Copart Inc (CPRT) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to the Copart, Incorporated, first quarter FY15 earnings call. Just as 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. Sir, please go ahead.

Thank you, Austin. Good morning, everyone, and welcome to the first quarter call for FY15. I'm going to pass it over to Will Franklin who will give you an update on the financials and then he'll pass it back to me for some quick remarks and then we will open it up for questions.

So 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 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 and comments. For a more complete discussion of the risks that could affect our business, please review the Management discussion and analysis and the risk factors contained in our 10-K,10-Q and other SEC filings.

With that, I will begin with a few brief comments about our financial results for the quarter. Total revenue grew by $10.5 million or 3.8%. Purchase car revenue declined by $9.7 million, driven by a reduction in both volume and in revenue per car. The reduction in volume resulted from lower direct purchase activity in both the UK and North America, as well as fewer cars processed for insurance companies on a principled basis in the UK.

Service revenue increased by $20.2 million or 8.9%. The increase resulted from growth in our international operations which included Germany, Spain, United Arab Emirates and Brazil of approximately $1.7 million; growth in the UK of $6.2 million; and growth in North America of $12.3 million. Growth in North America and the UK was driven by both an increase in volume and an increase in revenue per car.

Purchase car volume represented 6% of total volume in the current quarter versus 7.3% in the same quarter last year. Overall volume grew by almost 4% while inventory grew by over 9%. In North America, noninsurance car volume grew by almost 2% and represented almost 21% of the total volume sold.

Yard operations expenses increased by $6.3 million. The growth was driven by the increased volume, as we saw a drop in average cost to process each car reflecting our efforts to eliminate operational inefficiencies.

General and administrative costs declined by approximately $1.4 million at the same quarter last year contained $2.9 million in severance, lease termination, and relocation cost associated with our QCSA acquisition and the move of our technology team from California to Texas. 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. Finally during the quarter we generated over $83 million in operational cash flow and we expended $23.4 million for yard expansion technology equipment and three lease buyouts.

That concludes my brief comments. I'll turn the call back over to our CEO, Jay Adair. Jay?

Thank you, Will. As we said in the beginning, we're going to be pretty brief with the comments.

We spoke last year about the rationalizing of costs in FY15. We're starting to see that in the first quarter and will continue to see that in the second, third and fourth quarter of the year. As previously stated we expect that rationalizing of cost to be completed at the end of FY15.

There are a number of costs in the last year that were associated with the integration of QCSA CrashedToys and DVAA and a number of one-time costs that existed in the prior year that will not exist in the current year. In addition to that, Will spoke to the technology strategy that we had previously. We are now going through a process of eliminating all inefficiencies that exist from our prior strategy and seeing some improvements there as well at the G&A levels. So you're going to see improvements in the second quarter, third quarter and fourth-quarter, both in G&A costs and you're going to see improvements in operational costs.

We are focused right now on seeing total dollars reduced, but also percentage of G&A as a whole as we continue to see increases in sales. So we'll be focused on the cost side and then we're going to see increased sales as well due to increased inventory. So as Will talked about, there is some timing that exists currently with respect to sales that occurred in the quarter and then the inventory build that took place again in the quarter. We have seen a consistent build in inventory for the last three years year after year after year increase, and we expect that inventory to be sold off in the year that we are in now.

Looking at the current month of November, volume is up year-over-year and in terms of assignments and that's going to manifest into sales again in the quarter. And so we wanted to give you a little color on that.

And then with respect to inventories, as we talked about, we should be building those again in the second quarter. We expect, as we have seen in the past, that we build inventory first and second quarter due to seasonality of the business and then sell those vehicles off in third and fourth quarter. But we've also seen some inventory builds due to timing in the past.

So we expect that that will continue to be the case and that we'll see some of those inventories sold off in the existing quarter we are in. The timing component and then the inventory build that's seasonality driven, we should be selling off in the third quarter. So overall we're really happy with the quarter.

We're excited about how the improvements in costs have already started taking place in the quarter we are in. We look forward to seeing further success in those areas as we go into the rest of the year.

And with that, I'm just going to turn it over for questions and go with that. Thank you.

Thank you.

(Operator Instructions)

Bob Labick, CJS Securities.

Good morning. Congratulations on a nice quarter.

Hi, Bob.

So, back to Jay's last comments on inventory there: You said it grew 9% in the quarter, and your sales were up 9%. Last quarter, inventory was only up 5%. Was there new business wins or other drivers? Jay, you alluded to timing, but could you just clarify what that refers to, as opposed to seasonality?

Yes. Well, we've had some wins in the past year that, candidly, some of the accounts don't move their cars as quickly as our normal book of business, if you took the average for how fast vehicles move. We had some insurance company wins that don't move their vehicles as quickly. So, we've got some inventory builds in the last year that we're now starting to see sell off. And we think that's going to happen in the next quarter.

The seasonality piece is that, regardless of the book -- the mix of business -- inventories are going to build in the quarter we are in now, November, December, January, and then we're going to be selling off that inventory February, March, April. Typically, the peak happens sometime in February, and then there's a big sell off of inventory, March, April, May.

So, that's all I was referring to. There's a timing component, and we've just seen inventory continue to build. It built last quarter; it built this quarter. And you'd normally expect, in the fourth quarter, to see some of that inventory dropping off, but it just seems like we keep building and building inventory.

Okay, great, thank you for that color. And then, you've been very successful in continuing to increase your non-insurance cars as well, because you've had a lot of insurance wins. Can you talk about the levers that you are pulling and your thoughts on non-insurance car growth, and what you are pursuing on a go-forward basis?

Yes, we're going to continue to focus on it. It's been a big growth driver for us over the last five years. I don't anticipate that will change. We're going to continue to push for that book of business to grow.

The fact that it's been able to maintain while we've grown market -- there's two things that have happened on the insurance side. Big market share gains for Copart, and then the second thing is it's the 80% of the pie that grows. And so, obviously if the two grew at the same rate, you'd expect the non-insurance to fall behind because it's a fifth the size, and yet it's been able to maintain basically that 1/5 push.

We see a big trend right now in older vehicles. We talked about that -- six years ago when we saw new car sales fall off, in 2008. And that older mix allows vehicles to total easier, and so we're seeing unit volumes up every single quarter. And yet we've been able to maintain that 80/20 mix on the non-insurance side; so, we'll keep pushing in that area.

Okay, thanks. And then, on cost to process car, you saw a nice leverage this quarter, but it had been a couple quarters in a row where you had faster cost to process a car than revenue per car. What changed in the quarter, and do you think you've kind of turned the corner in terms of getting back to that yard leverage?

We had a lot of costs that were associated with -- it's hard to define for everyone how much costs you have associated with an integration like Quad Cities. Integrating a business like that has a number of costs that have to be taken in, in that year that we did the integration, and now we're going to see that number coming down. The other side is we're very focused on making sure that we have the optimal expense per car.

So, there's two pushes. One is that we're rationalizing expenses, and the other side is that we've got a year now where we don't have those expenses baked into the model. So, both of those are going to drive our cost per car down. That's our goal for the year.

Okay, great. Thanks very much.

You are welcome.

John Lovallo, Merrill Lynch.

Hey, guys, thanks for taking the call. Two quick questions for you, Will, and then one strategic question for Jay. Will, first, on the purchase vehicle revenue, and your strategy there for purchase vehicles, it seems like you're focusing on fewer, more profitable vehicles, which has been working pretty well. Is this a strategy that you guys expect to maintain? And if so, do you think this kind of mid-$40 million quarterly run rate is reasonable?

Well, you are absolutely right with respect to our strategy. So, we're focused on more profitable cars and, in fact, the contribution on a per-car basis is higher on a purchase car than it is a fee car. But we can't predict what the revenue will look like several quarters out. We can tell you what we're focusing on, in terms of our strategy. And basically it's that: Look for the more profitable cars. If it's marginal in nature, if there's any risk of loss at all, we don't pursue it.

Got it. That's helpful. And then the stepdown in general and administrative depreciation and amortization in the quarter -- is that largely due to the writedown from the technology system -- the SAP system?

Not that system specifically, but that, in general, we're very aggressive in writing off our technology and our capitalized development costs. And so, we put a short lifespan on it, so it caused some fluctuations in our D&A as that technology reaches end-of-life. And that's exactly what happened in this quarter. We had a lot of technology that reached its end-of-life.

Okay, great. And then, Jay, one strategic question for you. As you guys push more into the non-insurance business, do you get the sense that customers would prefer having another kind of big player in the market, for one? And then, do you see the fact that you guys don't have a physical auction presence as a potential roadblock? As the vehicles get higher in price, do you sense that customers want to be able to get into the physical auction and kick the tires? Or is that not the case?

I'll answer the last question first. We do have a physical auction presence. So, we've got over 6,000 acres around the country; over 150 sites that we are storing cars. And the buyers today do come out and look at the vehicles, and can come out any time they want and look at the vehicles. They don't have to be standing there during the auction, though they can.

During the auction, they can stand there in the lane and bid on their iPhone. But the nice thing about our model is they don't have to. They can do all the pre-inspection of the vehicle prior to the auction, or they can be sitting at a Starbucks coffee shop and bidding. That's really the magic of our product is we stripped out all the inefficiencies and the friction coming to the auction. The physical facilities are there, so they have the ability to completely inspect the vehicle, look it over, and be 100% comfortable with their purchase.

Got it.

And your first question -- I'm not sure I fully understood what you were driving at?

So, Manheim and Adesa are pretty big in the whole car side of the business. Do you get the sense that the market could support a third sizable player?

No, we're not interested in doing that. We're not going after their book of business, typically. We go after dealer business that is, in many ways, neglected in the industry. But we're not trying to go in and compete directly in the same space that they are. We're much more trying to serve a market that we think is underserved.

Very helpful, guys. Thank you.

Thank you.

Bret Jordan, BB&T Capital Markets.

Hey, good morning.

Good morning, Bret.

If we were looking at the inventory, and I guess as we'd seen some extended cycle times with some of your insurance customers, have those cycle times improved or are we just sort of maximizing or sort of normalizing inventory levels around these new customers? I guess, as we think about working inventory down, is it a more efficient processing system or we're just going to anniversary what is a slower-turn customer and we'll work down from there?

In general, the days in inventory is improving -- is declining. But there are some customers that still -- some suppliers that have an opposite trend. And we're working with those suppliers to help them improve their processes. One of the most valuable assets we have is our land, and to consume it with old inventory is not in our best interest, nor in theirs. So, we work with them to try to make that process as efficient as possible.

Is there a way we can look at North American insurance inventory, carve out the non-insurance business and the non-US business, sort of look at -- on a quarterly basis, to measure the efficiency of that turn, or is that a number you would care to share?

I don't think it's -- Will is looking, but I don't think it's too important. At the end of the day, they're incentivized to move that inventory. The vehicle is going to depreciate if it sits in the yard an extra 30 days. So, it's to their advantage to move the vehicle, and we're working -- that's one of the services we provide is to move that vehicle, and we've seen that number coming down now. We believe that the peak, in terms of inventory due to cycle time -- we've reached that.

We're going to see inventories build, so I don't want you to think the opposite. We're going to see inventories build, but that's due to seasonality now, as we enter the second and third quarter. But we think we're past that. We think that's over, Bret. So, at this point, we think that inventory is going to be coming down in the future.

Okay, then one last question around that same theme: The average unit selling price as vehicle values are coming in a little bit and maybe inventory had built up -- what's been the trend there? Where are we in maybe deflation on the units?

Actually, on a year-over-year basis, our ASPs are higher.

Right. Are you expecting that we're going to see any deflation because used vehicle values are declining? Do you sort of build that into your expectations, or is the quality of the vehicle going up to the point where it offsets?

No. I would say there's been a very tight correlation between ASPs and used vehicle pricing. I'd expect that to continue.

Used vehicle pricing comes down, and then that means the ACV, the actual cash value that insurance companies pay for cars, comes down. And so, as that happens, you'll see sale price come down, but you'll see volumes go up.

Yes. All right. Thank you.

You're welcome.

Thanks, Bret.

Bill Armstrong, CL King & Associates.

Good morning, Jay and Will. Will, in your opening remarks, you did cite higher revenue per car. So, is that a pricing issue, or are there other drivers behind that?

No, primarily it's other drivers. So, it's a higher ASP on a year-over-year basis. It's also mix. We generally have more revenue per car on non-insurance cars.

Okay, so, it's a mix towards non-insurance. Now, the Manheim is slightly lower than it was a year ago, so I would have expected your ASP, all other things being equal, to be down maybe 1%, but not the case apparently?

No. Like I said, we have different contracts, and we have different supplier types. We have banks' repossessions; we have charities; we have [pie] loans -- all those have a different type of revenue profile. So, the mix has an impact on our revenue per car.

Got it. Okay. Thank you.

Gary Prestopino, Barrington Research.

Good morning.

Good morning, Gary.

Will, you said your volumes processed were up 4% in the quarter; is that correct?

That's correct.

And that's also a same-store number because we've anniversaried all the acquisitions?

We had one small acquisition in Canada, but the numbers are virtually the same.

Can you break it down between North America and UK?

You know, the UK had a higher volume growth than the US. I don't have the exact percentage in front of me.

Okay. And then, a couple of other questions here. Just want to dig into the vehicle sales versus service revenues. On the vehicle sales side -- I was writing in as I'm listening. Was there any material shift and a change in programs for some of the purchase cars going to fee-based cars for what you're doing for insurers in UK this quarter? Or was this just a function of ebb and flow of purchased vehicles coming to market?

There's been no change in the program. Like I responded to a question earlier, there's been a change in focus internally. So, we're not pursuing the cars that are only marginally profitable. More of cars that -- if there's any risk in a loss. And so, while the volume is coming down, the revenue and the contribution per car is going up.

So, you are not pursuing the cars on the insurance side or the regular -- or the public dealer side? My understanding of it is with the insurance companies is you can sometimes get hit with adverse selection because they are giving you a whole bunch of cars in bulk, or am I wrong there?

When I was referring to being more selective, it was with respect to our direct-to-purchase programs. We don't have that option with the insurance companies. We haven't seen any wild fluctuation in the contribution from the insurance cars in the UK.

Okay. Thank you. That's great.

Couple of more questions here: Towing. Obviously, with the price of fuel coming down, are the towers still hitting you with fuel surcharges, and do you expect the price of your tows to start coming down, given that fuel's cascading downward here?

We're very aggressively managing our [subhaul] fleet. And, yes, we're pointing out the fact that -- two things are in our favor. The average tow zones is coming down, and the cost of fuel is coming down; and we are managing that to control our subhaul cost on a per-car basis.

So, tell us what percentage of your -- it would be in yard operations -- is that towing expense?

It is.

What percentage of it is? What is the percentage that's towing within yard expense?

We don't break that out, Gary.

Okay, that's fine. And then lastly, on the balance sheet, there's a big movement on something called accumulated comprehensive loss, from $20 million to almost $44 million. Can you tell us what that is?

Sure. With the strengthening of the dollar, the value of the foreign assets is reduced. And the way that it's accounted for, as we consolidate those foreign assets, is to recognize that reduction in their relative value through the equity section.

All right. Thanks, guys

Thanks, Gary.

Craig Kennison, Robert W. Baird.

Good morning; thanks for taking my questions as well. I wanted to understand better the impact of used car -- used price volatility, if you will. Could you remind us what percentage of your business is on straight commission versus the PIP program you have?

Let me answer that, Gary (sic). The percentage of contracts on the PIP program has gone down significantly. But I'll tell you, over the course of the last five years, the contribution -- the difference in the contribution between the contracts has almost disappeared. So, we really stopped quoting that number a few years ago.

So, is the model less sensitive to volatility in used prices?

It is.

Okay, that's helpful. And, Will, you quoted a number -- average tow zone. Could you just clarify the meaning of that? Is that the distance to travel?

Yes, that's exactly what it is.

Okay. And then, Jay, on the international front, obviously it makes a lot of sense -- a lot of cars internationally that need to be insured and ultimately serviced by someone like you, but the economics tend to be unfavorable until you achieve some level of scale. What markets do you think are close to inflecting from a scale perspective?

Well, I think we'll be there on all of our facilities this year. I don't think we will have any international operations this year that aren't profitable.

That's true in India as well?

India is not up and running. India hasn't sold one car yet, so that doesn't count in markets where we have got people on the ground and we haven't processed a car yet. I'm talking about where we have got physical facilities and we're selling cars.

Any way to quantify sort of the profit drag of those operations last year versus -- even if you get it back to neutral -- what the impact would be financially?

I don't think it's necessary from the standpoint of we're expecting to see G&A come down this year. We're not going to be adding a material amount of cost internationally.

So, we have got our footprint. We'll be seeing G&A come down this year, and then we'll be expecting those international operations to become profitable this year. And as that happens, we'll be expanding further in those markets. But as we expand, that's profit driven; that's not going to bring the Company down. And if we have markets like India, to your example, where we end up adding additional costs, then we'll talk to that on the calls.

That's helpful. Happy Thanksgiving.

Thank you.

Thanks, Craig.

Thank you. At this time, we will be asking for final questions.

(Operator Instructions)

John Lawrence, Stephens.

Good morning, guys.

Good morning, John.

Just real quick: If you look back two or three years, Quad Cities and some of the integration moves, can you just talk about -- obviously, progressing to get to this point as far as the plan of reducing cost. All in all, this is what you started to see, and there's no real changes into that plan from that time point of basically when you moved to Dallas; is that fair?

I'd say this: We started the move from California, which had a lot of cost baked into the Company. You saw revenues increase in FY11 when we started that move. You saw revenues increase in 2012, 2013 and 2014, subsequent to that move.

You then saw the cost of Hurricane Sandy come into the Company. You then saw costs associated with Quad Cities. So, we've had, I'd say, three years in a row of costs, and then you can throw technology onto that as well. So, we had three years in a row of technology costs, and this will be the year clearly where we will have -- we anticipate having record revenues and then rationalizing our costs this year, as we talked about in the last call.

At the end of the day, the only thing market-driven that's really helped -- I mean, that's really, from a market standpoint, that's impacted your progress has been a little bit of these tow costs and a little incremental services that it appears you were going to leverage on the other side anyway?

We've had some increased towing costs that came after Hurricane Sandy -- and Will said that earlier. We're going to rationalize that down. We've opened up more locations, so we've seen the average tow zone or the distance that we go to tow a vehicle -- we've seen that decrease. Part of that's mix, part of that's we've got additional facilities that came through QCSA and some other stores that we opened up, like we talked about Wheeling last quarter in Chicago.

So, yes, to your point, we've had -- there's been reasons for all this. We've talked about why the reasons exist for the costs, and now we're going to be seeing the benefits of higher revenue and then lowering those costs.

Great. Congrats and good luck. Thanks.

Thanks, John.

Ryan Brinkman, JPMorgan.

Hi, good morning, guys, this is David Karnovsky in for Ryan.

Hi, David.

I think basically all my questions have been asked at this point -- maybe just a quick housekeeping question on the tax rate. I think it was running at 36% in the quarter. Can we still expect, for the full year, a little over 34%?

Yes, I think it would be at the high end of 34%. Our tax rate's seasonal. In our third quarter, we always have true-ups for FIN 48 reserves. I think, on an annual basis -- I think high-34%s; mid- to high-34%s is about right.

Okay, thanks a lot, guys.

Thank you.

Thank you, Mr. Franklin and Mr. Adair. There are no further questions in the queue at this time.

All right. Thank you, everyone, for attending the call, and we look forward to reporting on the second quarter, and wish everybody a Happy Thanksgiving.

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