Copart Inc (CPRT) 2015 Q4 法說會逐字稿

Excuse me, everyone. We now have all of our speakers in conference.

(Operator Instructions)

I would now like to turn the conference over to Mr. Adair. You may begin.

Thank you. And it's my pleasure to welcome everyone to the fourth-quarter call. Before we start I'm going to transfer it over to Will Franklin, who will do our Safe Harbor. Then he'll pass it back to me, and I'll give you a quick update, he will review the financials and then we'll open it up for Q&A. And with that I'd like to turn it over to Will.

Thank you, Jay. 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 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'll turn the call back to you, Jay, to begin the comments on our fourth-quarter results.

Thank you, Will. Will will give you an update on the financials for the quarter so I'm going to focus primarily on some of the successes that we achieved in the quarter and in the year. We had a great year. We had a great quarter.

We did start off the year with significantly higher ASPs, or average selling prices, of cars. And we saw those average selling prices come down from Q1 to Q2 all the way to the end of the year. So, there were some unanticipated headwinds that we faced in that because as vehicle sale price sells for less, we end up generating less revenue on a per unit sold.

We believe the primary driver of this was the decrease in scrap, and the lower scrap prices basically caused buyers to pay less for the cars that we were auctioning off. In addition to that we would throw in the strengthening of the US dollar that took place during the same time frame in the last fiscal year, again making it harder for international buyers to pay as much at auction for vehicles that we were selling. So, in spite of these headwinds and these challenges, we had a record year and a record quarter. And, as I said, I'll leave that to Will to talk about.

At the beginning of the year we talked about our focus on G&A and in the quarter we made huge improvements in our G&A. So, I would call that out so that there's some focus by the analysts and by investors to look at the improvements that we made. It can be very hard for companies in a growth mode, adding locations and making improvements to the business, to at the same time reduce G&A, and our team has just been really successful this year in getting that done and executing on those fronts and we're really proud of them for that.

Across the board, from operations to sales to our technology teams, we produced improvements for the Company. And you'll see the fruits of those improvements in the year that we're currently in. We expect in Q1, Q2, Q3 and Q4 of this year to be launching some new products, opening up in some new markets and driving volume for the Company associated with that.

In the UAE, we added two more facilities this year in Oman and Bahrain in the fourth quarter. And we finished the year with 183 yards worldwide, of which 28 are now outside of the US. We now have two years of vehicle sales with our third generation virtual bidding technology. We refer to that as VB3.

As an example, this platform enabled us this year to sell a vehicle, a 2003 Ferrari Enzo, located in East Bethel, Minnesota, to a buyer not too far away in Essex, Maryland. We often give these great stories of vehicles selling in all sorts of foreign countries, and I've got another one that I'll give you that is similar to that. This is one that's not too far away but the price is the key. It was the most expensive vehicle we sold in the year, it was $706,000.

We had five Teslas that we sold this year to buyers in Ukraine. I thought that was interesting that they're buying those types of vehicles. It just really speaks to the power of VB3 and our technology and our ability to drive results even in the face of those headwinds that we talked about in the form of low scrap prices and the US dollar.

In previous calls, we've talked about the average age of vehicles that we're selling. In 2008 that average vehicle age was 8.6 years. In 2011 it had grown to 9.7 and it is currently in 2015 at 11.4. We believe that's going to drive additional unit volume, as it has in the past. As vehicles are aging, their probability of becoming a total loss is going up. So, you'll see and you'll hear from Will some investments that we made in additional locations, expansions, et cetera, to make sure that we have the capacity to handle the additional volume that continues to come in.

Then, finally, I'll just close with another queue on technology, mobile technology. We launched our first mobile app in 2013 on the iPhone platform. We launched the Android platform this year. And I'm happy to say that we have received over $8.8 billion worth of bids now via mobile. And in 2015, we finished selling now 12.5% of our vehicles over mobile devices. So, it has become a very strong part of our platform.

Again, I think back to the days of having to physically show up to auction. And putting those auctions online allowed buyers to eliminate travel and weather and all of the other friction points. And now you don't even have to be in your office. You can literally be bidding on vehicles from the local Starbucks. And we're seeing that now as 12.5% of our bids are coming in through mobile devices.

So, with that, I'll transfer it over to Will and then upon his completion we will open it up for Q&A. Thank you very much.

Thank you, Jay. I'm going to make a few brief comments about our financial results for the quarter. Total revenue declined by $5.2 million or 1.8%, as the growth in volume was offset by a decline in revenue per transaction and the impact and the change of the percentage of cars sold on a principal basis, which carry a higher revenue per transaction, versus cars sold on the agency basis. Overall, volume grew by 8.2%. In North America, it grew by 8.6%.

The decline in ASPs resulted primarily from lower commodity pricing and the impact of the stronger dollar. The index for crushed car bodies, which we believe to be highly correlated to junk and dismantler buyer behavior, declined by over 44% year over year.

The stronger dollar continued to inhibit auction participation by our international buyers and impacted the ultimate selling prices. 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 $5.8 million.

Purchase car revenue declined by $7.6 million or 16.4%. The decline resulted from reduced auction selling prices as the volume remained relatively flat. In addition to the impact of commodity pricing and the stronger dollar, the average selling price was 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.

While purchase car volume remained flat on an absolute basis it declined as a percentage of total units sold. Service revenue remained relatively flat, increasing by $2.4 million or 1%, as the increase in agency car volume was offset by a reduction in revenue per car and the impact of FX. Yard operation expenses declined by $900,000 and was driven by a reduction in the average cost to process each car and the beneficial impact of FX.

General and administrative costs declined by $7.2 million. The same quarter last year contained $1.1 million of one-time costs associated with the restructuring of our technology strategy and the relocation of our technology department from California to Texas. In the current quarter reductions came primarily from the rationalization of technology resources, lower legal expenses, and the beneficial impact of FX. We expect our G&A cost to increase in FY16 due to growing international activity.

On an overall basis, the change in FX reduced EBIT by approximately $1.5 million. During the quarter we expended $30.1 million for yard expansion, equipment, and technology. This included $9 million in lease buyouts.

Finally, during the quarter we expended $233.5 million for the repurchase of approximately 6.5 million shares of our common stock at an average price of $36 per share. We exited the quarter with $456 million in cash and $645.8 million in bank and private placement debt.

With that, we'll turn the call back over to you, Cassidy, to manage the Q&A segment of the call.

(Operator Instructions)

Our first question comes from Bob Labick with CJS Securities.

Good morning. Congratulations on a nice quarter. The service gross margins were up year over year despite the FX and scrap you alluded to. And, Will, you just mentioned that it was, I think, due to the lower processing cost per car. That trend had been going up a little while ago. Can you talk about the drivers and how you lowered the cost to process each car and where you expect that to go over the next several quarters?

Sure. First off, we've cycled completely through the integration pain of the QCSA acquisition. And, second, and probably more importantly is we're starting to see again the efficiencies that are endemic in our model, and that is we have a lot of fixed cost. In fact, if you exclude the titling cost and the sell-whole cost, almost all of our costs are fixed. And two of the most important metrics that we look at are the number of cars per head and the number of cars per yard, and both those are up nicely during the quarter. So, we're starting to see the benefit of what we call fixed cost absorption in our processing cost.

And then the third element of that is, Sean Eldridge, our Chief Operating Officer, and his team have worked extremely diligently to carve out any waste in our system. And he's been very successful in the last year in doing so. Going forward, I wouldn't expect to see a meaningful change. I think that we'll control the cost, but I wouldn't expect to see significant reductions going forward.

Okay, thank you. And then, on to growth opportunities, and internationally in particular, could you give us an update on the German market and your process there -- what's going on there? And any luck in terms of turning it more towards a US style insurance market?

Sure. We've had growth in that market in the year with our existing business that's there. And we are poised to enter into that market in the next calendar year. I always hate to speculate on when that will happen and how that will look, but the plan is that as soon as we are open, we will make an announcement, as we've always done, with press releases, and then we can talk about that further, Bob, on calls as to the success we're having in that market.

Germany -- clearly, Germany is the biggest opportunity. We've also grown in the Middle East and we've grown in Brazil. So, across the board, if you roll up the international team as a unit or as a whole, as we do, as we think about it, we've seen growth throughout the whole market. So, we're happy with it. It's been good.

Great, thanks. And then last one and I'll get back in queue: You mentioned the $30 million in CapEx, and I think you said $9 million in land. Was that US land? Was that international? And do you have any idea for a ballpark of CapEx for next year?

No, actually that $9 million was a lease buyout, so I guess you could say that's land. There's other outlying purchases of land that's included in that $30.1 million. All those lease buyouts were domestic in nature.

We generally don't make predictions and give guidance on CapEx because of the uncertainties that surround buying this land. You can imagine how difficult it is to get zonings, and how sometimes we can get up to the very moment of closing a deal and find out we don't have the right zoning and we have to start all over again. So, it's just really hard to predict how much we will be spending in a certain period of time.

Got it. Okay, thank you very much.

Our next question comes from Ben Bienvenu with Stephens Inc.

Good morning, guys. You referenced growth in G&A over time. That was a source of nice upside in the quarter. And you guys have done a good job at reducing absolute dollars spent on G&A. What's a reasonable expectation for where that should go? And how high off of this level where we are today do you think we could see that skew?

Once again, we hesitate to give guidance in that, other than to tell you that there's going to be more upward pressure in the absolute number during the course of FY16. That will be driven primarily by, like I said, international expansion. Some of that will be driven by the need to add more resources in our technology rollout -- for our rollout of some of our technology. I actually wouldn't expect it to grow much faster than -- I think they will be leverageable.

Okay. And then maybe just touching on the tender offer and share repurchase, stock is now below where the tender offer was done. You still have quite a bit of cash on the balance sheet. You generate nice cash. I'd be curious to hear your thoughts around your outlook for share repurchase, your strategy there, and how you think about allocating capital given the surplus of cash on your balance sheet.

We're always hesitant to discuss on calls how we view buying stock back. I would just put it this way: The tender price, as you stated already, was higher than the current price. And the amount that we [have to] buy in was higher than what we ended up selling. So, I think most investors can probably read between the lines on that, how we view the stock. We discuss this at the Board level, and if it's something that we think makes sense going forward then we'll do it.

Okay. And then last question for me: You've seen in recent quarters, typically the correlation between your unit growth and your largest competitor over the last couple years has been a fairly tight correlation. But in the last couple quarters you've seen that disparity widen. And while your unit growth has been strong, it hasn't matched up with your peer, and it hasn't matched up with the inventory growth that we've seen. I'd just be curious to see -- help us understand what's going on, on the unit growth side, so that I can get better clarity there.

I'm not sure what you're looking at. We don't disclose units, and they don't disclose units, so it's very difficult for us to be able to see what units they are selling compared to us and vice versa.

Okay. You referenced unit growth up 8.2% in this most recent quarter. They had unit growth up 14%. Those are the numbers that I'm looking at.

We're a lot larger company, in terms of volume. So, when you talk about percentages, I think that's one piece I would look at.

The other thing is it's timing. Our quarters don't line up. And you're talking about months that are going to have more activity in them than other months. As a Company, for us, having the kind of growth that we're seeing right now, we're really, really happy with it.

Okay. And then, sorry, one last quick one, just housekeeping -- what was the diluted share count at the end of the quarter?

It's 130.2 million.

Okay, perfect. Thanks so much. I'll get back in the queue.

Our next question comes from Ryan Brinkman with JPMorgan.

Hi, this is Samik on behalf of Ryan Brinkman. The first question I had was primarily related to the impact or the influence on pricing that you're seeing from the stronger USD, like the interest or demand you're seeing from international buyers. And curious to know if you can ballpark for us what percentage of your buyers at your US auctions are international buyers? And give us a sense of what influence that is having?

Normally we're looking at the number of units sold internationally but, more importantly, we look at the value of what we're selling internationally. And in this quarter, that was down to 21.8%. As a comparison, in the second quarter of FY14 that was 29.3%. So, we're seeing a significant impact on their behavior because of the stronger dollar.

Okay. And sequentially going down through the quarters, through each quarter this year, is that a good way to think about it?

No, actually, sequentially we're flat.

Okay, great. And the second question I had was more about in what you're seeing now in terms of lower scrap prices, et cetera, which is pressuring pricing. Can you talk about what levers you have or what [is the ability] that you have to take pricing to be able to offset some of the pressure that you see?

We don't discuss pricing on conference calls.

Okay, that's fine. And I just had a housekeeping question, which was: I didn't catch if you disclosed your inventory number, like was it up year over year, if you can just share that?

Inventory was up in North America about 9.6%. Worldwide it was up 9%.

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

Our next question comes from Elizabeth Suzuki with Bank of America Merrill Lynch.

Good morning. Last quarter you noted that the stronger dollar impacted revenue by about $6.8 million negative and EBIT by $1.3 million. In this quarter those numbers were, I think you said $5.8 million to revenue and $1.5 million to EBIT. Do you expect that foreign exchange headwind to continue to ease or should we be modeling in continued headwind for 2016?

We don't have any information that the market doesn't have, so I would suggest that you -- I would speak with commodities or a foreign currency expert in that respect.

Okay, thanks. Second question: Is the year-over-year benefit from the roll off of the QCSA integration costs now complete or is there more that you expect in the coming quarters?

No, it's done. They're completely absorbed.

Okay. And one more quick one: At this point, we understand that it's still very early to determine what the ultimate impact of the VW controversy would be on the industry. If impacted vehicles have to be sent to salvage auctions, I'd imagine that would be a tailwind. But if they get retrofitted and there's a cascading effect on residual values, that could be a headwind for ASPs. Do you have any approximate estimate of what percentage of vehicles that come through your auctions are VWs?

No, not off the top of my head.

All right, thank you.

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

Good morning, guys. Just a quick follow-up on the G&A: Were there any non-recurring items within that, that might have kept it down during the fourth quarter, or anything that might have been pushed out into the new fiscal year?

No, there really weren't. I mean, there's always one-time. When you have a Company this size, you'll have things that are unusual in every period, but there's nothing that's material that we'd call out in this quarter. We do a pretty good job of calling out those things that are material, just so you can do your modeling. (multiple speakers)

Right, got it. Okay, thanks. That's really all I had, thank you.

(Operator Instructions)

Our next question comes from Gary Prestopino with Barrington Research.

Hey, good morning, guys. Jay, you basically said at the beginning of the call that we're going to have some new markets and new products, Q1 and Q3 of this year. I know enough not to ask you what those new products would be because you're not going to tell us anyway. But in terms of new markets, are you looking to go into new regions of the world where you aren't right now or countries that are tangential to where you are in, say, Europe and the Middle East?

I think I resemble that remark that you just made. (laughter) But we are going to be looking at expanding in existing markets that we're in. And we are anticipating, based on what we can currently see in terms of volume coming in, in the US, we're anticipating having a significant -- a good year in terms of that.

Some of the new products I talked about, our customers are aware of them, they're waiting for them. We'll be releasing them this year. And some of them are going to allow us to expand further in some of our existing international footprint. So, that's really what I was referring to.

Okay. And then, I think one of the questions was asked, but I didn't quite get it. Did you say your international revenue was about 22% this quarter versus 29% in last year's fourth quarter?

No. International revenue is less than 2% of our total revenue -- well, excluding the UK and excluding Canada. So, if you're looking at the emerging side of our international strategy, it's less than 2% of our revenue.

What I'm getting at is what's your total international revenue as a percentage of sales? That's what I'm --

The numbers Will was giving out was international buying. That was the buyers -- what percent of the value of the cars that we sell to international buyers. I believe that's what he's referring to, down from 29% to 21%-ish.

Right. But in terms of the percentage that's total international in this quarter, do you have that handy?

That's what I gave you. That was 21% -- [21.8%]. (multiple speakers)

Okay, 21%, that's fine. That's what I'm trying to get at.

And then, if you look at that, how does that break down between vehicle sales and service? At one time, the majority of that was vehicle sales because it was UK, but has that shifted more as a percentage into service? Can you give us a breakdown there?

Just to be clear, the number I gave you were the North American units sold to non-North American buyers. And those are almost exclusively agency cars.

Okay.

To be clear, you were not giving him our international revenues as a percentage of the Company.

Correct.

I think he might have thought that, that's why I was --

All right, I'll follow-up with you guys after the call. But, anyway, in terms of the tax rate going forward, Will, what should we use as a tax rate for next year?

You should probably be 35.5%, 36%.

Okay, thank you very much.

At this time, we have no further questions. Speakers, are there any closing remarks?

Thank you, Cassidy. And thank you, everyone for attending the fourth-quarter call and FY15. We look forward to reporting in the first quarter. Goodbye.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.