Copart Inc (CPRT) 2016 Q1 法說會逐字稿

(Operator Instructions)

Thank you, I would now like to turn the conference over to Jay Adair.

Good morning and welcome to the first-quarter call for 2016. I'm going to transfer it to Will first. He'll go over the financials have closing remarks and we'll open it up for questions. With that, it's my pleasure to introduce Will Franklin, our Executive Vice President.

Before we begin our comments I would remind everyone on the call that our remarks will contain forward-looking statements. These statements are neither promises nor guarantees and are subject to risk and uncertainties that could cause actual results to differ substantially from those projected or implied by our statements or comments. The Company expressly disclaims any obligation to update or revise these statements or comments. For discussion of the risks that could affect our business, please review the risk factors contained in our most recent 10K, 10Q, and other SEC filings.

Also, this morning, Copart filed a scheduled TO offer of purchase and certain other documents with SEC relating to a tender offer to purchase outstanding shares of common stock. These doctrines are available at the SEC website. Copart is also mailing the offer to purchase, letter transmittal and related documents to all shareholders.

We do not intend responding questions concerning the terms and conditions of the tender offer on this call. The offer is made solely pursuant to the offer to purchase as may be amended from time to time, the associated letter of transmittal, and any related documents. We encourage shareholders to review them carefully.

With that I'll begin with a few brief comments on the financial results for our first quarter. Total revenue remained relatively flat defined by $1.5 million or [53] basis points. As increased volume was offset by reduced ASPs and consequently reduced revenue per car. ASPs were driven lower by the continuing decline in scrap metal pricing which we believe to be highly correlated to junk and (inaudible) prior behavior.

The index for crushed car bodies in North America declined by over 48% year-over-year. We believe ASPs were also negatively impacted by the stronger dollar as a significant portion of our North America sales are to international buyers and the stronger dollar continued to inhibit their auction participation. Purchase car revenue declined by $5.9 million or 13.5%. The decline resulted from reduced ASPs, a change in mix in the negative impact of FX.

In the current quarter and higher percentage of purchase cars came from our direct purchase program which has a lower ASP and cars purchased from insurance companies. Are just purchase program we buy and sell cars for our own account. Service revenue increased by $4.4 million or 1.8% as the increase from agency car volume was offset by reduction of revenue per car go the decline in revenue car was tied to the lower ASPs.

The auto operation expense increased by $5.4 million and was driven almost completely by volume as the average cost to process each car remained relatively flat. General administrative costs declined by $5.6 million, the reduction came primarily from the rationalization of technology resources and the beneficial impact of FX.

On an overall basis the change in FX reduced revenues by $4.6 million and EBIT by approximately $0.9 million. During the quarter we expended $19.2 million to accommodate the growth and accounts receivable and inventory. $20.2 million for yard expansion, equipment and technology and $21.1 million in marketable securities.

We exited the quarter with $473 million in cash and $226.7 million in total private placement debt.

That concludes my brief comments I will turn the call back over to our CEO Jay Adair to conclude comments on in the quarter before we turn it over to Q&A.

Think you Will. Good morning everyone. I would like to talk about inventory in the quarter, inventory in North America increased 14.4%. Looking at sales for the quarter, as Will mentioned, we saw a decline in ASPs due to strong dollar and also due to the low value scrap at this time and that revenue was offset because of sales increase of 5.1% in the quarter for North America. Looking at cycle times because we often talk about inventory increases and the impact they will have in subsequent quarters typically in the next quarter. We want to talk about cycle time was flat for the quarter that was zero. We don't see the increase in inventory associate it with cycle time expanding but rather just through additional volume coming in.

Finally, as Will mentioned, international sales are down because of the strong dollar situation. A year ago in North America we were approximately 21% and today we are just a tad below 20% on international sales. These are vehicles that are sold in North America and exported to countries outside the US.

With that I would like to now turn it over to Josh and will open up for any questions that you may have.

Thank you.

(Operator Instructions)

Bob Labick, CJS Securities.

Good morning. I want to start off first question, you had one other announced last night as well, you announced a new Senior Vice President and CFO to come on early next year. I was wondering if you could tell us a little bit more about his background, we obviously read the release, but any more color around that? Additionally, talk a little about Will's new roll and the growth opportunities in the US that are likely to come with that?

Jeff is a great guy, we have known him for a of couple years here in Dallas. He has been with FleetPride and prior to that -- FleetPride is owned by TPG. Prior to that he was with TPG in a corporate role. We had been talking to him for awhile about a CFO position.

Will started the EVP, or took over the EVP role, approximate 18 months ago. The biggest improvement that he has made that you can clearly see is the reduction in G&A. That has been a big push to have a focus on measuring outputs and reducing expenses where we felt we weren't getting a return. And you have seen that.

We talked about that a year ago. We felt very confident a year ago that we were going to be able to see those types of results and Will executed on that on the last year. At the same time, he's been carrying the CFO title but we have been having a lot of that work done by [Big Badia] on our [chain]. That wasn't the intent for [Vic] to do that, but we want to make sure that Will was focused on the G&A reductions and other G&A performance pieces that we've got, areas that we measure and areas that we focus on.

Jeff will start in January. We brought him on as CFO based on his experience previously, and our knowledge of him, so we are looking forward to having him on the Team.

That was helpful color, I appreciate that. To the quarter, last quarter -- you did an excellent job on the cost to process a car, it was down materially, and you were able to hold it flat again after previously there had been a number of quarters where it had been going up. Can you talk a little about expected trends and cost to process a car and what you're doing maybe differently now to flatten out or bring it down slightly?

Part of it has been execution. The Team's ability to focus on cost -- part of it has been the benefit of fuel. Fuel is off significantly year-over-year and that has helped us control transportation costs.

Part of our cost going up if you recall was related to Sandy and then it was related to an acquisition, large acquisition, we made to QCSA. There was a whole process we had to go through to eliminates implicative costs to try to reduce [subhall] expenses that shot up through Sandy. There were a couple years of having costs that were increased because of those two factors and then we also moved the Company from California to Dallas.

I feel strongly at this point we're at a normalized run rate. I don't see any reason at this point why fuel is going to skyrocket back up. I think that's pretty much understood throughout the industry. I think we will be able to maintain our current cost per car.

The only thing that would increase that a little bit is we are looking at adding some additional facilities in the US in the next year because of volumes that are up. And as we add stores, they have a cost -- they increased the cost in the beginning and as we fill the stores with cars and start to sell those cars off, then it reduces the cost. But for the most part, I don't think we're going to see a real big increase in our operating costs at the yard, Bob.

Okay, great. And then last one, I will get back in queue. In terms of the international expansion you have given us updates on a quarterly basis, wondering how things are going, and the key markets you are focused on and when we might hear more?

We are happy with what we are seeing right now in terms of our results, both in the UK and in the rest of the world. UK is obviously the vast majority of the international. The UK is a much more mature market as opposed to the other markets that we're doing business in.

We will be in a far better place to report on some of the results towards the end of this fiscal year. For now, I don't think I can add a lot more color than we added in the last quarterly call, but as we approach the end of the year, we should have some results and some color that we can give you on how we are doing internationally.

Okay. Thanks very much.

Elizabeth Suzuki, Bank of America.

Good morning. Can you break out how volume price and mix trended in the quarter in terms of year-over-year change for each? What was the average age of vehicles sold in the quarter, and how does that compare to this time last year?

I think we addressed that directionally. The volume was up, Jay gave the statistics on that. ASP is down, we didn't give an exact percentage to that, I think we'll just leave it at ASPs were down. ASPs were down, that drives revenue down. And the last question--

Inventory was up.

Inventory was up.

I think you asked about mix. Roughly 80/20.

Between insurance and non insurance? In North America we're slightly under 20%. And non insurance. And that's basically because of significant growth we have on insurance side in terms of total units, it's remained relatively flat.

Okay, thanks. Do you have data on the average age of vehicles that were sold in the quarter?

No, I don't.

It's going to be not too off far from where it was the prior quarters, which is about 11.5 give or take.

Okay. So no material change there.

It's going to be within a few tenths.

Are you seeing any market share shifts or any market share being taken by smaller independent companies getting new insurance contracts or any other of the majors taking some share by reducing pricing or fees?

No.

That's helpful, thank you.

John Healy, Northcoast Research.

I wanted to ask a little bit about the UK market. One of the stories of this year is you're a big competitor here in the US entering into that market. I was curious to know if you've seen anything change in that marketplace, if you are watching anything more closely than you have in the past and any sort of feel you can give for how that landscape is evolving?

I'm happy to do that. United Kingdom inventory was up 14.5% so little bit more than North America. Sales in the UK were up 5.6% so a little more than the US as well.

It's, from a international standpoint, it's taking about the same trend. They are off a couple of points from -- a little over a point from what used to sell internationally in that market. It is doing well and I've really got nothing negative to report from the UK. They are doing very well.

I wanted to ask more of a comparison issue. If you look over the last few quarters your volume numbers have been healthy but maybe not quite as healthy as what's going on with insurance auto auctions.

I was wondering if you could help us understand the difference in the growth rates. I don't know if it's associated maybe with the market share amongst the insurance customers you have or if it has to do with maybe your charity business. Any color you could give us that would help us understand the difference in growth rates there?

I really can't. I can't talk to my competitor. I can tell you that from our perspective, to grow 5% year-over-year when you are our size is a big growth rate. To have an inventory build of almost 15% is a big number. I really can't talk to what they are doing and how they are doing it. I could really just answer any questions you have about Copart.

I was just curious your thoughts along the lines from a share standpoint. Have there been any changes in the makeup of your customer base? Are you seeing certain insurance companies grow at a faster rate maybe than others? Is there anything that you see that would maybe explain the [rate of your] change?

We've had a recent market share gain but that's not going to show up until probably the third and fourth quarter of the year. You have to start bringing the vehicles in and building inventory, and sell the vehicles off.

In the past year, we've had market share gains. We have seen the industry expand because of the AG vehicles. The numbers -- we have reported the numbers historically on the quarters, and so I won't to try to restate them all. The numbers are out there.

Got you. Thank you so much.

Gary Prestopino, Barrington Research.

Good morning. Jay, did you guys give the total volume growth in the quarter? I think you gave 5.1% increase in North America. Did you give the total volume growth?

No, I didn't. I can give you total volume for the whole -- globally? For the UK, for North America, the whole Company was 4.9%.

Okay. That's fine. Thanks. And then in terms of your line of credit, or your debt or whatever, what rate are you currently paying now on that debt or the line if you need to borrow?

We're paying -- on the fixed fee, we have a blended rate that's about $400 million of about 4.22%. On our term loan A we are at about a little over 2%, and the amount of that is $225 million at this point.

Okay. And then just a couple other things. In your proxy you guys put [forth] something where you're trying to increase the shares outstanding from $180 million to $400 million. But yet you're just announced -- made an announcement today of the self-tender. What is the rationale for doing that, Jay?

That's interesting, I wasn't expecting you to ask a question like that.

I want to get you with one question per quarter, right?

I want to -- I'm going to look to my attorney for a minute. I'll put you on hold one second.

I think the best answer I can give you Gary is that we have a limited number of shares currently. We could have asked for less shares in the proxy and then we might have to come out later and ask for more shares again.

We asked for a number that we felt was sufficient that we wouldn't have to go back and ask for again. And as my attorney is sitting here telling me, the explanation is in the proxy and he would prefer that we go with that. We felt like we were asking for enough that we wouldn't have to go back and it gives us the flexibility for the future.

That's fine. And then lastly, it looks like year-over-year your gross margin on agency was down about 124 basis points. Was there anything in there that's driving that, was there something one time or was there some benefit last year that would not make the comparison apples to apples?

No. It's definitely to find the revenue per car while our costs stay the same. Our costs [have] really fluctuated. They've been fairly consistent the last four or five quarters. They fluctuate less than 4%.

So it's only really attributed to your decline in ASPs then?

Yes. It's all decline in ASPs. In fact last quarter while we were flat on our cost to process each car, we also had a negative impact of Hurricane Joaquin, which had a significant amount of cost. We absorbed that and still maintained a flat cost basis to process the car. We are pretty happy with the efficiency of our operation.

Thanks. Have a happy Thanksgiving both of you.

Ben Bienvenu, Stephens Inc.

Thanks, good morning. Thanks for taking my questions. On the mobile front you have had quite of bit of success there adding the Android platform last year I think you cited on the last call that about 12.5% of vehicles sold are coming through the mobile platform.

I'd be curious to know, are we still in that ball park, how it's trending and then I assume as you add capabilities, and buyers or sellers become aware of that process, that is skewed upward over time. Just your thoughts on that capability?

We talked about it in the shareholder letter as well. If you want to look to that in the annual report, there is maybe a more current stat on how we're doing. We are extremely happy with that result.

We didn't know if -- many of our buyers like to bid on five to ten auctions up on one screen at one time. That is one of the benefits of our virtual bidding third-generation platform. As opposed to having to physically attend an auction, and have the different cadence and speed of human beings that are running the auction, our auctions are all much easier to follow when you have 10 auctions open at once.

We didn't know candidly how many people would go to a mobile platform. We didn't know if it was going to be a scenario where they're out at our yard, they're looking at the car, bidding on it, or they're going to be at Starbucks bidding on it. To be near 15% in penetration, I would say has already exceeded what we thought it would do.

I don't know if it will end up at a fifth of our units selling over mobile or if it will stay where it's as but I can tell you from both the Android and from the Apple platforms, we are extremely happy with the results we have seen thus far.

Let me add to that. There's other efforts. We have I think a robust strategy to develop our mobile. Not only through apps but through mobile optimizing our current website which we haven't done which will make participation at our auctions through mobile devices much more attractive.

That's great color, thanks. One last one for me. You guys talked about adding incremental sites next year. Do you have a sense of what your site capacity utilization is today and are those additional sites going to be broad-based by geography within North America or are there specific regions?

I don't have the actual percentage in front of me and I don't think it's relevant anyway. We have some locations that have 50 acres of capacity and other locations that have five acres of capacity.

The reason we are constantly investing in expanding locations, we [rarely] talk about how many locations we've expanded in the year. This year we're going to actually have to add additional locations and markets and that's because we have seen a consistent growth in inventories since Sandy.

Since 2012, there has been a year-over-year increase in inventories, and yes, we do sell that inventory off in the third quarter, but it has continued to grow year-over-year. We are at a point now where we not only are we going to be expanding yards this year, like we have last year, but we are going to be adding a number of locations and we will talk about that in the year.

I would guess it's in the half a dozen to a dozen locations that we will be adding and when that -- as we bring those locations online we will announce it so that everyone is aware of it.

Thank you. Best of luck.

(Operator Instructions)

Craig Kennison, Baird.

Good morning, thanks for taking my questions as well. Many have been addressed. Jay, I think you hinted at this, but was there any important RFP activity in the quarter that could affect your share down the road?

We did have a win in the quarter, but that is not uncommon for us to have a win or multiple wins in a particular quarter. We did have a win and that volume is -- some of that volume is coming on now, and some of that volume will be coming on in the subsequent -- in Q2 and Q3. We will be selling that inventory off Q3, Q4. We should be normalized I would think by the end of the fiscal year.

In the past, you have had similar wins where you've gained essentially exclusivity with a big insurance company. Is this that flavor or is this something less significant?

It's a top five carrier and it is an exclusive long-term agreement. So yes, it's of that flavor.

I'm guessing you already had significant share with that top five insurer?

We did, yes. We had a significant amount of their volume and now we will be going 100%.

Just a final follow-up on that. Will, if my notes are right, sometimes these big insurance wins can be diluted upfront until you get all the volume you expect to get over time. Is there any modeling nuance to this deal that we should be aware of?

No, I don't think so. I think this new volume will blend in very efficiently with our current capacity.

Thanks. And finally, I'm not sure if you want to address this or not, but I'm curious what the attraction is of a Dutch tender offer versus other buyback alternatives? Thanks.

That is again another question I wasn't expecting so I will just say we can't comment on it because it is the tender.

Look to the documents for any information you need for the tender.

Okay. Thanks guys.

At this time, I would like to turn the call back over to Jay Adair for closing remarks.

Thanks Josh. Thank you everybody for attending the first quarter call. We look forward to reporting the second Q next year and we want to wish you all a happy Thanksgiving and we will see you then. Thanks

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