Good day everyone, welcome to the Copart Incorporated second quarter fiscal 2018 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, Chantelle. Good morning, welcome everyone to the second quarter earnings call for Copart. On the call today is Jeff Liaw, our CFO, Will Franklin, our Executive Vice President. It's now my pleasure to turn it over to our CFO, Jeff Liaw.
Thank you, Jay. I'll start the call as always with a brief safe harbor. During today's call, we'll discuss certain non-GAAP measures, including non-GAAP net income per diluted share, which includes adjustments to reverse the effective income taxes on the deemed repatriation of foreign earnings, net of deferred tax changes, disposals of non-operating assets, foreign currency related gains and losses, certain income tax benefits, payroll taxes related to accounting for stock option exercises. We've provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our website under the investor relations link in our press release issued earlier today. We believe the presentation of these non-GAAP measures together with our corresponding GAAP measures is relevant in assessing Copart's business trends and financial performance. We analyze our results on both a GAAP non-GAAP basis described above.
In addition, this call contains forward-looking statements within the meaning of federal securities laws, which are subject to substantial risks 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 management's discussion and analysis portions in our related periodic reports filed with the SEC. We do not undertake to update any forward-looking statements that may be made from time to time on our behalf. Moving to the second quarter. This was a record second quarter for Copart in unit sales revenue, gross profits, operating income. We grew global revenue by 31.3%, including a slightly beneficial year-over-year currency effect of $5.5 million, primarily due to relative strength in the British pound. Excluding Hurricane Harvey, our revenue grew at 18.5%.
Copart grew global unit sales at 15.5% with U.S. unit growth of 18% and international unit growth of 1%. U.S. unit growth was driven by catastrophic events as well as market growth, Will will provide more color on those fronts. Excluding catastrophic events, U.S. unit sales growth was 9.4% for the quarter year-over-year. Turning to inventory, our global inventory grew at 8% year-over-year at the end of the second quarter. Excluding catastrophic inventory from both periods, inventory growth would have been 8.1%. Virtually no difference. This is because if you exclude Hurricane Matthew and the Baton Rouge events from our inventory last year, in turn, Hurricane Harvey and Irma from this year, we end up with inventory growth of 8.1%. Approximately 1% of this inventory growth is attributable to acquisitions.
In terms of the U.S. and international split, U.S. inventory grew at 7.8% with international growth at 9.5%. For the quarter, Copart grew service revenue of $91.9 million, or 29.6% year-over-year, and purchased car revenue growth of $17.7 million or 44.7%. Gross profits grew from $146.8 million to $191.6 million, with a slight decrease in gross margin rate from 42.0% to 41.7%. A mix of offsetting factors, but most significantly, Harvey. Excluding merely the effects of the quarter's catastrophic events, our margins would instead have been 44.3% on a gross margin basis. Continuing themes we talked about last quarter, we continue to observe improvements in United States average selling prices year-over-year, in this case for the quarter of 27.5% in the U.S. and 16.1% ex Harvey. As we discussed on the last call, we are noting that newer cars are being totaled.
Less severely damaged cars are being rendered total losses as well. That in turn, we are observing significantly increased bidding activity, both more registered bidders as well as more bidders per unit. Again, Will will describe more of the underlying drivers and underlying levers that we're pulling to generate that benefit. We also continue to observe a reasonably strong used car price environment. Manheim has finally broken its consecutive month streak of record highs, used car prices remain substantially higher by their Manheim index than last year. Finally, we have noted a reasonably strong scrap environment as well of 16% year-over-year. On balance then, we generated a benefit of $8.3 million for the quarter from Hurricane Harvey, which represents a cumulative then $9 million loss through the first six months of fiscal 2018.
We'll also note that that $9 million loss from catastrophic events excludes significant capital expenditures made, both in anticipation of catastrophic events as well as in response to them. All told, Hurricane Harvey remains the most substantial resource mobilization for a catastrophic event in Copart's history. Our G&A expenditures for the quarter were up from $32.4 million a year ago to $34.7 million this year, excluding D&A. The difference is due almost exclusively to the acquisition of NPA a year ago. Our GAAP operating income growth, we grew operating income from $108.9 million to $150.9 million or 39% year-over-year. Our operating margin last year of 31.2% compares to this quarter of 32.9%. Again, our rates were burdened approximately 150 basis points from Hurricane Harvey. Net interest expense was approximately flat year-over-year, with a lower debt balance offset slightly by a higher risk-free rate.
I will now pause for a moment on income taxes, which were unusually complex, of course, for the quarter by virtue of the passage of the Tax Cuts and Jobs Act of 2017. I categorize the effects in two broad buckets, the first being a change in federal income tax rate. We will benefit from the reduction in the federal tax rate from 35% to an eventual 21%. However, for Copart's fiscal 2018, because we straddle the pre-reform and post-reform periods, our federal tax rate for this fiscal year will be 26.9%. In fiscal 2019 and beyond, our U.S. federal tax rate instead will be 21% even. This quarter, of course, includes the benefits of that change from 35% to 26.9%. It also includes the benefits of releasing of some of the accrual from Q1 of 2018, which we had assumed at the 35% prior federal tax rate.
For companies like ours with foreign unrepatriated earnings, we calculate our transition tax due, which in our case is subject to further refinement, as well as additional guidance from the IRS. Nevertheless, in this quarter, we accrued approximately a net $10 million charge for this transition tax, which is net of deferred tax changes as well. Our GAAP net income then increased from $66 million a year ago for the second quarter to $103.3 million this quarter, the result of operating profit growth as well as the various tax changes I just described a moment ago.
On a non-GAAP basis, our net income grew from $67.4 million a year ago to $111.4 million this year, growth of 65%. You can see in the detailed reconciliation the exclusion of the book's tax benefits of our early adoption of ASU 2016-09, as well as the various other factors described a moment ago. Our effective share count has increased slightly from 234.2 million to 238.7 million, largely attributable to an increase in stock as well as stock option exercises. On a non-GAAP basis, our EPS has grown from $0.29 to $0.47. Last couple of comments on the balance sheet and cash flow, and I'll turn it over to Will. Our operating cash flow for the quarter of $93 million is compared to $81.3 million a year ago, a reflection of increased cash earnings as well as working capital movements.
Finally, on capital expenditures, we invested $69.4 million this past quarter, of which approximately 80%, again, was for land and development, a continuation of our capacity expansion efforts in general. With that, I'll turn it over to EVP Will Franklin.
Thank you, Jeff. Let me add a few more comments and some more color on the quarter. Copart delivered another strong quarter. This quarter, we grew our worldwide revenue and EBIT by $109.6 million and $42.1 million, respectively. Excluding the impact of Hurricane Harvey, our revenue and EBIT growth would have been $64.8 million and $33.8 million, respectively. The growth rate in revenue and EBIT, excluding Harvey, would have been 18.5% and 31%, respectively. In North America, our revenue grew by $100.5 million or 34.6%. Excluding the impact of Harvey, its growth would have been $55.7 million or 19.2%. In North America, total volume was up year-over-year by 18.6%. Excluding Harvey volume, it was up 8.2% and was driven by organic growth and market wins in the insurance market, the continued growth in the non-insurance markets, and our recent NPA acquisition.
Volume from non-insurance sellers, which include franchise and independent dealers, finance companies who assigned us the repossessions and off-lease vehicles, charities, municipalities, equipment dealers, and brokers, grew by over 31%. Excluding volume from NPA, which was acquired in the fourth quarter of last year, our non-insurance volume increased over 18%. Also within the non-insurance market, we are seeing a shift in mix as growth in volume from dealers was up nearly 27%, and volume from charities and municipalities were down four% and 26%, respectively, as we strategically dedicate our limited land capacity to the more profitable markets. Dealer cars are typically run and drive cars that yield an average ASP and average gross margin significantly greater than those for insurance cars, while at the same time have a shorter cycle time.
In total, non-insurance cars represented 20.5% of all North American cars sold. In North America and excluding Harvey volume, which yielded a higher value of salvaged car, our service revenue per car on a quarter-over-quarter basis was up approximately 9.9%. The increase in revenue per car was due primarily to higher ASPs. The increase in ASPs were driven by a number of factors. The value of used cars, as measured by the Manheim index, was up over 6%. The value of crushed car bodies as measured by the indexes maintained by American Recycler were up about 16%. Beneficial mix of cars sold, as previously discussed, and the additional volume from NPA, which yields a higher ASP. Finally, we continue to see increases in revenue from sellers as we adjust our pricing to certain sellers to more accurately reflect the value of the land utilized in our operations.
We also believe our marketing efforts to international buyers is having a beneficial impact on ASPs. Despite the challenges caused by the stronger dollar, total bids from our international buyers were up over 42% over the same quarter last year. Measured by the business address of the buyer, total sales to international buyers was approximately 21%. However, based on the location of the IP address of the buyer, sales to international buyers is approximately 32%. This does not capture the activity of buyers who have domestic physical addresses, bid locally, then export the car. We believe it is not unreasonable to estimate that as much as 35% of all of our sales are for export. Another area of significant progress within Copart is that of data analytics and business intelligence.
We have a team of data scientists utilizing new technologies, machine learning, and the millions of data points we have systematically captured over the years to enhance and develop our products. We have a product called ProQuote. It's a tool used by our insurance partners to predict the proceeds that we generated at auction for any specific car. As you can imagine, this is a very complex calculation, including inputs like year, make, model, trim, auction packages of the car, nature and severity of the damage, proximity to a port of export, season, scrap metal valuation trends, and many others. Next week, we will release our fourth new version of this product in the last 12 months. By using gradient boosting, we have improved the accuracy of that prediction by 34%, thereby allowing insurance companies to make better repair versus salvage decisions.
Due to the electronic nature of our auction platform, we can capture all the search and bidding activity, including product preferences and bidding tendencies. Utilizing that data, we may, when appropriate, extend our electronic auctions in anticipation of further activity. During the quarter, this new capability generated $ millions in additional gross proceeds for our insurance partners. Finally, we are using data and data technology to enhance our yard configuration and workflows to increase the capacity and efficiency of our operations. Turning to the U.K., we generated another strong quarter. We saw a marginal decline in units sold, resulting in part from our decision to eliminate the low-margin cars from our direct purchase program and to eliminate in total our municipality program. Nevertheless, expressed in GBP, revenue was flat and EBIT grew by almost 10% as we increased the yield per car.
Germany continues to deliver impressive auction results but low volumes. We hold biweekly auctions for three insurance suppliers and two major rental car companies. Auction buyers' participation continues to exceed our expectations as the number of participants and the number of unique bidders per auction are higher than those same metrics in North America. Returns achieved through our Copart auctions in Germany significantly exceed those achieved through the existing remarketing conventions. Key to growth in volume in Germany is the expansion of our network of facilities. In addition to our sole operational facility, which is located near Hanover, we have purchased and are in the process of developing two new facilities, one near Berlin and the other near Leipzig. We expect to begin phasing in operations in these locations this calendar year. We continue our efforts to open at least three other new facilities in the country.
We are also seeing meaningful progress in Brazil, where revenue and EBIT were both up over 20%. As our Brazilian operations mature and continue to gain market share, we believe it to be a more meaningful contributor in the future to our financial performance. Nevertheless, on an overall basis and for the quarter, our operations outside of North America and the U.K., while profitable, remain immaterial in both revenue and EBIT. We are seeing rising diesel fuel, labor, and health insurance costs. Nevertheless, on a consolidated basis and excluding the abnormal costs associated with Hurricane Harvey and the $2.6 million special bonus paid to our operation employees, which was tied to the recent change in corporate tax rate, our average cost to process each car grew only marginally over the same quarter last year.
We remain focused on controlling our G&A expense, and we are pleased with our efforts to gain leverage by limiting its growth. Total G&A expense for the quarter was $34.7 million. It included $1.8 million of additional G&A expense associated with the NPA operations. Excluding the additional NPA cost, G&A remained very consistent with the prior three quarters, despite the increases in both unit volume and number of yards. As a percentage of revenue, our G&A expenses remained below 9% of revenue as we strive to operate in a lean and efficient manner. Our inventory in North America was up 8.6%. Excluding all CAT units from both this quarter and the same quarter last year, North America inventory was up 8.7%. Inventory outside of North America was up 3.9%. At this point, we have a clear picture of the impact of Hurricane Harvey on our financial results.
Overall, we expect to lose approximately $8.2 million on the event. As always, we conducted a comprehensive post-event review of our performance to identify areas of improvement and to prepare for the next CAT. We have identified several areas in which we can improve operational efficiency through better use of technology and data, most notably the recovery of the flood cars. We have also identified areas where, through the expansion of our CAT equipment fleet and mobile facilities, we can improve the experience, comfort, and efficiency of our insurance companies' employees and their policyholders, as we are currently procuring and outfitting equipment in those mobile facilities. While costs associated with our response to Harvey were high, they were necessary to provide the level of service expected by our insurance companies.
Within days of the event, both before and after, we secured over 750 acres of temporary storage capacity at a cost of over $15 million. We diverted all of our appropriate machinery and equipment of our construction company to the region even before the storm hit land to prepare and manage these facilities. We called on over 660 people, who are seasoned members of our CAT team, to temporarily relocate to the Houston area. To supplement the 58 loaders we initially dedicated to the CAT, we procured on an expedited basis 22 more loaders at a cost of $4 million. Our marketing team developed international marketing campaigns specifically for flood cars that resulted in 55% of all Harvey units going to first-time flood buyers and an estimated 37% of the product going offshore, including a disproportionately high volume going to Latin America and the Middle East.
Our IT team was on-site day one, establishing connectivity for communications and for operations. Regarding land, while we know there will be another CAT in Houston, we also know the likelihood of gaining access to the land used in this CAT is remote. In fact, we know that 450 acres of land we used will become a residential development. Accordingly, we have developed a more permanent solution for Houston. We are expanding our existing facility. We have purchased and are currently developing a new operating facility of approximately 240 acres, and we have a non-operational CAT-only facility of 150 acres. This more permanent CAT land solution is being executed in Houston. It's just a continuation of a broader strategy that will ultimately cover the entire Gulf and Atlantic hurricane exposure areas.
In addition to Houston, last year, we announced the acquisition of a 162 acres non-operational CAT facility in Okeechobee, Florida, to address CAT needs in Miami, Tampa, and Orlando. In fact, this facility was utilized to address CAT volume from Hurricane Irma. In the current quarter, we purchased a 201 acres non-operational CAT facility in Theodore, Alabama, which will serve CAT needs from New Orleans to the Panhandle of Florida. Let me address our non-CAT land needs. Over the last 16 quarters, our year-over-year quarterly volume growth rate has averaged 10.8%. We have previously discussed extensively the drivers of that growth: increased accident frequency and increased total loss frequency. While the growth rate in accident frequency is moderating, we see no such trends in total loss frequency. In the most recent report from CCC, total loss frequency is up 6.5%.
Further, we believe there's a reasonable expectation that total loss frequency may accelerate due to the anticipated decline in used car pricing. Historical data suggests that used car pricing declines as off-lease volume increases as a percentage of new car sales. We're extremely active in our yard expansion program. While we did not announce the opening of any new yards this quarter, activity continues at an elevated pace. During the quarter, we closed 14 land transactions, including new yards or yard expansions in Salt Lake City; Ogden, Utah; Memphis; San Antonio; Atlanta; Tampa; Boston; Minneapolis; and Milwaukee, all of which either are or will soon be in development. Last April, we acquired our own construction company to more efficiently and cost-effectively develop our new yards. Currently, we have nine new yards or yard expansions in development.
Within three months, we expect 11 more new yards or yard expansions to begin. That concludes my comments. I'll now turn the call back over to the moderator for questions.
Thank you very much. Ladies and gentlemen, at this time, we would like to open the floor for questions. If you would like to ask a question, please press star one on your touch-tone phones now. Our first question will come from Bob Labick, CJS Securities.
Good morning. Congratulations on a great quarter.
Thank you, Bob.
I wanted to start with Germany, making progress there. You mentioned last quarter that you were starting to build out two other yards. Can you just give us an update on that progress, how it's going, and is it when you get those yards, more insurance companies will come? Because I think you were three last time as well. Give us maybe some milestones in Germany, as to how that should play out this year, please.
Sure. We have two that are on schedule. One that we should begin construction on over the next two weeks, the other in Berlin, which will probably be in the next two months. We have, I think, very viable targets in two other cities. We really don't expect to see an expansion of our volume until we get this network in place due to the cost to haul these cars. We're more confident than ever of the success of our product offering in this region, and we're progressing full speed ahead.
Okay, great. Are there any emerging competitive threats, or is the only threat to your expansion there really just status quo? How does the rest of Europe look going forward?
No, there's really no one that offers what we do. The market in Europe is primarily where the insurance companies pay to the policyholder the diminished value of their vehicle, then it's up to the policyholder to recover the balance of the value through selling that vehicle. What we offer is a completely different model, but one I think will be welcomed by the market there in Europe.
Okay, great. Last one, just jumping. The non-insurance growth in the U.S. remains very strong, excluding NPA as well. You mentioned a little bit about focusing more on dealer versus charity. Any other drivers there and what you've been doing differently to have such strong growth?
Yeah, I think we're finding areas in which we can maximize the sale proceeds of these non-franchise dealer cars. We have developed internal teams that help with counter bidding, because of the elevated returns that we're achieving, we're aggregating more volume from franchise, primarily independent dealers.
Great. Okay. Thanks very much.
Thanks, Bob Labick.
Thank you. Our next question will come from Ben Bienvenu, Stephens Inc.
Good morning. I'll also add my congratulations on the quarter. I want to ask on the vehicle sales line item up nearly 45% year-over-year. That's kind of a trend change from what we've seen over the last several quarters. I'm wondering how much of that is driven by the hurricanes. What are some of the factors that's driving that growth rate so substantially higher?
Sure, Ben Bienvenu. This is Jeff, and I'll jump in here. Just a brief reminder before I get even to the substance. The purchase car math, I think is sometimes misleading because we recognize them as revenue for the full selling price of the car. They always look more meaningful at first glance on the P&Ls than they actually are to the operations of the business. They're 14% of the revenues, but they're well less than 5% even of actual units sold. Purchase cars include a variety of sourced cars, including the Copart Direct business, which you've heard us talk about on prior calls as well. There are countries in which we operate that have a higher mix of purchase cars as well, including the U.K., for example, as you already know, among many other drivers.
I treat the variability in this quarter as largely noise more than anything else, and with less of an effect on the bottom line than it might first appear from the headline number.
Okay, great. That's helpful. Thank you. I want to pan out a little bit and think about the capacity expansion that you've added to the business. Obviously, total loss rates have been driven up pretty steadily over the course of the last several years, accident rates going higher. We've had an absence of what I characterize as normal winter. How do you feel about your ability to handle additional throughput in light of a more normalized winter that we've seen, at least in one calendar, one Q to date, where does your capacity stand to absorb what I would think would be more normalized volume in that environment?
Well, we're addressing that on several different fronts. First, and the most obvious one is we're expanding our land capacity. Secondly, we are developing new ways to handle the cars, which allows us to store more cars on the same facility. Third, we're exploring any ways that we can to reduce the cycle time to get the car sold faster. In the past, we've announced a tremendous investment of land. I think we were between approximately 700 acres last year. We'll be in that range this year, and we don't see the need for land abating in the next few years.
Ben, I think you just heard both sides from Will, which are both true, which is one, we are confident in our ability to provide excellent service to Copart standards to our customers, including in weather scenarios as you described, but also that you've now seen multiple years of highly elevated capital expenditures, which is a reflection of our expectation that we need still more. As you know already, land and capacity, we always talk about it on earnings calls as a big sweeping concept. It is very much a market-by-market, individual city, even regions of a given city basis. We study that very carefully and we invest accordingly on truly a microeconomy basis.
Last question for me is for the housekeeping around tax rate. Jeff, thanks for the color provided in the release today. I want to make sure that I'm thinking about this correctly. Given your targeted rate for the full year for this fiscal year of 26.9%, I'm inferring around the 25% tax rate for the back half. Is that the way that we should be thinking about go-forward tax rate?
No. First clarification is that 26.9 is strictly U.S. federal. You know already that Copart pays a U.S. federal tax. We pay state income tax as well, and then we pay foreign income taxes in the jurisdictions in which we do business, principally to date, the U.K. All of that historically has blended to a 34%-36% rate for the past few years. For Q2 2018, and for all of fiscal 2018, frankly, we will pay a U.S. federal tax rate and accrue at 26.9%. Q2 reflects that. It also reflects a quote, "correction," because Q1 was accrued at 35% initially. For the balance of the year, for U.S. federal tax rates only, you should expect to see an accrual of 26.9%.
By the time it blends its way into our actual P&L, the number will deviate a little bit, but that's the fiscal 2018 implication is the input is a 26.9% U.S. federal rate. In 2019, fiscal 2019 and beyond, our U.S. federal tax rate will be 21%.
Okay, understood. Thank you.
Thank you very much. Our next question will come from Bret Jordan, Jefferies.
Hey, good morning, guys.
Hey, Bret.
Could you talk a little bit about the increase in the international buyer bids? Obviously, you are saying maybe 35% of your volume is being exported. Is there anything going on, I guess, beyond a weaker dollar that is driving that? I guess from an import-export, is there anything politically going on? We are hearing about import duties on metals. Is there anything that could shift that trend going forward?
I think that the difference is the way we are measuring it. We can be more accurate in how we determine where the bid is actually coming from. Instead of relying on the address that they provide us when they sign up, we are relying on the IP address from which the bid is received. Based on that, we are providing a more accurate number. Despite that, however you measure it, our international activity is growing, and much of that is based on our marketing efforts targeting our international buyers. We had buyers for the first time last quarter from Saint Lucia Island, and every quarter it seems like we have one or two new countries that are bidding. So we expect that our international influence on our ASPs to continue to grow.
Bret, I was going to add a little bit of color there, too. You heard the commentary we made about ASPs rising and the underlying drivers there being newer cars on average, as well as less damaged cars on average. When the population of cars shifts in that direction, I think it naturally expands the available universe of buyers, including foreign buyers, right? The less damage and the newer the car, the more folks that might be interested, including foreign buyers who can put those cars back on the road in their respective countries. I think that's part of the story, too. For sure, as Will articulated, the big headline shift you might have in your head from low 20s to 35%, that's a measurement difference that he described.
Okay, great.
Bret, to more precisely address your question about heightened trade barriers, if that eventually comes to pass, I think the short answer is that has all kinds of first and second-order complications that I don't think anyone's prepared to opine on thoughtfully at this point. If you saw increased barriers to products getting in the U.S. from outside the U.S., you could imagine that the value of a salvaged car that's here domestically with a number of intact parts and a rebuildable platform could be worth more. You could also see a scenario, as you described, in which the international buyers who have helped to increase ASP in the U.S., that could be net harmful. Hard to say where that shakes out.
I don't think any of us yet has a clear and articulate vision of where that might end up in terms of the trade implications themselves.
Okay, great. Thank you. Then a quick follow-up. You commented on adjusting pricing to certain sellers to reflect the land values. Could you give us a little bit more detail as to which certain sellers and how much of an adjustment?
No, we won't go into specifics. You can imagine that the sellers that bring us the more valuable cars would have preferential pricing in that consideration. You can probably also understand that charity cars and cars received from municipalities are very low in value. Despite the fact they're low in value, they consume the same amount of land and typically have cycle times that may be even longer than insurance cars. They're far less attractive to us on an overall basis.
Okay, great. Thank you. Appreciate it.
Thanks, Bret.
Thank you. Our next question will come from Ryan Brinkman, JPMorgan.
Hi, good morning. Thanks for taking my question. Just to follow up on the earlier conversation about Germany, can you elaborate on the early reaction from customers given how different your service is from the model that was prevalent before your arrival, and what that might mean for the ultimate growth potential in Germany, which you've commented on before? Could you provide too, sort of an update on some of the other places you've recently expanded into in recent years, like India, for example? What are you learning there about whether that's a market you want to continue to invest in and what the ultimate growth potential could be in that country?
I'll start with Germany. The feedback's been very positive. The policy holders obviously love the fact that they can collect a check and then walk away and buy a new car without having to collect a check with simply the diminished value of their car, and then to sell the damaged car to aggregate enough cash to go buy a new replacement. It's more beneficial for the buyers, too. In the current market, a buyer in Germany may bid on a car, and then he has to wait 21 days to find out if the car will ultimately be awarded to him. In our convention, a buyer knows within days whether he has the car, and he can better plan his business and his inventory management.
Our challenge before us is just to build out the infrastructure to take advantage of this beneficial product offering that we provide. It's not a simple task. Obtaining land in Germany is every bit, if not more difficult, than obtaining land in areas like Miami and Los Angeles in the U.S. It's taken us some time, but we're well on our way. Like I said, we've got one in operations. We have two that are beginning construction, and we have two other sites that we feel very comfortable, we should close on in the next six months. That's in Germany. Every country's different.
When you asked about India, the prospects in India are not as bright as they are in what we've seen in Germany. We'll make the correct decisions in addressing the potential and best allocation of our management resources going forward.
Okay. That's very helpful. Just lastly from me, how should we think about management's priorities for the use of the incremental cash flows provided by the lower tax rate? I see the one-time bonuses to the employees. Relative to your prior plan, do you think you'll use the excess cash flows to accelerate organic growth, would that be domestic or international, or potentially to repurchase more shares than you otherwise would have, or some other purpose?
Well, let me just add before I turn it over to Jeff. Let me add, it was more than just a one-time bonus. We actually had pay increases for a number of the job classifications in our operational side of our business.
In response to your question, I think we invest to grow our business organically and to provide outstanding service to our customers. I think you can see reflected over a very long period of time, Copart's generally very conservative financial practices because we want to be relatively unconstrained when it comes to serving our customers well and to servicing their needs. We also expect to continue to invest internationally. We've talked a fair bit about Germany today, Western Europe as the big strategic non-U.S. priority for us. That likely will consume a substantial amount of capital as well. As we've always said, the ultimate residual is returns to the shareholders, of course. We historically have pursued share buybacks. I don't think the tax reform per se changes the timing and how we approach that.
It's, as you can tell, historically very lumpy by nature, but that's ultimately the lever that we will use. No immediate triggers, but ultimately that is the result of the incremental cash generated.
Great color. Thanks a lot.
Thank you very much. Our next question will come from Matthew Paige, Gabelli.
Good morning. I just wanted to quickly follow up on Hurricane Harvey. I think in the past you noted that you expected about 85,000 vehicles. Is that still a target number, and could you just give us an update on how many you've already sold through?
Hurricane, we think of, for what it's worth, hurricanes and Harvey and Irma being contemporaneous, Harvey being much larger, of course. We have sold approximately 85,000 units to date through the first two quarters of fiscal 2018, and we have approximately 7,500 units or so remaining in inventory.
Got it. Understood. Then lastly for me, maybe thinking bigger picture. You've made acquisitions, but are there other adjacent markets, especially in the auction space, that you think your technology would work well in?
It's a fair question. Nothing specifically. We know what job one is day to day, which is to service our customers exceedingly well, and job two is to expand internationally into the markets we've talked about. We'll always explore strategic adjacencies, but want to be thoughtful about it. As you heard us describe on prior calls, the NPA acquisition made sense for us both because we liked it as an investment financially, but also because we thought it was a strategic benefits to our core business. That will likely always be the baseline test, and any meaningful extensions beyond that would have to meet a very high hurdle.
Got it. Congrats on a nice quarter, and I'll talk to you soon.
Thank you.
Thank you very much. Our next question will come from Gary Prestopino, Barrington Research.
Hey, good morning, everyone.
Good morning, Gary.
Just want to touch on the dealer cars. Good strength there on the growth on units. First of all, with your program with the dealers, can a dealer put their car on your system through a mobile means and sell it that way rather than have to take it to a site, or do they still have to take it to one of your facilities to sell it?
No, they have to bring it in.
Okay. Is there any plans to do something like that where the dealer would not have to bring it in and you could just do it through a mobile phone, upload everything?
No, not at this point.
In terms of the transactional base, are the buyers mostly independent dealers? The sellers are mostly franchise dealers? Is that how these vehicles are flowing from buyer to seller?
Yeah. The sellers are mostly independent.
Oh, the sellers are mostly independent? Okay.
Yeah, mostly independent. Yeah, we have a few franchises. They're mostly independent.
They're going there?
They're going everywhere. It'd be hard for me to single out one particular pocket of buyers that is significantly more important than others. A lot of these cars are going offshore.
Okay. Lastly, Jeff, I just want to make sure I'm clear on this because I'm not. In terms of when we start looking at the tax rates for the back half of the year and next year, you talked about the U.S. tax rate, but is there any way you could probably just give us what your all-in blended tax rate is going to be the back half of the year and for fiscal 2019?
No, unfortunately, Gary. I think the U.S. federal tax rate historically has been a very good starting point for estimating our overall rate, coincidentally, our overall rate ends up similar because we had the offsetting benefits of relatively lower rates in the U.K.
Right.
Again, offset and lifted by U.S. state tax rates in turn. The point I was trying to make was that in Q2 2018, you have the noise of not just the lower rate year-over-year, you also have the noise of the $7.6 million we are effectively releasing from the Q1. Q3 and Q4 will just have a fairly clean 26.9% U.S. federal tax rate. We haven't historically provided any guidance beyond that's the then starting point for Q3 to Q4.
Okay, thank you.
Yep. Thanks, Gary.
Thank you. Ladies and gentlemen, at this time, if you have any final questions, you may press star one on your touchtone phone now. Our next question will come from Chris Bottiglieri, Wolfe Research.
Hi, thanks for taking the questions. I want to focus first on the dealers. What exactly is driving that? Is it more like your efforts trying to get more of these dealers to sell out of value trade-ins to yourselves rather than scrap yards? Trying to understand where the higher supply of these cars is actually coming from.
Yeah, mostly we're meeting their expectations in terms of returns. We're getting higher returns, therefore that's driving higher volumes. We've got a number of programs in place that are helping us in that respect, but we've seen our returns increase significantly over the last four to six quarters on these dealer cars.
Got you. Are there any other supplementary market factors that are driving that, like repossessions or anything like that, or do you think it is more so your own efforts?
Mostly it is our own efforts. We developed some programs and some expertises and some internal processes that are allowing us to yield a higher return.
Got you. Okay. Related, vaguely might be calling out a market share win in the prepared comments. Was there any big account? Was it kind of just broad-based or just general comments you are making? Was this new to the quarter? Just kind of wanted more commentary on that.
I am not sure. No substantial shift this quarter.
No substantial shift. Okay. All right. Then just finally, when we think of these CATs, pretty small loss. Sounds like, i.e., something comparable, maybe a small gain, who knows. When you think about the CAT frequency unfortunately seemingly picking up, becoming a more recurring event, this is largely an industry that's a duopoly with high barriers to entry, and you've both made these massive permanent land investments. How do you start thinking about these CATs going forward? Do you think there's any ability to price these more effectively to be compensated for your pretty strenuous efforts? Is there a point where you think you can make money on these as a part of a recurring ordinary event?
In the past, we have not. We've not adjusted any or we have any special pricing for CATs. Right now, I can't say that there's any discussion that's been entertained about doing so. I just wanted to also jump in on the premise of your question, too. We've felt a pretty meaningful financial effect across the first six months of the year, a $9 million net operating profit loss, and we don't expect it to make that up to any meaningful degree. I'd also add, per the prepared commentary, that that doesn't even count the very meaningful capital expenditures we've made in anticipation of these catastrophic events and in response to them. These are major financial burdens for us, no question, on balance. As Will articulated, that's simply what it takes to provide Copart service to our customers.
As to your question about pricing, I think we view it as part of the cost of doing business to provide exceptional service to our customers. We historically have not, as Will noted, have not adjusted pricing accordingly for those moments in time.
Got you. Okay. Thank you for the time.
All right. Thank you.
Thank you very much. Ladies and gentlemen, at this time, we have no further questions in the queue.
All right. Thank you, Chantelle, and thank you, everyone. As you can see from the results of the quarter, we're quite happy with how things look. With the CATs primarily behind us, I just want to point out our people have done a fabulous job. We've been out in the field speaking with those folks, and I know they're proud to work for Copart, and we're proud of them. We appreciate all the hard work and the effort and look forward to reporting on Q3 on the next call. Thanks so much.
Thank you very much. Ladies and gentlemen, at this time, this conference has now concluded. You may disconnect your phone lines and have a great rest of the week. Thank you