Copart, Inc. (CPRT)

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Copart, Inc. (CPRT)

F2Q09 (Qtr End 01/31/09) Earnings Call Transcript

March 5, 2009 11:00 am ET


Jay Adair – President

Will Franklin – SVP and CFO


Tony Cristello – BB&T Capital Markets

Bob Labick – CJS Securities

Scott Stember – Sidoti & Company

Bill Armstrong – CL King & Associates

Matt Nemer – Thomas Weisel Partners

Craig Kennison – Robert W. Baird

Ivan Holman – RBC Capital Partners

Gary Prestopino – Barrington Research

Edward Hemmelgarn – Shaker Investments

Charles Weissman – Chilton Investment Company


Good day, everyone, and welcome to the Copart Incorporated second quarter fiscal 2009 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, President of Copart Incorporated. Please go ahead, sir.

Jay Adair

Thank you, Carolyn. Good morning, everyone. It's my pleasure to welcome you all here today. I want to thank you for attending the second quarter call for Copart. Before we start I'll turn it over to Will for just a couple of remarks.

Will Franklin

Thank you, Jay, and good morning. Before we begin our discussion of our second quarter's results I would like to remind you that during this call we will make forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially 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 managements' discussion and analysis and the factors affecting future results contained in our 10-Q, 10-K and other SEC filings.

With that, I'll turn the call over to Jay Adair to begin the discussion of our second quarter's performance.

Jay Adair

Thanks Will. Well, again, good morning, everyone. As we discussed in the first quarter when we started to see a lot of these trends take place. We expected back then that volumes would be up, we expected that ACVs would continue to decline, and we've seen that. So just to give you a little flavor, a little feel for what's going on there, basically ACVs for 2008 were roughly the same, meaning that you can go back May, June, July, August, they were roughly the same number, and we started to see that dip after September.

So in October we saw the first decline in ACV values. That continued into November, it continued into December and actually hit the low point in December. It has modestly come up for January, February and March. So it's probably right where it's going to be from what we can see. Obviously, used car values have come back a little more in February. But I think – yes, when we look at ACVs, I think the number is kind of where it's going to be.

I think we're pretty comfortable with that. Obviously, lower ACVs drive volume and we've seen volume up. We've seen a pretty good trend there with respect to increased volumes. Volumes increase inventory for Copart, obviously, as we pick cars up in Q2 and then we sell those cars off in Q3, and we've always said basically we convert cash into receivables in Q2 and then we'll convert the cars into cash in Q3. So we finished the quarter with roughly $22 million in cash and we will finish Q3 – we're talking a month and a half from now, we should be something north of $70 million in cash. That's what we're expecting today from what we can see. So that's kind of volume and ACV related; now we get into returns.

I think this is the exciting part for Copart. We're pretty jazzed up about this. Returns are up for us and I'd say they're up materially, looking at the returns right now, just to give you a flavor for that. Again, returns started to decline from September into October into November into December and they hit the low point in December, as well. Those returns have increased. Average selling prices increased in January, up again in February, up again in March. Looking at where we're currently at compared to our low point, we're up about 10%.

So I think the worst is over, A, but B, more importantly, I think we're outpacing the market. From what we can see that's out there today from talking to industry participants, from talking to clients, it appears the market is relatively flat, and we are hearing that maybe it's up modestly in the first quarter, and so we're excited about that, because we're up significantly and we're looking at that and saying, okay this is good. Obviously, our clients are very focused on returns right now. They're focused on money that they can get for these vehicles and improvements there, and we think we're outpacing the market.

It makes sense to us. We've got a friction-free platform. You open up a browser, you're in the sale. There's no physically attending, there's none of that. So from kind of a gut visceral [ph] perspective it makes a lot of sense to us. From a competitive standpoint it really puts us outside, above, and with a real advantage compared to other players in the industry, not only returns but the strength of our balance sheet, and I think that's a big deal. We're sitting today with no debt. Obviously got a $200 million line that's untapped and the odds are we won't tap it. We'll be finishing April north of $70 million, that's our estimate, and we'll be generating cash again in Q4. So as we sit here and we look, we're the Company that's out there today that has a very strong product, we're the Company today that has a very strong platform and a very strong balance sheet, and so a lot of prospective clients out there today are looking at Copart and seeing if this is an alternative from what they're currently doing.

In addition, we're investing in IT and I think this is important. When you're in an economy like this I think people just tend to pull in their horns and they may not have a choice. If you've got significant debt or you've got significant requirements that you've got to pay you may not have the option of investing in facilities and investing in technology, and we're doing that. We think that by investing in IT and building a lot of new products, like the new web page that we launched, we're going to change the way that we sell vehicles, again. And so you are going to see a lot of improvements, a lot of enhancements in the next six months and a lot in the next 12 months for Copart. Now G&A is up because we've invested in adding so many folks in IT. We were going to actually increase it even more, but as of October we put a hold in on the expansion, as I discussed in Q1. We will not increase the number; however, at the same time we will not be reducing it at this time.

I guess it just basically boils down to the fact that we're not strapped for cash. We've got a lot of ideas, we've got a lot of great improvements to make, and we want to improve the customer experience at Copart. We want to make it a better environment for selling cars and we've just got a lot of things that we – a lot of ideas that we want to invest in, a lot of ideas that we want to bring to market, and so we'll be doing that and I think that's going to drive even further volume. The good news is, as we discussed in Q1, that we've got ample capacity across the organization. We finished the quarter with a $28 million investment in CapEx. That was for some additional land. So as I say to you, on one hand, that we've got ample capacity across the organization that is, in general, for all the stores. Now, if we – as a percentage. If we look out store by store there's a handful of stores that we've got a handful of yards that are nearing capacity and so we bought additional land in those markets. We are sitting on a number of sites, over a dozen sites today that we never discuss. They're mothballed, they're land that we own, it's zoned, it's ready, and if we get additional volume in that market and we run out of space then we'll turn that location on and add it to our network. And so that's, again, why we made some of that investment.

Now looking at Q3, we don't see a lot of investment in CapEx. So our target right now is roughly $5 million for CapEx and that will change if we were to get a major account somewhere and we had to expand a location or develop it. Some of the land isn't developed. We just own the land. It's sitting there and it's a Greenfield waiting to be improved. So we're in that kind of position right now where we've got a lot of capacity, we've got a lot of locations, we can take on new business, we've got great products, we're seeing returns that are up. So we're looking forward to a great, great year, especially considering and comparing to how the US economy is going right now. So I think we're in a good position there.

So that's US. Looking at the UK, just to give you an update on that, we are sitting today with the nation's best network in that market. We are today picking up cars in one day across the nation. That's amazing, because if you go back over two years ago it wasn't uncommon to pick a car up in three, four, five days. So we have gone in there and said, nope, that's not good enough, we're going to be picking them up in 24 hours. We get an assignment today, we pick it up today or we pick it up tomorrow and that reduces, obviously, storage. You've got direct costs of 20 pounds, 25 pounds, 30 pounds a day; sometimes it is 50 pounds a day, that's being billed, especially as you get into some of the London locations. But kind of even on the low end, you're looking at 15 pounds a day storage rate, so you shave that number off by a day or two you're talking about a huge savings for our clients. In addition, we're reducing cycle time, and I think that's a big deal. Obviously always wanting to shrink that and decrease that cycle time across the life of the car.

We recently – the other thing I want to point out, we recently had one of our largest clients switch from purchase to consignment model. This is the second large, large client to do this in the last two quarters. I think this trend is going to continue and it's pretty simple. If you're on a purchase you use the purchase number as the average, so you use that as the average for whether or not you should fix or total the car. I discussed this in the last call. So I won't elaborate too much and if there are questions on it I can explain it again. But in an effort not to kind of repeat things call after call I think most of us on the call understand that if you're averaging a car at 22% that car may be worth 30%, it may be worth 15%. You're not accurately totaling the right car. Sometimes you're totaling a car you should have fixed, and sometimes you're fixing a car you should have totaled.

So what we do is we implement ProQuote, and because we're selling so many cars – we've sold now over 200,000 cars in the UK, obviously, and because we've got such large volumes we can produce real empirical evidence. This is what the cars have sold for recently, this is what your car is worth and now you can factor that into the repair estimate. So because of that we think there's going to be a continued trend to see clients moving off of the purchase model, moving on to a real ProQuote model, where you get the real value on the car, and we'll report as we see further movement in that. Now, with respect to currency conversion, the British Pound to the US Dollar, and how that impacts revenues, I'm going to pass on that. Will will talk about that in his portion, but obviously it did impact us seeing the decline in the pound and the strengthening of the dollar.

And then finally, I just want to announce that we did come to an agreement with Auto Auction Services Corp. They operate the Auto IMS system. We just announced that recently and this is a good thing for Copart, because Auto IMS basically is the electronic link for fleet operators, banks, finance companies, leasing companies. They interact with Auto IMS then Auto IMS assigns the car to the auction. And so we have – obviously we've for years handled finance company cars, repos and leasing companies, and that type of business, but we've had to do it outside of Auto IMS, and now that we've come to an agreement with them, we'll be taking our assignments electronically through them. So literally a bank will be able to click a button on the Auto IMS platform and the car goes to Copart now. So this should drive additional volume for the company. So things look great. We're happy about where we're sitting right now. We think things are going to be doing a lot better going forward, and with that, let me turn it over to Will Franklin, CFO, for an update on the financial side.

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