Copart Inc (CPRT) 2016 Q3 法說會逐字稿

Good day, everyone, and welcome to the Copart, Incorporated third-quarter FY16 earnings call. Just a reminder, today's conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Jay Adair, Chief Executive Officer of Copart, Incorporated. Please go ahead, sir.

Thank you, Justin. Good morning, everyone, and welcome to the third quarter earnings call for Copart. With me today is Jeff Liar, our Chief Financial Officer; Will Franklin, our Executive Vice President. And I'm going to turn it over to Jeff, who will start things off, pass it to Will, and then we'll open it up for Q&A. With that, I will turn it over to Jeff.

Thanks, Jay. We'll start with the Safe Harbor. Our remarks today will contain forward-looking statements, including statements concerning our views of trends in our business. The statements are neither promises nor guarantees and are subject to risks and uncertainties that could cause the actual results to differ substantially from those projected or implied by our statements and comments. We expressly disclaim any obligation to update or revise these statements or comments. For a discussion of the risks that could affect our business, please review the risk factors contained in our most recent 10-K, 10-Qs and other SEC filings.

I'll start with a brief financial overview before turning it over to Will. Starting with the income statement, our operating performance included revenue growth of a little over $50 million for the quarter year-over-year. That represents 16.9% growth on unit sales growth of 15.6%. We did experience a detrimental revenue effect of approximately $3.7 million from currency effects, due to a slight strengthening of the USD year-over-year versus the British pound.

Our Service revenue grew by $46.9 million, or a little north of 18%. That's greater than our Purchased Car sales growth of $3.2 million, or 8% year-over-year. Within our Insurance segment in particular, we experienced volume increases across virtually all of our major carriers. We've heard the carriers themselves reference in their public discussions references to heightened driving activity, increased accident rates, as well as elevated repair costs, leaving them to render total loss decisions more frequently. That's the volume side of the equation.

As we look to the ASP portion of our revenue base, we've observed and talked previously about both scrap rates, currency rates, as well as the Used Car Index. We have experienced in recent months a stabilization of scrap trends, which has declined in the past year and change.

We are still down year-over-year for the third quarter in comparison to 2015, approximately 9% for scrap rates for crushed car bodies, according to American Recycler; but we are up sequentially, almost 14% relative to the second quarter alone. We have noted the Manheim Used Car Index for the third quarter was also down year-over-year, a little less than 1.5%, and also down versus the second quarter, about the same amount. As a result, our ASPs remain decreased relative to last year, but they are up sequentially.

Moving further down the P&L, our operating costs did grow by 11.7% year-over-year, somewhat meaningfully less than our revenue growth, which led to some leverage at the gross profit level, as we grew GP by 23.7%.

Our general and administrative expenses were up $1.9 million year-over-year, a reflection of higher volume and business activity, up sequentially versus the second quarter, approximately flat versus the first quarter for us this year. As we've noted on the prior calls, we do expect absolute dollar G&A expenses to rise over time, as our volume grows and the complexity of our business increases.

The bottom line is our net income grew by 28.6% for the quarter, while EPS was up 45.5%, enhanced by share buybacks in July of last year, December of last year, and March of this year, which I will comment on a little later in the call.

Turning to the balance sheet, we generated cash flow with a reduction in accounts receivable. They've declined sequentially, as they do typically with the seasonal depletion of inventory, less so than in the third quarter 2015, due to growth in our physical inventory.

Our capital expenditures of $66.6 million -- $66.1 million compared to $56 million and change in our prior quarter, again, approximately 85% for land development, lease buyouts and the like, largely an investment in our growing capacity.

Last two notes on the balance sheet, the first is that we purchased 2.9 million shares on the open market for $118 million or thereabouts, at an average share price of $40.13, a continuation of our program, or an extension of the program we completed in December of last year. Over the past 12 months then, we've purchased approximately 17.5 million shares, or about 14% of our total shares outstanding.

And the last note, we undertook a simple refinancing action. We restored our term loan to the original balance of $300 million that we had completed in December of 2014. We extended the duration a full five years and expanded our revolver by approximately $50 million. In effect, we termed out the revolver balance that we had drawn, leaving us with a fully undrawn revolver. We've reduced our interest rates slightly on both funded spreads and undrawn fees. With that, I'll turn it over to Will Franklin.

Thank you, Jeff. I'd like to add a little color on our business performance, as well as the environment in which we operate. Once again, we are very pleased with the results of our third quarter. The 16.9% growth in consolidated revenue was driven primarily from increased volume, which grew by 15.6%.

I'll start first with some comments about our North America results, in which volume grew by 16.4%. First, we believe we're seeing a growth in the overall size of the North America salvage market. Accident frequency is up, driven by lower fuel prices and higher employment trends, which is leading to increases to miles driven and the average speed of travel, and consequently, to more frequent and more severe accidents. And we believe this trend will continue.

At the same time, we are also seeing growth in salvage frequency. By salvage frequency, we mean the rate at which cars involved in accidents are deemed an economic loss and totaled as opposed to being repaired.

We believe there are several reasons for this growth. The first is the growth in repair costs, driven by industry consolidation, as more independent repair shops are being purchased by MSOs, and, more importantly, the greater complexity of new cars, as they incorporate exotic and lightweight materials, extremely tight repair tolerances, sensors, cameras and other electronics, all of which demand that shops employ new equipment, tools and training, as well as requiring more replacement parts per repair.

The second is the increase in average age of the car part, which reached 11.5 years in 2015 and is expected to grow. As cars age, their value declines, making it less likely that they will be repaired.

And third is the increasing length of time policy holders must be without their cars during the repair process, whether as a result of the process itself or longer cue time waiting to get into their collision shop. This increases not only the total cost to repair the car, but also impacts the customer satisfaction metrics. Insurance companies are increasingly sensitive to the quality of the policyholder's claim experience.

In addition to the growth in the size of the overall salvage market in North America, we saw growth in our market share, as the impact of several recent contract wins, for the most part, were fully represented in this quarter's volume numbers.

And finally, we saw a 10.4% growth in volume from our non-insurance suppliers. This growth was led by increases in charity and donation cars, as well as cars from dealers and brokers.

Now I'll turn to make a few comments about the UK, in which we also saw growth in volume, increasing by 11.1%. In the UK, insurance volume grew to increases in both market size and market share. In addition, in the UK volume from non-insurance sellers grew by 23%, as the dealer and direct purchase programs grew in both volume and profitability. While we grew consolidated revenue by 16.9%, we grew our gross margin by 23.7% and our operating margin by 28.7%, once again demonstrating the operational leverage endemic in our business model.

Despite the additional costs associated with operating in cat environments, primarily Houston, we have kept our costs to process each car remarkably consistent over the last seven quarters, as efficiencies derived from processing higher volumes have offset the natural increases in labor and self-haul cost.

We also remain focused on controlling our G&A expenses. While G&A of $31.7 million for the quarter was up both year-over-year and sequentially, we remain well below the run rate of FY14 of $36.8 million per quarter. The growth year-over-year and sequentially was driven primarily by increased costs on brand development, litigation, conferences, headcount and compensation.

And finally, to accommodate the volume growth that we have experienced and the future growth that we anticipate, last quarter we announced an initiative to open 15 new yards during the next 12 months. We are reporting that during the current quarter we acquired five yards, two of which were placed in service. We closed on those two yards, one in Wilmer, Texas and one in Temple, Texas, in April; and currently they have approximately 4,600 and 1,800 cars on the ground, respectively.

That concludes my comments. Justin, at this time, I'll turn the call back over to you for Q&A.

At the time, we will open the floor for questions.

(Operator Instructions)

Bob Labick, CJS Securities.

Good morning. This is actually Robert Majek filling in for Bob today.

Good morning, Robert.

Can you discuss the inventory growth in the quarter?

Sure. So our inventory for the quarter grew at approximately 20.7% year-over-year. That's a global number. As a reminder for folks who haven't followed us for a long time, when we talk about inventory, this is physical assets at Copart as opposed to balance sheet inventory, which is a different animal altogether.

But growth of approximately 20.7%. If you isolate the effect of weather events that we experienced in Texas, excluding the growth from that alone, we still observed inventory growth of approximately 18% year-over-year.

That's helpful. Thank you. And in previous calls, you discussed a top five insurance FRP wins. Did we see the volume from that contract in the third quarter, and was that the full impact or should there still be additional incremental volume in the fourth quarter?

No, I think we addressed that in our comments. We did -- we feel that that volume is fully reflected. We don't see any future growth from those recent market wins. And I should mention, it's just not one. There's several market wins that we've had over the last three or four quarters.

Appreciate it. I'll jump back in the queue.

Thanks, Robert.

Thank you.

Ben Bienvenu, Stephens, Incorporated.

Thank you. Good morning. Congrats on a nice quarter.

Thank you, Ben.

Just curious on the gross margin front, you spoke to the leverage, the operating leverage inherent in the business. I'd be curious what cycle times looked like in the quarter, given the really strong volume growth you called out. Then any other things that you might be doing to capture incremental efficiencies to drive that leverage.

So our cycle times, Ben, were approximately the same as they were a year ago for the third quarter, as well. So that's not a major driver of the unit performance for the quarter.

Okay. Great.

And let me comment on what we're doing to become more efficient. We're really a very efficient company already. We are looking to technology to help us in that process, and that's in a couple areas. One is in the dispatch area, the other is the pickup cycle. And we anticipate rolling out these products to enhance these operations over the next three or four quarters.

I'll add to that, DMV, as well. So as we process DMV in-house as opposed to sending it to the state, we see an improvement. And the final point I would make, Ben, is you really can't crunch the cycle times too much. If you look historically over the last 20 years, they haven't changed enormously.

There's a period of time from day of loss to first notice of loss, to pickup, to receiving title, to sending title to state, to selling the vehicle. And as Will pointed out and on the DMV, that's about really all you can do to compress those times. So they are always going to run somewhere north of 60 days, as an average.

That's really helpful detail. Thanks. Looking this year at FX and relative to last year when the dollar was quite strong and the presumable pressure that put on the foreign buyer appetite at auction, what are you seeing from foreign buyers this year, year to date, with the dollar being a little bit more subdued. Have you seen any trend shifts there?

Yes, we have. Actually, sequentially, participation by our foreign buyers is down marginally, not a lot, but it is down marginally, and it's down year-over-year, as well.

Okay. And one last one for me. When you look at your balance sheet, you've raised some debt to support the tender offer, but leverage is still pretty modest. I'd just be curious to get your comfort level on leverage.

And then what sort of capital deployment opportunities would you need to raise that comfort level? Would you be willing to take on incremental debt to fund repurchase or would you prefer to do that out of free cash flow?

We're comfortable with the amount of debt we've got right now. With respect to future debt, we'd analyze that at that time. So I think it would be premature to talk about what scenarios. We would have to know at that time what all the factors were to decide what we want to do.

I think the biggest point I might make on this question is that insiders control a large portion of this company, and so we'll always be prudent in our analysis and our thought process with respect to debt.

Great. Thanks and best of luck.

Thank you.

Ryan Brinkman, JPMorgan.

Hello. Great. Thanks for taking my questions and congrats on the quarter.

Thank you, Ryan.

First question is, you mentioned, I think it was Will, that industry volumes are up in North America, [said in] miles driven, et cetera, and I think we can see that. But are you able to say how much of your volume growth in the quarter is from industry tailwind as opposed to how much reflects the market share gain, including as a result of the new contract?

No. We could if we made some assumptions. And because it would be based on assumptions, we're probably not going to share that on the call. I will tell you this, though, that the salvage has a very unique spot in this collision repair ecosystem.

And when you see an increase in overall volume of accidents, it's much easier for us to increase capacity than it is for the repair shops to increase capacity. And it's not because it's difficult to build new repair shops, but it's very difficult to train new technician and craftsmen to accommodate this higher demand. And consequently, we're seeing a higher portion of these accidents, we believe, a higher portion of these accidents being salvaged as opposed to being repaired.

Okay. That's helpful. Thanks. And on the impact of currency again, you just mentioned about the lower interest from overseas buyers in the US auction, but what about the currency translation impact on you profits in the UK? How has that been impacted? And then could you comment at all on how the business there might be potentially impacted by Brexit?

I think the data we shared at the top was that we experienced a detrimental revenue effective of about $3.7 million in the translation from GBP back to USD. And that's because year-over-year we've experienced relative US dollar strengthening. So when you, quote, trade the profits from the pound back into USD, you get fewer USD than you did a year ago. So that's the effect we've experienced there.

As for Brexit, I think we probably aren't well positioned to speculate. I think there are experts who believe that the euro would then in turn suffer as a result. I think that's probably better left to other experts to speculate on. We don't foresee a meaningful effect on either our UK or US business directly.

Okay. Great. And lastly, I think I heard you say that the non-insurance volumes also are rising maybe 10% in the US. Can you just remind us of the size, the materiality of this business relative to your overall business, and then provide an update just in terms of what the volume drivers are that are causing the non-insurance cars also to increase in volume? Thanks.

Sure. As a percentage of our total North America volume, it's actually drifted slightly below 20%. And that's not because it hasn't grown, because it's grown nicely. It's just that our insurance business has grown so much faster. The drivers for our growth are primarily our returns. We're providing our suppliers favorable returns and that's attracting more business.

Okay. Appreciate it. Thank you.

Bret Jordan, Jefferies.

Good morning.

Bret, good morning.

Try to work around this market share question again. If we look at the inventory growth, and I think last quarter you commented that some of that Farmers volume began to show up in inventory at the end of the quarter, if we look at your inventory up 20.7%, could you talk about maybe which of that is associated with new partners or how much of the growth was associated with new partners?

Once again, in order to do that, we'd have to take the overall growth and apportion a part of that to change in the business environment, how much of that is simply market wins. Those that are 100%, it's very easy to do that. And like I said, because that would be based on some assumptions that we'd have to employ, we're probably not going to make that, speculate on that on the call.

Okay. And if we look regionally, and some of the collision guys, specifically [Boyd] was talking about some of the northern markets seeing some softer collision repair trends this winter with the general lack of winter, could you talk, would the quarter have been meaningfully stronger or was there any real regional dispersion as far as strength or weaknesses in the salvage volumes?

It's really hard to point to weather as a driver to our business, because we're nationwide; and when you include the UK, we're worldwide. And when you might have inclement weather in one region, you might have unseasonably good weather in another region.

The only time we really point to weather events is when we have what we call a cat. And we had three cats last quarter, in San Antonio, in Fort Worth, and in Houston. And I think Jeff addressed the impact of those cats in his inventory numbers. We can tell you that on the sales side, we calculate a few hundred of those cars are actually represented in the sales volume.

Okay. And I might have missed it, did you give any update on Germany?

No, we didn't. Outside of North America and the UK, those businesses combined represent about 1.5% of revenue and really no EBIT, they're about breakeven. And so we have concluded that, until they become a meaningful driver of our business in either direction, up or down, that we're really not going to talk about their performance.

That being said, we will say that we're extremely happy with our international strategy and we're also very happy with the recent execution towards that strategy. And hopefully, we'll have some more comments in the next few quarters on the results.

That's what I was getting at. I was under the impression maybe you were going to accelerate your investment in Germany, if you had updates as to where we were in that?

Bret, just to the question you opened with, regarding the inventory growth, I think Will noted how difficult analytically it is to isolate the different effects. I think it is accurate to say the strong majority of our inventory growth is not due to new accounts per se, that it's more like-for-like growth across our own customer base.

Great. Thank you.

Thanks, Bret.

John Healy, Northcoast Research.

Thank you. I wanted to ask a bigger picture question as it relates to expectations going forward. You're adding the 15 or so yards, you're adding capacity to a number of yards.

And when I hear you talk about the growth prospects of the business, I hear you guys talking more about salvage frequency than just the number of collisions on the road actually increasing. Where do you guys think we're at and what are the insurance companies telling you we're at in terms of salvage frequency, the outlook for that maybe over the next three or four years?

I think we want to be clear on that, it's combination of both. So we live in an environment right now where, Will started to mention, or in his remarks, mentioned the technician. But the difficulty in hiring technicians today versus ten years ago is the complexity of vehicles. So we live in a world where there are more accidents, and then when those accidents occur, total loss frequency goes up, the likelihood of that vehicle becoming a total loss goes up. And much of that is driven.

To me, it's very analogous to 20 years ago when we saw airbags and anti-lock brakes go into cars. They'll be offsets where one reduces the amount of accidents and there will be another offset where when there is an accident, one increases the likelihood of a total loss. So we're seeing that right now. And we are opening up and expanding a number of locations in the next year, because frankly, we've got record capacities and we anticipate that that will be the same a year from now, that we'll be looking at another record inventory build with record sales.

Got you. And I wanted to ask about the CrashedToys business. To me it seems like you guys are putting a little bit more resources towards marketing that business and maybe interested in doing some things there. Can you talk about what the plan is for CrashedToys? And it almost even seems like there's a retail aspect of it that you guys are marketing. I was hoping you could give us some more color on that.

Sure. So we bought the company in June of 2013, when we made an acquisition of Quad Cities and Desert View Auto Auctions. With that came CrashedToys. We have continued to run the company and understand the brand. And what we've decided at this point is we want to build the brand. And so we've opened a location in Dallas, Texas.

The retail aspect -- it is a retail operation, so that is accurate. But it's more than that. It's an experience. And the retail side that we're really pushing for is to have folks come out, hang out, learn about what we do, and eventually become buyers. So it's very much an incubator of future buyers of product, and it is a differentiator for us on the Toy side.

So just in the last quarter alone, we sold a Porsche 918 for over $400,000. We sold a Denali for almost $200,000, and then we sold Harley-Davidsons for $8,000 and Hondas for $3,000. So it's an across-the-board product line, but it's everything related to Toys. And we're testing it right now at this location in Dallas; and as we decide or put our strategy together, we'll report on that in future quarters.

Great. Thank you.

You're welcome.

Matthew Page, [Kimberly] and Company.

Good morning. Thanks for taking my call. You had noted an increase in volume from dealers. Is this a trend that you expect to continue as a large number of vehicles are expected to come off lease moving forward?

I think we do. We refined our processes. We're seeing higher yields. We've seen growth year-over-year. And we see no reason for that trend not to continue. And the really attractive part of that is that these are the most profitable cars that we process. The cycle times are short, the ASPs very high, and we're beginning to build more tools to help us in this arena.

Once again, we're starting to roll out, our IT department is doing a great job and they're starting to roll out a lot of product. And the tools in this arena are in the queue, and we expect those to be available to us to use in the next three or four quarters.

Got it. Thank you. And the last question for me is, how do you view repurchases moving forward, as well as the different repurchase tools available to you? In the past, you've done Dutch auctions, as well as open market So I'm just curious how you think about it, looking forward.

Sure. And Matt, big picture, as Jay noted, capital allocation questions are ones we address on a regular basis, as we consider organic uses of our cash for our business internally, as well as other possibilities, including debt pay down, share repurchases and the like. So share repurchases over the long term will likely continue to be a tool, or an arrow in our quiver. We don't comment or speculate precisely on when or how much we would do.

As for the tools, the specific path to share repurchases, whether they are tenders, Dutch tenders, open market purchases and the like, again, that's circumstantial. We evaluate, given our own assessment of the pros and cons at the times of those decisions.

Perfect. All right, thank you, gentlemen, and good luck in the next quarter.

Thank you.

(Operator Instructions)

Gary Prestopino, Barrington Research.

Hello. Good morning. This is Matthew Gall filling in for Gary. Quick question. I think, Will, you had mentioned, based on salvage frequency being up due to certain factors, such as increased miles driven, high repair costs, one thing that I think I hadn't heard before was the speed travel. If you could maybe expand upon that dynamic?

Sure. So on the increased miles driven, more of those miles are freeway, rural and freeway driving activity, which is a higher rate of speed, which leads to more severe accidents.

Got you. Okay, thank you. And then as far as the international buyers with FX impact, is that similar to what it has been in terms of as far as purchases from North American auctions, or is that down a little bit, directionally, where it was, I think, 20% of units purchased?

It's down slightly, but it's ever so slightly. I believe it went from 21% to 20.3%.

Okay. Lastly as far as the ASPs have started to stabilize, down year-over-year but up sequentially, is that consistent on the non-insurance side or how do we look at that as part of the shift mix from where you've been?

Well, when you look at the non-insurance, you have to bucket them, because a charity car is completely different than a dealer car. And so we've seen growth in our ASPs for our dealer cars. As I mentioned previously, those are our, the most profitable cars that we process.

And actually, we've actually seen growth in our ASPs for our charity cars. And I can attribute that to a couple factors, one of which is because of the scarcity of our land, we've intentionally targeted certain customers, we visit them to ensure that we're getting the type of cars that are appropriate for us. So we've been very selective in those that we allow to use our land, especially in the more precious areas, like Southern California and the New England area. And because we've been more restrictive on accepting the low end cars, we've raised the ASP on an overall basis for the charity cars.

Great, great. Thank you very much. Congrats on the quarter.

Thank you.

I'm currently showing no further questions. I would now like to turn the conference back over to Mr. Adair.

All right. Thank you, everyone. We appreciate you making the time to listen to our call. We look forward to reporting on the fourth quarter in the new fiscal year. And that concludes our meeting. Thanks.

Thank you.

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