. Thank you very much.

Ryan Brinkman, JPMorgan.

Hi. This is [Sami Cure] on behalf of Ryan. I just wanted to get an update on the inventories first. I didn't really hear anything in terms of inventories.

How much were they up year over year on a same-store basis in North America? Can you just help us with that?

Sure. Inventories are up a little over 5% on a same-store basis.

Great. So is there any portion -- just on the [cranes] on processing internet tax contributing to any of the higher inventory you are seeing?

Also, what trends did you see in processing time? Sequentially, last quarter you mentioned that processing times were coming down. Is that still on [to be] different?

The insurance companies are addressing that. Some Insurance companies are doing a better job than others. In general, the days in inventory are starting to subside.

Okay. Great.

My next question is primarily on international expansion and your strategy there. When we look in terms of the expenses that you've been incurring, or the investments that you've been doing, that's been a headwind on margins.

But what we think about the trajectory of your investments, which fees are you in? Do you think these expenses or investments will accelerate for the next year as you continue to build scale in those markets? Or, are they going to normalize?

And what is probably your updated outlook on being profitable in these international markets, obviously outside UK?

Yes. I'll comment. You didn't -- I didn't hear you specify.

I guess, from the perspective of profitability in international markets, that's always hard to predict. I would say, we're going to have some technology completed in the next year, and that's going to allow us to reduce some costs, because it just makes us that much more efficient.

From a G&A perspective, we have said -- we said it on this call, and I'll say it again. We don't anticipate G&A going up in the next year. We anticipate it coming down.

That's fully loaded G&A. That's not domestic -- that's international, that's everything. We've got teams in place, we've got expense in place, and at this point, we don't anticipate costs going up at a G&A level. We anticipate revenue going up.

Okay, great. Thanks for taking my questions. Thank you.

You're welcome.

Bret Jordan, BB&T Capital Markets.

Hi, good morning. A quick question on yard operating expenses.

Has something structurally changed in that pass-through in some of the services that you're spending on? Are they related to the RFP businesses, that you've got more labor and/or expense built into some of these insurance contracts?

Yes. Part of it is. Part of it is, we're just providing more services to the sellers, and that's a part of the RFP process.

Part of it is a structural change in our costs. Our sub-hauling costs have increased.

With the increase in volume, we have a diminished ability to utilize the low cost providers. We have to expand the sub-haulers that we use, and by so doing, we have to utilize those that charge a higher rate.

And, we have a natural increase in our labor cost and our benefits cost. And all those have had a permanent, structural change in our yard operating costs on a per vehicle basis.

Okay. And then a qualitative question. You began to address the inventory bulge in some of the cycle times that we've talked about in the last couple of quarters. But it sounds like inventory's beginning to work down.

Could you give us a feeling, where we are relative to a normal base level in the inventory work-down? Are we 20% of the way to where you'd expect us to be in a base case scenario, or 50%? Or sort of a general ballpark?

It's hard to predict. But currently, our same-store inventory levels are about 5%. Our same-store sales are about 5%. So, it seems to suggest that's about the new norm, about a 5% growth.

Okay. All right. Great, thank you.

You're welcome.

Gary Prestopino, Barrington Research.

Good morning, guys.

Good morning.

On the non-insurance side, could you -- it's 20% non-insureds. Could you maybe bucket that between dealer, consumer? Are you considering charity in that non-insurance, as well?

Yes. Charity is included in non-insurance.

What I'm trying to get at is, if you could bucket how that 20% split goes between those three areas and those markets, if you would? And give us a thumbnail look at how each of those -- particularly the dealer, I'm more interested in -- what the growth profile has looked like here this year?

We've had growth in both dealer cars and charity cars, and we've had a slight decline in what we call our core cars. Those are cars the come from individuals and companies that just make the living buying and selling cars on our platform.

Those are the three major [bugs]. In addition to that, we have other institutional sellers; banks for the repossessions; fleets, like Southwest Bell and AT&T, that utilize us for fleets; rental companies that utilize us, as well. But primarily, most of our volume comes from those three buckets -- charities, franchise, independent dealerships, and individual car brokers.

All right. Is charity still the largest of all of those three, followed by maybe fleet, and then dealer?

I would say charity -- (multiple speakers) Go ahead, Jay.

I was just going to say, no, dealer is clearly the largest. It's bigger than the charity side.

Okay. It is the largest.

And you say, obviously, the focus is on that non-insurance segment for growth. Are you devoting much more marketing efforts, selling efforts there? Have you increased your feet on the Street to get more business there?

There's been some increase. We've made some changes in the last year.

We've got some -- we've got, I guess you could call it some cost creep that's come in through some of those efforts. But, I look at that as an investment. We think it's the right thing to do to drive that book of business.

Okay. And then you also mentioned that you've adopted some best-in-class practices from QCSA. Could you maybe elaborate on --?

Well they're -- I'm hesitant to, Gary, because they're differentiators in the space. And we've done some things with clients, that our clients like those kinds of differentiators, as well.

Some of it is some simple stuff that's technology-based, some web changes, things like that. But, some of it's process-driven, and it's definitely something that we use with clients to give them a better experience than what they would get elsewhere. So, it's proprietary stuff.

Okay. That's fair. All right.

And then lastly, not looking for any actual numbers -- but as we go through the year, should we sequentially see declines in G&A expenses as you do this -- finish off what you need to do to get that in line?

No. I don't think we're prepared to make that assertion. I think our comment stands, that by the end of the year, we'll see a decline.

Okay.

There's a lot of work that needs to take place between now and then.

Okay. Thank you.

You're welcome.

Thank you, Gary.

Thank you.

(Operator Instructions)

John Lawrence, Stephens Incorporated.

Morning, guys.

Hello, John.

I understand the reluctance to give any guidance as far as those margins are concerned. But, Will, can you look at it another way and just say, the pressure's on the business, obviously, on the yard costs, and as far as that operating metrics. And then offset that with G&A, and then just put it in perspective.

I guess a couple of years ago, we were at a -- closer to a 32% operating margin. We've lost -- there's 500 basis points of erosion. Is there a certain amount of that -- 100 and 150 basis points that you could point to that you can't recover?

No.

Or, can you give any kind of -- I'm not talking about timeframe -- but just what would be the limiting abilities to get back -- I mean, can you offset SG&A with some of those operating costs?

Yes. It's hard to look at our business on a margin percentage-basis, or an EBIT-percentage basis, because of the impact that purchase car revenue has on that. And as that fluctuates, it has tremendous impact on that percentage.

We look at our business on an EBIT-per-car basis. And when you look at it on that basis, we're fairly happy with where we were this year. We're certainly not where we were in 2012, but we're to where we were in 2011.

We anticipate to increase that next year, as we go through the rationalization of certain costs. But it's hard for me to talk about it on a percentage basis.

Okay. Thanks.

You're welcome.

Thank you. It looks like we have no further questions at this time.

All right. Well, thank you again, everyone, for attending the FY14 and fourth-quarter call for Copart. And we look forward to giving you updates on the next quarter.

And this concludes our call. Thank you. Bye.

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