Copart Q1 Earnings Call Transcript

123jump.com Staff
10 Dec, 2010
New York City

The junk car auctioneer total service revenues and vehicle sales for the quarter rose 14.7% to $212.7 million. Net quarterly profit increased 7% to $37.8 million. Earnings grew to 45 cents per share from 42 cents per share for the year-ago quarter.

Copart, Inc. ((CPRT))
Q1 2011 Earnings Call Transcript
December 1, 2010 11:00 a.m. ET

Executives

A. Jayson Adair – Chief Executive Officer
William E. Franklin – Senior Vice President and Chief Financial officer

Analysts

Robert Labick – CJS Securities
Anthony Cristello – BB&T Capital Markets
Mark – Robert W. Baird & Co.
William Armstrong – CL King & Associates
Scot Ciccarelli – RBC Capital Markets

Presentation

Operator

Good day, everyone and welcome to the Copart Incorporated First Quarter Fiscal 2011 Earnings Call. As a reminder, today''s call 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.

A. Jayson Adair

Thank you, Melissa [ph]. Good morning everyone. Welcome to the first quarter call for fiscal 2011. Before we start, we''ll turn it over to Will for some brief statements and then I will give you an update on the company.

William E. Franklin

Thank you, Jay. Before we begin our comments, I would like to remind everyone on this call that our remarks will contain forward-looking statements. These statements are neither promises nor guarantees and are subject to certain risks, trends and uncertainties that could cause actual results to differ significantly from those projected or implied by our statements and comments.

For a more complete discussion of the risks that could affect our business, please review the Management''s Discussion and Analysis and the factors affecting future results contained in our 10-K, 10-Q and other SEC filings. With that, I will turn the call back over to Jay Adair to begin the discussion of our quarterly results.

A. Jayson Adair

Thank you, Will. Good morning again, folks. Just wanted to report on international bidding for the quarter as a starting comment. We finished the quarter with 22.5% of units selling internationally that represented 26.6% of gross proceeds.

Looking at North American mix, we finished with a higher than normal insurance sales ratio but still under 80%, finished at 79.7% insurance, 20.3% non-insurance supply.

Looking at G&A and I reported in the last quarter that we would be reducing G&A year-over-year. So obviously anyone whose ever been through that experience before, of cutting back some costs, you''re going to have initially some actually increased costs in doing that. So we don''t expect it to be this quarter, even the next, but as we approach the end of the year, we do expect year-over-year G&A to be down 2011 as opposed to 2010 G&A cost. Finished the quarter with $27 million in total G&A expense as opposed to $23.9 million for the prior quarter, Q1 in 2010.

All right. Let''s look at capital spending. In the last quarter, we also spoke of about a $70 million budget for the year in capital spending, that''s excluding any large acquisitions, but acquisitions that we''ve got planned, along with lease buyouts and along with some capital spending for development costs.

Total capital spending for the quarter was $14.8 million. Out of that number, $4.3 million was associated with lease buyouts on facilities. New yards for the quarter, we opened a new facility in Homestead, Florida, that will service, obviously, Southern Florida, Miami area and in the quarter we''ve purchased approximately 2.25 million shares in our stock buyback.

We currently have authorized 29 million shares to be purchased. We have bought so far approximately 16 million shares and we have approximately 13 million shares remaining in the buyback in the authorization. Approximately $76 million was spent on that stock and we finished with cash of approximately $260 million on our balance sheet.

That''s all the update I''m going to give for now because I''m sure there will be questions. And I''ll turn it over to Will and after his comments we''ll be happy to answer any questions that you have.

William E. Franklin

Thank you, Jay. Yesterday, we reported our financial results for the first quarter of our 2011 fiscal year. Consolidated revenue was $212.7 million, compared to $185.5 million for the same quarter last year.

During the quarter, we adopted a new accounting policy that changed the way we recognize certain revenues. For this quarter, we deferred to the recognition of the revenues from towing a car into the yard and the revenue from converting a title to a salvaged or branded title, until the car associated with these services was sold.

We now recognize this revenue as the service is performed. The acceleration and the recognition of these revenues resulted in a one-time increase in total revenue of approximately $9.1 million and a total increase in yard operations expense of approximately $8.8 million.

Excluding the impact of this change, revenue would have been $203.5 million. This represents an increase over the same quarter last year of 9.8%. The growth in revenue came primarily from increased volume.

On a same-store sales basis and excluding the impact of the change in the accounting policy, revenue increased 6.1% and was driven by volume. During the quarter and in the U.K., 41% of the cars were sold on the principal model compared to 60% in the same quarter last year.

The transition to the agency model had the effect of reducing revenue by approximately $9.5 million. Excluding this impact, same-store sales would have increased 11.3%. The gross margin percentage on purchased cars declined as both average selling price and average cost increased at similar amounts.

Our operating margin grew from $82.6 million to $89.9 million or 7.6%. Included in yard and fleet cost in the quarter was the impairment of certain operating assets, totaling approximately $1.3 million and $8.8 million in costs associated with the revenues, whose recognition was accelerated due to the accounting change.

Excluding the impact of these items, yard operations expense would have been $76.1 million. Gross margin would have been $89.9 million and the gross margin percentage would have been 44.2%.

General and administrative costs excluding depreciation were $27 million compared to $23.9 million for the same quarter last year. The growth was driven primarily by the increase in investment and marketing to buyers.

Our operating income increased from $56.5 million to $59.6 million or 5.5%. Our effective tax rate was 37.1% for the quarter. Diluted EPS from continuing operations was $0.45 per share compared to $0.42 per share for the same quarter last year.

We ended the quarter with $260.5 million in cash. Vehicle pulling cost and deferred revenue declined and accounts receivable grew as we accelerated the recognition of certain revenues in compliance with the accounting rules changes.

In the quarter, we generated approximately $77.5 million in operating cash flow. We expanded approximately $75.7 million for the repurchase of approximately 2.25 million shares of our own stock. Capital Expenditures in the quarter were $14.8 million and include the buyout of one facility''s lease for $4.3 million.

That concludes my comments. Melissa, we''ll now turn the call back over to you for the Q&A portion of this call.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. If you are on a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question at this time, please press star one now. And our first question will come from Bob Labick from CJS Securities.

Robert Labick – CJS Securities

Good morning.

A. Jayson Adair

Good morning, Bob.

Robert Labick – CJS Securities

Hi. A couple of questions. On the last call, you elaborated on your marketing, you said you had taken a big broad brush last year in marketing and you were going to do more rifle shooting this year. Is there an opportunity for you now to update us on your marketing plans and your plans to drive more traffic to the Copart website and more buyers?

A. Jayson Adair

Yeah. I mean, we''re happy. We''re very happy with what we''ve done so far. We''ll be repositioning some of the dollars in some new areas that will drive more traffic, that have been more effective in the past than others and in some areas where we''ve matured to some extent, we''ve kind of worked that area and now it''s time to find some new sources. And then some of it will just be a reduction in total cost as well, so we''re actually going to be reducing some marketing spend at the same time.

Robert Labick – CJS Securities

Okay. Great. And then on a bigger picture question, over the next several quarters, we should see a continued solid ramp in your insurance business related to the Allstate new business. Could you tell us about your plans for top line growth drivers beyond this new Allstate business once you get to the higher plateau? What do you think will be the key drivers for 2012 and beyond to get past the 3% to 5% top line growth?

A. Jayson Adair

Well, I don''t think the drivers have changed and we''re still going to be focusing on non-insurance business, business that is dealer trade-in vehicles and other sources. I mean, I could go into all of the details, but I think everyone is aware of what sources we get, where we get our vehicles from. And it will also be insurance business, the existing book of business that''s out there that is attainable, that we believe in the future will be bringing on more clients and more customers just as we did with Allstate.

I think that''s a great example of a company that -- a large company that''s made a decision to go with Copart and anyone who''s talked to them knows that they are very happy. So that''s a good thing and quite possibly be more deals like that in the future, you never know. But yes, we feel really good about 2012, ‘13 and on, in terms of getting additional clients both from the insurance segment and from the non-insurance segment.

Robert Labick – CJS Securities

Okay. Great. And one last question and I''ll get back in queue. Obviously, you made a big statement with a fairly sizeable share repurchase in the quarter, it was the first time in three years or so. Can you just, once again just update us on your thoughts? You''re generating a lot of cash. Your priorities for that cash and will there be additional share repurchases in the future?

A. Jayson Adair

Well, we bought stock in ‘08, calendar year, I''m not thinking fiscally, I''m thinking calendar year, we bought stock in ‘08. And I don''t have it in front of me but I think we bought in ‘09, a little in ‘09 and we bought a fair amount in ‘10.

William E. Franklin

Not open market.

A. Jayson Adair

Not open market, though, right. So yeah, this is the first open market purchase we''ve had since 2008. But a lot of that''s because of what we''ve seen in the past and the economy and at the time we had a cash position somewhere below $50 million by the end of calendar year ‘08.

We were sitting on -- and currently are sitting on a lot of cash and without getting into how we value the stock, Bob, I think at the end of the day, actions speak louder than words. We''ve made a decision to buy a little over 2 million shares in the quarter. We thought the stock was undervalued, so we did that. And we''ll be looking at quarters ahead and seeing whether or not we think that that''s an option for us. It''s always going to go back to, where is the best place for us to deploy our capital and last quarter, we felt that was the right move and we''ll see on the quarters ahead.

Robert Labick – CJS Securities

Great. Thanks very much.

A. Jayson Adair

Thank you.

Operator

Next, we''ll go to Tony Cristello with BB&T Capital Markets.

Anthony Cristello – BB&T Capital Markets

Thanks. Good morning, gentlemen.

A. Jayson Adair

Hi, Tony. Good morning.

Anthony Cristello – BB&T Capital Markets

A couple of questions. First, just to be clear, when we look at SG&A and you talked about it being down, but then you had some incremental up front cost. If we looked at fiscal year ‘11 versus fiscal year ‘10, should we see G&A expense be down on that basis?

A. Jayson Adair

Yeah, total year, yes.

Anthony Cristello – BB&T Capital Markets

Okay. Perfect. The second question is, when you look at sort of the upfront costs that you talked about, that maybe cause a little bit of an increase in SG&A, can you maybe give a little bit more color, are those automation costs? Are those costs associated with gaining efficiencies and are those going to bring you further ability to drive SG&A lower subsequent to the additional market expense that you can take out?

A. Jayson Adair

Yeah, the answer to that is, you actually hit it. Yes, there are some costs that you have associated with technology and automation and the rest and will they drive reductions in costs into ‘11, ‘12 and ‘13? Of course. So, without predicting where the G&A spend will be in ‘12, as we''re just at the beginning of fiscal ‘11, my guess is that we''ll see the effects of what we are doing today in subsequent years. And it''s not going to be something that is just this year. It''s something I think will happen in years to come. I think we''ll see additional drops in G&A, but look, we''ll see what happens.

From the visibility that Will and I have today looking at the numbers, looking at the year, we anticipate the total spend for this year to be down. And then of course, there''s a lagging effect. Some of these things take time to implement, so as we get to the end of this fiscal year, we''ll then comment on what we think G&A spend will be in fiscal 2012.

Anthony Cristello – BB&T Capital Markets

Okay. And maybe just one more question. This is sort of the first quarter where you had then that big Allstate volume finally come through and I''m assuming that a big percentage of that 6.1% comp was related to that. Can you tell me a little bit about the profitability and how we look at Allstate contributing in what is a seasonally weaker quarter, such as the October or the January quarter or what impact that might have on profitability from a contribution standpoint in an April or perhaps a July, which are seasonally stronger quarters. Is there a difference in how should we think about the Allstate overall to your business, now that you''ve had a quarter in?

A. Jayson Adair

Let me give it to you this way, Tony, because I obviously don''t want to give you earnings guidance. So when we think about this quarter as opposed to Q3, Q4. This is a lighter volume quarter. So as we get into Q2, we''ll be building inventory, Q3 and Q4 we''ll be selling off some very large volumes. So the impact is going to be much greater in Q3 and Q4 than it is in Q1 and Q2. And I''ll say that, but I don''t want to really get into any other specifics, just because we had a history and we want to continue to tell you about what we''re doing in the company and not tell you what''s coming in terms of earnings guidance.

Anthony Cristello – BB&T Capital Markets

That''s fair. And is there any reason why I still shouldn''t think about January as still being a little bit seasonally weaker than October or has something changed given the macro and everything that''s been going on, in terms of how we should look at the overall seasonality of your business?

A. Jayson Adair

No, I think that''s a fair way to look at it. Do you agree?

William E. Franklin

Yeah. Absolutely.

Anthony Cristello – BB&T Capital Markets

Okay. Thanks, guys. I appreciate it.

Operator

We''ll now go to Craig Kennison with Robert W Baird.

Mark – Robert W. Baird & Co.

Hi. This is actually Mark in for Craig. Thanks for taking the question.

A. Jayson Adair

Hi, Mark.

Mark – Robert W. Baird & Co.

How''s it going? Right now, about 20% of the business is non-insurance. Now, there are several sources here which you touched on, but could you maybe rank the top two or three and talk about how those have evolved over time?

A. Jayson Adair

Well, yeah, without sitting here and going through every segment that we have, the top two are probably dealer, all dealer, whether that''s dealer trades or dealer broker or regardless, all dealer is one lump. And then the next is probably vehicle donation program cars.

So those are the two largest outside of that. In addition, you have got a number of other suppliers, whether it be bank repos, whether it be rentals, et cetera. But those are the two largest that we have got and they are the largest growth drivers. They are the largest pieces with the availability for growth going out there and it''s a huge market.

I mean, when you get into dealer trade-in vehicles, it''s just an enormous market compared to the insurance industry and they''re incremental units. They are vehicles that turn in a lot less time. And I''ve given the analogy before, so I''ll give it again. It''s kind of like the mall has the large Nordstrom stores, but they really make all their money off the little stores that are on the strip and that''s really the same scenario here.

This is a business where we have large clients, large customers, the insurance companies that are providing a steady stream of volume and then the real gains in additional revenue and profit can come through finding ultimate sources of product to move through the auctions that don''t have to be stored 60 to 90 days and that can be turned relatively quickly. So that''s where we anticipate a lot of the growth will be in the next couple of years as well.

Mark – Robert W. Baird & Co.

Okay. And then what is the status of Auto IMS? Has that platform been as productive as you''d hoped?

A. Jayson Adair

Yeah, it''s in place and we''re happy with it. We''re glad we''re connected to it. And I have nothing negative to say. I think it''s all -- from that perspective, it''s all good. We get volume through it now, and we''ve been able to gain additional customers through it, so it was a win-win.

Mark – Robert W. Baird & Co.

Great. And then finally, one more here. Could you just give us an update on the Copart Europe strategy? Are there any acquisition opportunities in new markets that may make sense?

A. Jayson Adair

Yes, there are. Again, I feel like, without going through the playbook so to speak, we have got plans that are in the works and some of those plans are going to be achieved this year. You''ll see some of the things that we''ll be announcing, some of the acquisitions we''ll be announcing this year. Some of the plans will be coming down in 2012 and 2013, but it''s a great market. We have a great customer base. We have a fantastic team that is running it and so we fully intend to be expanding over in that market. Everything so far has just been all thumbs-up.

Mark – Robert W. Baird & Co.

Great. I''ll jump back in the queue. Thanks again.

A. Jayson Adair

All right. Thanks.

Operator

And as a reminder, if you would like to ask a question at this time, please press star one now. And our next question will come from Bill Armstrong from CL King & Associates.

William Armstrong – CL King & Associates

Good morning. A couple of questions here. The same-store sales growth mainly was from higher volume. Could you discuss the trends in revenue per transaction? Was that up, down, kind of flat?

William E. Franklin

No. If you exclude the impact of the transition, revenue per transaction was up mid single digits.

William Armstrong – CL King & Associates

It was?

William E. Franklin

Yes.

William Armstrong – CL King & Associates

Okay. Could you tell us what the U.K. revenues were, could you break that out for us?

William E. Franklin

Sure. U.K. revenues, Q1 of last year was about $38 million in USD. It''s $42.8 million this quarter. We had about a $1.8 million negative impact on FX during the quarter.

William Armstrong – CL King & Associates

Got it. The $9.1 million revenue adjustment, was that all North America or was any of that in the U.K.?

William E. Franklin

It was virtually all North America.

William Armstrong – CL King & Associates

Okay. Tax rate was 37%. Is that a rate we ought to look at, you kind of assume when we''re modeling going forward?

William E. Franklin

I think to be safe perhaps maybe, below 37.5%, I think it''s safe to say we won''t exceed that.

William Armstrong – CL King & Associates

Okay. So low 37%s then?

William E. Franklin

Right.

William Armstrong – CL King & Associates

Okay. That''s all I had. Thank you.

A. Jayson Adair

All right. Thanks.

Operator

Next, we''ll go to Scot Ciccarelli from RBC Capital Markets.

Scot Ciccarelli – RBC Capital Markets

Hi, guys, how are you?

A. Jayson Adair

Hi, Scot. Good, buddy.

Scot Ciccarelli – RBC Capital Markets

Good. I guess I was a little confused by Will''s comment regarding the revenue per unit. When you say excluding the change, are you talking about the accounting change, Will?

William E. Franklin

No, I''m talking about, well, yes, I excluded both of those, when I quoted the 11.1%, I excluded the accounting change.

Scot Ciccarelli – RBC Capital Markets

Yeah.

William E. Franklin

And I excluded the impact of the transition from the principal model to the agency model in the U.K.

Scot Ciccarelli – RBC Capital Markets

I got it. Okay, sorry. And I know you guys don''t want to give too many details about the Allstate deal, but would volume have increased without the incremental volume from Allstate?

A. Jayson Adair

We know the answer. The question is, do we want to get down to this kind of detail? The answer is yes.

Scot Ciccarelli – RBC Capital Markets

Well, it''s a pretty big change to the model, right?

A. Jayson Adair

The answer is yes. We would have done more volume year-over-year had we not achieved the Allstate business.

Scot Ciccarelli – RBC Capital Markets

Okay. That''s helpful. And I guess the last question, this is a little bigger picture, I''m just interested in your perspective, we have the SAR starting to pick up a little bit, miles driven starting to get a little bit better. What are you guys thinking about, just generally speaking in terms of kind of ASPs and pricing as we look out per the balance of the year here?

A. Jayson Adair

Well, for the balance of the year, it''s just so hard to predict what ASPs are going to do. Right now they look great. Right now, what we''re achieving in the second quarter, what we achieved in the first quarter, ASPs look great for the year or they look great right now. Who knows what it''s going to look like in June and July. My guess today would be that I don''t see anything that''s out there. With that said, my crystal ball didn''t predict what happened at the end of 2008 either.

So, we don''t see anything really that''s out there right now that would dramatically change the fundamentals of how vehicles are totaled, how they''re repaired, the demand for used parts, the demand for exports, the demand for rebuilders. You put all those factors together, vehicle sales seem to be kind of hovering at the same amount, trade-ins are coming in at about the right rate. So from every standpoint that we can see, it looks like the ASPs will continue to be where they''re at today throughout the year.

I guess you just don''t know what 2012 is going to be like, but you have to sit back and think, here is an industry that was selling 50% more new units every year than it is today. And we''re about a couple of years into this now and if you take this out another three years, we should have a vehicle mix in the U.S. that''s missing about 25 million new vehicles, as opposed to the prior five years where a lot more new vehicles were being sold.

And a lot more of what I consider better quality vehicles, the SUVs, the trucks, those are vehicles that are less, they are getting less demand today, more of the small cars, Prius''s and those types of vehicles. And the big deal about that is it takes a lot more to total a truck or an SUV than it does to total out a small car. So if you take the fact that we have an aging population, because we''re not selling as many new cars, and then you take the mix of vehicle, we''re going to see, in my opinion, a lot more vehicles in 2013, 2014 and 2015 as we look out.

With that said, I would think the ASP on those vehicles would start to drop a little because they aren''t the quality of units, they won''t be the larger vehicles, the trucks, the SUVs. They will be more the cars and hybrids and those types of things. So as we sit here and we look at this year, we think that ASPs will stay where they''re at and as we look out into the future we think volumes will go up, and ASP will probably soften a little.

Scot Ciccarelli – RBC Capital Markets

Okay. So kind of what we''ve seen recently, so sluggish volumes but strong ASPs in the near-term and that kind of reverses as we get out, call it eight quarters or so from here?

A. Jayson Adair

I would think so.

Scot Ciccarelli – RBC Capital Markets

Okay. That''s helpful.

A. Jayson Adair

Again, it''s a guess, but that''s what we would think. If you look at the data, that seems to make sense.

Scot Ciccarelli – RBC Capital Markets

Right. Okay. Thanks a lot, guys.

A. Jayson Adair

Thank you.

Operator

That concludes our question-and-answer session for today. At this time, I''d like to turn the call back to Mr. Jay Adair for any closing remarks.

A. Jayson Adair

Thank you, Melissa. Again, thanks, folks for attending the call. We look forward to reporting on Q2 next year. Happy New Year and we''ll see you then. Thanks, bye.

Operator

That does conclude our conference for today. Thank you for your participation. You may now disconnect.