CPRT

Copart, Inc. (CPRT)

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Exchange: NASDAQ
Industry: Consumer Durables
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Copart Inc. (CPRT)

F2Q08 (Qtr End 01/31/08) Earnings Call

March 7, 2008 11:00 am ET

Executives

Jay Adair - President

Will Franklin - CFO

Analysts

Bob Labick - CJS Securities

Tony Cristello - BB&T Capital Markets

Scott Stember - Sidoti & Company

Scot Ciccarelli - RBC Capital Market

Bill Armstrong - C.L. King & Associates

Craig Kennison - Robert W. Baird

Tom Lamb - Weybossett Research

Gary Prestopino - Barrington

Chris Blackman - Core Capital

Dan Rudder - WHC

Jon Christensen - Kayne Anderson Rudnick

Garo Norian - BlackRock

Edward Hemmelgarn - Shaker Investments

Presentation

Operator

Good day everyone, and welcome to the Copart Incorporated second quarter fiscal 2008 earnings call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Mr. Jay Adair, President of Copart Incorporated. Please go ahead, sir.

Jay Adair

Thank you, Catherine. Good morning everyone to the second quarter call for Copart, as you can hear, thanks as I am got my voice back. So, we have got a lot of information to update you on today with respect to the quarter and things are going on in the company. So, I would like to start off, I will turn it over to Will Franklin and then we will do the call and open up for questions. Will?

Will Franklin

Thank you, Jay. During this call we may make forward-looking statements within the meaning of Securities laws. These forward-looking statements may include projections about our future revenue and earnings growth, which are subject to various risks, including weather conditions that are adverse to our business, our ability to increase market share in competitive market, and our ability to secure beneficial supply agreements. We face risks arising from our increased dependence on internally developed systems to conduct our auctions.

Finally, our recent acquisitions in the United Kingdom expose us to new risks relating to international operations. For more discussions of these and other 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 and other SEC filings.

With that Jay I will turn the call over to you again comments.

Jay Adair

Alright, thanks Will. Again good morning everyone, I did break the call or at least break my portion of the discussion out into North American and United Kingdom operations. I will start with North America.

Looking at North America revenues grew 6.8% to $137.6 million. International sales in the second quarter of '07 were 26%; international sales in the second quarter of this year are 28%. We believe this is due to the fact; we now got European headquarters based outside of London. That is doing a lot of direct marketing. This is marketing in magazines and newspapers in Poland, Russia, Lithuania, lot of Eastern European areas.

In addition we have got a footprint now that covers the UK of locations. These are locations that are interacting everyday with buyers from the European, Eastern European markets etcetera. And the last bit that I think is a cause of this is just cross-pollination of buyers. We have got buyers that were buying product in the US, that are now buying product in the UK and we have got buyers. There were buyers of product in the UK that are bidding on vehicles in the US. So, we are just seeing an overall penetration there in North America that's increased quite a bit.

We also think record returns in fiscal '08. So, as we look at the year, I think from my perspective, since I have seen returns increased every single year since 2003. The launching of VB2, I keep waiting for this to mature in kind of level off and that just has been the case. So, both in the US and in the UK, we are seeing returns increased. We are currently sourcing 83% of our vehicles from the insurance industry and 17% of our vehicle sales from non-insurance, a lot of growth in the banks and financial institutions, as they see the power of remarketing your vehicle through Copart.

Excluding the hurricane Katrina, vehicle same store sales for the second quarter were 8.5%. In the second quarter and up to today’s date we opened four locations, a location at Birmingham, Alabama; Minneapolis, Minnesota; Walton, Kentucky, servicing the Cincinnati, Ohio area and Trenton in New Jersey. We expect in next twelve months that we will open another 8 to 10 locations across North America.

Looking at the United Kingdom things are going very, very well in that market. We are excited about the fact that we have a fully integrated ten locations. We will talk about on the call today, how those ten locations are doing and additional growth in that market and some recent acquisitions. But, I think the important part here is that our clients have been extremely supportive of what we are doing. They realized the value behind building a network and building that network, you want to closer to the vehicles that allows for quicker pick-up times, reduce costs associated with picking up those vehicles. And at the end that just means that we can become more competitive and offer more compelling SLAs to our client base.

So we are doing all that and at the same time we are offering up some of the XML, EDI EFT interface technologies that we have done in the past to those clients and they are very interested in anything we can do to give them better reporting, on salvage and allow them to reduce costs at the same time. So things have gone very, very well there.

Now if we look at the business from a financial perspective, guys, this is all about timing. And Copart is not going to run the company on a quarter-to-quarter basis. We are not even going to run the business on a year-to-year basis. This is going to be a business that we look at long-term. And the short term impact of that, the short term effect of that is that we have, what I would call normal integration costs associated with a full integration of an enterprise that is literally larger than 10% of the whole company of all of Copart.

So we've got increased towing cost, we've got increased temporary labor, associated with training, associated with finding vehicles in the yard, and inventorying those vehicles, and getting everything done. At one point we had over 100 employees from the US that were assisting in the UK in this integration.

So the fact of the matter is, we're in a position today that, we can handle an integration of this magnitude but at the same time having an integration of this magnitude is going to have one-time cost and those cost exist in Q2 and they won't exist is Q2 of '09. So we'll see that expense.

The other thing is it would be crazy, silly and stupid for this company to go out and start flooding the market in the holidays with vehicles during the Christmas break, the winter break, the fact that we are bringing in a record number of units and then just start selling off those vehicles when you get buyers, that are fully trained at that time on VB2 and utilizing of our technology.

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