Copart Inc (CPRT) 2015 Q3 法說會逐字稿

Excuse me everyone, we now have our speakers in conference. Please be aware each of your lines is in a listen only mode.

(Operator Instructions)

I'd like to turn the call over to Mr. Jay Adair, CEO. Sir, please begin.

Thank you, Katie. Well, good morning, everyone, to the third quarter conference call for Copart.

We are very pleased with the results of the third quarter. Will Franklin will give you an update on the quarterly financial results after my brief introduction and commentary on Q3. I'd like to start with a review of average selling price.

I need to do the Safe Harbor.

Oh, I'm sorry. (Laughter) I was firing away. I was ready to go. Yes, we've got Safe Harbor, then I'll jump in. Okay.

Good morning, everyone. This is Will Franklin.

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 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 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'll turn the call back over to Jay Adair, our CEO, to begin the comments on our third quarter results.

Thank you, Will. We were just saying before the call that this is probably the 80th conference call we've done since we've been public for over 20 years now, and I think that's first time I've forgot to introduce Will for the Safe Harbor.

So as I said already, we're really pleased with the quarter, and I want to give you an update on the quarter. Just some brief commentary, and then Will will give you an update on the financial results for the quarter.

So I'd like to start by talking about average selling price. In the quarter, we saw further softening of average selling price, or what we refer to as ASP's, compared to the second quarter. Looking at May data, average selling price has dropped again, but we believe we are currently at the bottom in terms of where salvage values will end up for the fourth quarter. Additionally, we expect this trend of low ASP's to continue into our future quarters, and do not anticipate that average selling price will bounce back in the next couple of quarters.

We believe the cause of this lower ASP or average selling price is due primarily to lower scrap prices and softer international bidding. The lower scrap prices affect many of the lower end vehicles that we sell. The lower scrap price is caused by weakening global demand and a strong US dollar. The softer international bidding primarily affects the higher end units that we sell, and is primarily caused by a stronger US dollar.

Additionally, we have seen the age of the US fleet increase for the past seven years, and as we discussed on previous calls, older vehicles will sell for less at auction. With the older fleet, we have seen total loss frequency increase. We believe this trend will continue as the fleet ages, and so will the likelihood of the vehicles becoming total losses.

We also believe repair costs are up, increasing the number of total loss vehicles, and fuel prices being lower are causing miles driven to go up, again causing more accidents and more total loss vehicles. We believe the trend of vehicles aging will continue. Therefore, average selling price should continue to be soft and volumes should be up for the foreseeable future.

As we have also discussed on previous calls, there is a natural hedge in our business, that when ASP's fall, volume increases. This will cause our revenue per car to drop, but volume to increase, offsetting for the most part the drop in revenue per car.

Cycle times for the quarter did not increase materially and inventory increased approximately 12%, comparing the third quarter of 2014 to the third quarter of 2015. We are pleased with the improvements in G&A, specifically the reduction in costs made in the quarter, and Will Franklin will give you more detail in his update on the financial results.

That concludes my remarks. At this time, I'll pass it to Will for a financial update, and then we'll open it up for question and answer. Thank you.

Thank you, Jay. Let me provide a few details on our financial performance before we open it up to Q & A.

Total revenue declined by $12.6 million or 4.1%. We saw good growth in volumes, increasing by 5.4% in North America and 5.2% worldwide. We saw a reduction in revenue per car due to decline in auction average selling price. The decline in ASPs resulted from lower commodity pricing and the impact of the stronger dollar.

In April 2014, the index for crushed car bodies, as issued by American Recycler, stood at $273 per ton. That same index was at $143 per ton at the end of April 2015. We believe this index to be highly correlated to dismantler and junk buyers behavior.

In addition, the strengthening dollar suppressed participation by our international buyers, as the percentage of units sold to international buyers was the lowest since our third quarter of FY09, and the percentage of value sold to international buyers was the lowest since our first quarter of 2005. Finally the stronger dollar against primarily the Pound, the Real, and the Euro on a year-over-year basis resulted in a reduction of total revenue of approximately $6.8 million compared to the same quarter last year.

Purchase car revenue declined by $14.1 million or 25.8%. The decline resulted from reductions in both the number of vehicles sold and the average selling price of those vehicles. As a percentage of total revenue, purchase car revenue declined by four percentage points to 13.7%.

Purchase car unit volume represented 6% of total volume in the current quarter versus 6.4% in the same quarter last year. The purchase car volume was impacted by the reduction of insurance vehicles processed through purchase contracts in the UK. In addition to the impact of commodity pricing and the stronger dollar, the average selling price of purchased vehicles was also impacted by a change in mix, as a higher percentage of cars came from our direct purchase program versus our insurance suppliers. In our direct purchase program, we buy and sell cars for our own account.

Service revenue remained relatively flat, increasing by $1.5 million, or less than 1%, as the increase in car volume was offset by a reduction in revenue per car. Yard operation expenses increased by $2.9 million, or 2.3%, and was driven entirely by increased volume. Cost to process each car declined marginally.

General and Administrative costs declined by $6.1 million. In the same quarter last year, we had $1.4 million in severance, lease termination, and relocation costs associated with our QCSA acquisition and the move of our technology team from California to Texas. Further reduction came primarily from savings garnered from the rationalization of technology resources associated with the abandonment of certain software and technology strategies. This change in strategies, which began with the $29.1 million impairment in the third quarter of last fiscal year, is now complete.

On an overall basis, the change in FX reduced EBIT by approximately $1.3 million compared to the same quarter of last year. During the quarter, we expanded $9.6 million for yard expansion, equipment, and technology. In our second quarter this year, we refinanced our debt. This refinancing added approximately $3.8 million to our interest expense this quarter, compared to the same quarter last year. Finally, we exited the quarter with $679 million in cash.

That concludes my comments. We'll turn the call back over to you, Katie, to monitor the Q&A.

Thank you, sir.

(Operator Instructions)

Our first question comes from Bob Labick, from CJS Securities.

Good morning.

Good morning, Bob.

Hi. Will, you just touched on this in your comments. I was hoping maybe you could elaborate further. You mentioned that the yard costs rose slightly faster than the overall sales service costs, and so therefore gross profit on a service revenue basis was down slightly. It had been growing the last few quarters.

Can you talk about the drivers there and where you expect the yard costs to go? And is this all, as you said, volume related, or what are the other moving parts there?

Sure, it's real simple. It's volume, and it's cost to process each car. So, we have far less volatility in our cost to process each car. Its movement has been far less than the revenue associated with those cars. So, when we see a decline in revenue on a per car basis, it's detrimental to our margin percentages.

Okay, and I think Jay, you mentioned you think we're getting closer to a bottoming in that trend. Certainly in the current quarter, but you don't expect it to rise any time soon, is that what you said?

Yes, that's right.

If you look at Q2 to Q3, we saw a softening in the average selling price, and if you look at the month of May, which is the first month of our Fourth Quarter, we're at a number right now that we believe will be consistent with the quarter. We don't think it will drop more than that in the Fourth Quarter than where we're at currently, and barring the US dollar, barring fuel price changes and other what I'd call macroeconomic factors, we think that the continued trend of the ASP, where it's currently at, will continue. And that's looking, as well, Bob, at volume. So looking at existing inventory levels and current volume coming in, that's driven by volumes go up -- as I stated in the commentary, that volumes go up when ASPs come down.

So we haven't really seen used car pricing come down yet. We think it's going to come down. We tend to be a leading indicator for that. Looking back at data that we had back in 2008, we could see that. So we would anticipate that used car pricing will probably come off in the coming quarters and we don't anticipate our pricing coming down further from where we are already at.

And obviously if those change, used car pricing goes up, scrap goes up, then we'd anticipate volume to slow a little bit. That's the natural hedge, volume would slow and then ASPs would come back up.

Okay, great. Very good color there, thank you. And then just excluding FX, wanted to ask a little bit about your international business. You talked a little bit about Brazil, Germany, Spain, and the Middle East, where you stand in those. Are they still in investment phase, are they breakeven, profitable? And where you see them in three to five years?

Sure. Brazil -- I could go through each country, but Brazil is profitable, the Middle East is profitable, Germany and Spain are profitable. That's to say that there are quarters where we're down; there are quarters where we are up, but in general, we're profitable internationally. We tend to view the international segment or the international team as one group, and we have further investment that we're making in all, including the UK. That we've got technology that we're utilizing in all those markets to run those operations.

We're building technology, currently that will help us to improve the service offerings in those Markets. In Brazil specifically, there will be some technology coming that replicates what we've done in the rest of the US, Middle East, UK model. In Germany, we've got a completely different model, as well as Spain. And so we're talking about technology and service offerings that we're going to be bringing to the market that are really completely new in those markets.

So I don't know specifically, I think you asked, are we still in the investment stage? Yes, we are going to continue to be looking at some pretty dramatic change in many of those Markets, excluding the UK. The UK is what I would call very mature at this point in terms of our product offerings.

We've been there almost a decade now, so when you get into Germany, Spain, the Middle East, and Brazil and the other markets, we're going to continue to make improvements to the model. And a lot of that is technology, but a lot of that is footprint, too, adding locations, and we're in the middle of doing those things, those investments, now.

Okay great. Thanks very much.

Thank you. Our next question comes from Robert Higginbotham, from SunTrust.

Good morning. Thanks for the question.

Good morning.

Your inventories still up double digits, and was up double digits last quarter as well. You definitely certainly saw an acceleration in volume trends from 2Q to this quarter. Should we think about seeing further acceleration in those volume trends as that inventory gets released?

Well, I would reply to that question by going back to 2012 with Hurricane Sandy. That was the first enormous bump we saw in inventories, and we're in FY15 today, and we've seen an increase year-over-year from 2012 -- I mean an increase that, historically, you didn't expect. We've always seen inventory increases associated with new volume, or I should say new accounts, let me say it that way, as opposed to accounts that are just expanding because of the market, and what we've seen over the last three years is just an expansion of inventory and an increase in volume, specifically in the last year, associated with accounts that we know we have 100% of their business, and yet they've increased.

So this is some of the color we are trying to give you in the beginning about, we believe that right now, with the increased aging of the fleet that we see -- and it's not just US but also UK. So we tend to think of it globally. And with the increased aging of the fleet, we're seeing more total loss vehicles and so it's a little bit of a transition, so it's hard to predict. If you'd have asked me a year ago, would we have anticipated year-over-year inventory growth of 12% in the third quarter? I would have said no, and yet it happened. So it's hard to predict at this point how much volume we're going to see increasing.

I can tell you that, from looking at May, we're anticipating some high sales in terms of volume in the fourth quarter. But of course as I said earlier, we've got a softer ASP in the fourth quarter than we had in the third quarter, so we're going to be seeing some erosion of margin associated with that, but we're going to see an increase in volume associated with the relieving of that inventory.

Got it, thanks. And on your balance sheet, I think many are still surprised that you haven't deployed the cash you raised recently in some form or fashion. Could you remind us what your preferences for capital allocation are? And maybe as part of that -- meaning how that cash would be likely to be deployed, and then as part of that, what the potential acquisition landscape looks like? Are there a fair amount of willing sellers out there? You probably can't talk to anything you might be currently involved in, but what does that opportunity set look like?

Yes, we get quite a few opportunities throughout the year for acquisitions, and the ones that you would be familiar with are the ones that we actually closed on. So the ones that we pass on, obviously, we never comment on. We tend to view -- I wouldn't say there's a priority of whether it's expanding locations, adding footprint, buying companies or buying stock back. The priority is set based on value. So we tend to look at what is out there? What can we buy? And, what's the ROI? And, we go for the scenario where the ROI is the highest.

We wanted to -- in the last quarter, we talked about our debt. We wanted to fix some debt that was coming due, out 10 years plus. And so we took $400 million of debt on that would be ten year or greater maturity, and then we've got the remainder of that debt that comes due in less than five, and that was to afford us the opportunity to basically execute on our capital strategy, which is to either acquire businesses, open up additional locations, expand locations, or to buy our stock back.

Got it, thanks for that. I'll hand it off to someone else, thank you.

Thank you.

Thank you.

(Operator Instructions)

Our next question comes from Ryan Brinkman, from JPMorgan.

Hi. This is (inaudible) on behalf of Ryan, and thanks for taking the call. Now the first question I had is, maybe just going back to a discussion on the impact from the stronger dollar at the high end of the vehicles at the auction, and then the entrance at the high end, and getting influenced by the stronger dollar. What is the portion that is getting more influenced by the scrap prices? Maybe just pick that out for us possibly?

I would say in terms of scrap, and we're looking at each other based on your question, because in terms of scrap, I would argue 50% of the cars we sell are eventually going to be impacted by scrap, and that may be high.

It may be something less than that. But if we say 50% of the vehicles are impacted, meaning that they may be parted out, either completely scrapped out in a self-service fashion, or they will be parted out in a full service fashion and eventually the scrap value will matter. It's much less significant when we get into the full service approach, but it still matters.

When you go above that, let's just say the other 50%, those tend to be vehicles that are either ready to be driven or they're going to be repaired. And in that scenario, the dollar has a big impact, because we sell about a quarter of our vehicles historically overseas, and so when we start talking about overseas buyers and the impact of the dollar, it can weight pretty heavily on overseas buyers to be able to compete at auction to buy product.

So hopefully that answers your question in terms of both.

No, that's very helpful color. So maybe just following on from that, can you talk a bit about market share, since I think your major competitor reported like 8% volume growth, and I was wondering if these two factors, is there a difference in the mix, here, that's really driving that difference on the volume growth front?

Yes, I think when you're trying to compare us, you're looking at their quarter that ends March, and you're looking at us on a quarter that ends April, and you can't compare those two quarters. The inventory peak ends up being the end of January, usually first, second week of February, somewhere in that period. And then we are unloading enormous amounts of inventory going forward, so it's hard to compare sales.

It's hard to compare inventory, and the other factor is, you're looking at year-over-year data. So a lot of it has to do with timing, as well. How one year a year ago compared to this year. I just would give you that kind of -- make sure you're looking at that component of the timing.

Sure. Maybe on the last earnings call, you were referring to inventory build sort of happening towards the end of the quarter and you're starting to see that strength come through in February, I believe. So, just wanted to get your thoughts on the peak volumes in the quarter play out according to expectation? And I believe you said that inventories right now are 12% up, year on year. Is that adjusted -- I believe you always give a same-store number on the inventory or like-for-like number. Is that the number that you used? (multiple speakers).

Yes, that's total inventory. That's not a same-store, correct?

Right.

So, it played out exactly like we thought. Our same-store sales were 5.6% this quarter; they were less than 2% last quarter.

Inventory was up, I believe, a little under 8% overall last quarter, and this quarter on an overall basis, they were up 11%. So we're seeing a growth in both volume and inventory, and as you know in our Business, our inventory is the perfect indicator of what our sales are going to be the next quarter.

Okay, thanks a lot for taking our questions, thank you.

Thank you. Our next question comes from Bill Armstrong, with CL King & Associates.

Good morning, Will and Jay. Most of my questions were answered, but I did have one. The G&A was a little bit less than I was modeling. Should we be looking at that $30 million per quarter run rate, going forward? Or were there any non-recurring items in that number, in the quarter you just reported?

Yes, Bill, I would expect it to grow. So we executed on this change in IT strategy, and we've cut it to the bone, and now we're seeing that we need to add resources to develop new products and to expand internationally.

So I would expect that to grow. I would say -- I'm not going to give you a number, but it's going to be north of $30 million, going forward.

Maybe in the low $30 millions, would that be sort of a ballpark to use?

Fair enough. Low $30 millions.

Okay, great. Thank you very much.

You're welcome.

Thank you.

(Operator Instructions)

Our next question comes from John Lawrence, from Stevens.

Good morning.

Good morning, John.

Will, on the financial piece of the business. Looking at that, with your expanded role, what's the status of CFO role? I know there's been some changes on that side of the business. What's the prospects, there, and what are the plans on that staffing?

Sure.

The important thing to understand is we've got a really seasoned and mature staff. We've got three VPs: a VP of tax, a VP of SEC reporting and compliance, and a VP of transactional accounting. So, and in addition, we have other resources at the senior leadership team that help in that area.

We will make a move when it's right for our Company, but in the meantime, you shouldn't worry about anything falling through the cracks. We are well staffed, we've got, I think a wonderful team of accountants that look over our SEC compliance and 404 compliance issues. So we'll make that move when it's appropriate.

Yes, I was just -- Yes, I'm sorry.

I might add to that, John, because Will is not going to brag on himself, so I'll brag on him. He's been our CFO for the last 11 years, and the hiring process that we are going to go through and bringing in an SVP candidate, is to eventually pass the CFO title to that person.

That's a transition, so that it moves from Will to that new person, that new role, and allows Will to fully function or fully focus on the EVP role that he holds. But he never has given up the CFO title since we started that transition, just so you know.

Yes, I understand. I was just looking at it from the standpoint -- from his standpoint, to be more effective in that other role, is what I was thinking.

That's right, and that's exactly why we are in the process of hiring for that SVP role, so that we can eventually transition that over time, and Will can be that much more effective.

Last question, I hate to go back to the buyback. Just can you give us a little bit more sense of just a deeper dive into that discussion on return on investment, etc? I would assume with these changes, getting the G&A out of the way, I understand the cycle of the business, but can you just give us another thought process of the stock? At this point, appears to be a pretty good reinvestment.

You know, we never comment on the calls about the stock price and how we feel about it or how we view it. All I can tell you -- or at what price we buyback.

All I can say is that it's something we do discuss at the Board level, and we compare our Company with other opportunities. We always view the acquisition of another company, the growth in our industry against our own stock price, and you have seen historically where we've acted upon that. So, I'll leave it at that.

Yes, and I'm sorry. Last question would just be -- the point of this cycle would be, and I assume from a numbers standpoint is, Will, to your point, the G&A has come down, you've got that to the bare bones. Now the leverage point gets accelerated as ASPs go back the other way?

Of course, absolutely right.

Great. Thanks.

Thank you.

Thank you. This is the final call for questions.

(Operator Instructions)

Our next question comes from Bret Jordan, from BB&T Capital Markets.

Hi, good morning.

Good morning, Bret.

Just a question on insurance cycle times. Is this a new normal, or where are we? We had a slowdown for a period of time, and I guess if you look at velocity of inventory working through the channel, could you give us an update on where we are, relative to maybe the old normal, and what times look like today?

Yes, as I said in my opening remarks, it hasn't moved materially. It went up slightly. I mean 2%. 2% is nothing, so it's not a material movement, and I believe we're in the new norm.

Over time, I also believe that the cycle times will improve, but I don't think that's going to happen in the next couple of quarters. Especially with the volume that we're taking just right now from some of the flooding and flash flooding and weather that you're seeing across the country. We're already seeing some upticks in volume there, so I wouldn't expect cycle times to come down in the next couple of quarters.

But in the long haul, in the long term, we all expect that those cycle times will go more to like what they were a couple years ago.

Okay, and so we should think about inventory levels, assuming cycle times are longer but stable, sort of cycling through a linear basis? That what you're holding now, we should see clear relatively soon?

What we are holding now, we would expect to move in Q4. The difference in that, I'm cautious to say that and then we report a big inventory build in Q4. We may be selling off Q3 inventory and we're building a ton of inventory right now due to flooding and other components. So it not as simple to say it's just going to flop.

It may, we may end up high in Q4. But eventually, to your point, this is the number. We haven't seen cycle time continue to tick up, and so we're at a cycle time number we're comfortable with. And that should start to move out through Q4, Q1, Q2, and it becomes the norm.

Okay, thank you.

You're welcome.

At this time, we have no further questions. Now I'll turn it back over for closing remarks.

All right thank you, Katie. And again, Will and I appreciate you all coming on the call, and we look forward to reporting the next quarter and the fiscal year. Thank you.

Thank you, Ladies and Gentlemen. This concludes today's conference. You may now disconnect.