Ladies and gentlemen, good day, everyone, and welcome to the Copart, Inc. First Quarter Fiscal 2017 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, Inc. Please go ahead, sir.
Thank you, David. Good morning, everyone, and welcome to the first quarter call for Copart. I'm going to turn it over to Jeff Liaw, our CFO, who will give you an update on the financial performance for the quarter. Then he will pass over to Will Franklin, our Executive Vice President, who will talk about some of the operational effects that we had in the quarter. With that, it's my pleasure to introduce you all to Jeff.
Good morning, everyone. I'll start with the safe harbor. During today's call, we'll discuss certain non-GAAP measures, including non-GAAP net income per diluted share, which excludes the impact of foreign currency-related gains and the tax effects of recent executive 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 and in our press release issued yesterday. We believe the presentation of these non-GAAP measures, together with their corresponding GAAP measures, is relevant in assessing Copart's business trends and financial performance. Copart management analyzes its results on both the GAAP and non-GAAP bases described above. A cautionary note about our forward-looking statements.
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 latest periodic reports filed with the SEC. We do not undertake to update any forward-looking statement that may be made from time to time on our behalf. Per our custom, I'll start with a brief review of our income statement and then progress to the balance sheet and cash flow statement as well. We're pleased with the results of our first quarter in fiscal 2017.
We've continued the basis of presentation that we shared with you in the last quarter with a non-GAAP presentation to account for certain foreign currency-related gains as well as stock option exercises. I'll provide more color on both of those to come. Starting with the headlines, we experienced global revenue growth of 19.8%, and that's after accounting for the detrimental currency effect on revenue of approximately $9 million, largely due to the depreciation of the GBP relative to the USD. We grew unit sales volume worldwide at approximately 19%, with U.S. unit growth of approximately 20% and international unit growth of approximately 14%. Global inventory growth was 25%, of which 5% is attributable to catastrophic weather events. Service revenue growth outpaced that of purchased car revenue growth, with $56 million of our growth attributable to service revenue and $1 million attributable to purchased car revenue growth.
This is largely due to a proactive shift on our part from purchased car volumes to agency arrangements instead. We experienced gross profit growth from $120.9 million to $145.3 million. A couple of points of color. We did experience year-over-year scrap price improvement of approximately 26%. We continue to cite the same American Recycler index, averaging five different regions over the three months in the quarter. On an absolute dollar basis, of course, the scrap portion of the value in our auctions remains relatively small, but we did experience year-over-year improvement in that important index. Year-over-year used car values were approximately flat or up 1% using the Manheim index, again, averaged over the three relevant months. Our G&A expenditures on a GAAP basis increased by $3.8 million ex depreciation and amortization.
It's worth noting that $5.2 million of these G&A expenses are attributable to payroll taxes due to stock options exercises. We, of course, view these as non-recurring expenditures or episodic expenditures tied to stock option exercises, not incurred in the ordinary course of running the business. Our depreciation and amortization increased slightly as we placed more software assets into service. As always, we provide the general framework that G&A will continue to grow on an absolute dollar basis over time, though with reasonable growth rates, we should expect to achieve operating leverage. I wanted to take a minute here to pause on the non-GAAP compensation related adjustment. This is again due to exercises by certain Copart executives of outstanding vested options. In effect, what happens is this creates a tax deduction for Copart with an excess tax benefit to Copart of approximately $101 million.
You'll note that Copart's GAAP tax provision for the quarter was actually a substantial tax benefit instead. In practice, we withhold a portion of the shares the executives are exercising, retire those shares for cash, and remit the payments to the IRS. In reality, we have effectively prepaid a majority of our U.S. federal income tax liability for fiscal 2017 already by remitting that cash to the IRS. We experienced EBIT growth of 21.5% from $86 million to $104.8 million. Please do note that $104.8 million is burdened by $5.2 million of the payroll taxes I described a moment ago, which we believe are generally non-recurring and episodic expenditures. Interest expense for the quarter was approximately flat year-over-year due to a higher revolver balance, again, due to the cash exercises, offset by lower drawn rates.
GAAP net income, of course, increased substantially as a result of the negative tax provision. On a non-GAAP basis, the only other matter I haven't already mentioned is the reversal in our adjustments of foreign currency-related gains of $2.8 million post-tax. We hold certain cash balances in our overseas businesses, and when the U.S. dollar appreciates, we experience a positive gain that shows up in other income. We have unwound that gain for the purposes of calculating our non-GAAP adjusted net income. The bottom line then is an adjusted non-GAAP EPS of $0.57. Turning our attention to the balance sheet and the cash flow statement. Cash flow is again affected by that same cash tax payment we made on behalf of the stock options exercises. We nevertheless experienced operating cash flow for the quarter of $74 million. A reflection first, of course, of increased earnings or increased EBIT.
We also experienced substantial accounts receivable growth of just shy of $30 million. As you know, these are primarily advanced charges paid out on behalf of our customers, so that when we pick up the cars, we can access them. The growth, therefore, in AR corresponds to the inventory growth we described previously. The increase in deferred and current income tax assets net is approximately $70 million. That's, again, the same tax issue I described a few moments ago. We had capital expenditures of $38 million for the quarter, of which approximately three-quarters to 80% is attributable to land and development and lease buyouts. With that, I'll turn the call over to our EVP, Will Franklin.
Thank you, Jeff. As Jeff said, we are very pleased with the results for our first quarter of fiscal 2017. The growth in revenue of 19.8% mirrors our growth in volume of 19.4%. This is the third successive quarter in which revenue has grown by 17% or more, and the fourth successive quarter in which revenue, volume, excuse me, volume has grown by 13% or more. In fact, we have averaged growth in our inventory of over 15% over the last nine quarters. I'll start with a few comments on U.S. operations, where year-over-year volume increased by 20.2%. As we have discussed in our previous earning calls, we believe the overall size of the U.S. total loss market is increasing in size at an annual rate of between 8%-10%.
While the growth of the U.S. salvage market is marginally attributed to growth in both car park and accident frequency, the largest contributor to growth is growth in total loss frequency. Total loss frequency continues to rise as repair costs continue to grow due to consolidation in the collision repair industry, more severe accidents, greater complexity of newer cars, and longer average replacement car rental times. On top of the organic growth, we have layered on an increase in our share of the market and growth in our non-insurance volume. Non-insurance volume grew by 18.4% and in total represented 18.6% of our volume. The growth was led by increases in charity and donation cars and in broker cars. At the end of the quarter, our U.S. inventory was up 26.1%, of which approximately 5.4% was attributed to CAT activity.
I'll turn to revenue in the U.K., where we saw growth in units sold of 12.4%. Insurance volume grew to increases in both the size and our share of the insurance salvage market. Non-insurance growth was 20% as the dealer and the direct purchase programs continued to expand in both volume and in profitability. Measured in GBP, U.K. revenue grew by 16.4%, and its EBIT grew by over 40%. After translation into USD, revenue was down marginally, and the EBIT grew by only 18.1% due to the strengthening of the dollar to the pound. On a consolidated basis, we experienced an increase in average cost to process each car due primarily to operating in an environment of general growth, the extra expenses associated with operating in CAT environments, and due to the growth in inventory. We remain focused on controlling G&A expenses.
G&A spend for the quarter was $35.2 million. As Jeff mentioned, included in that total is $5.2 million for the company portion of payroll taxes associated with the exercise of stock option. We consider this to be an extraordinary and unique item due to its magnitude. This expense averaged less than $60,000 per quarter in fiscal 2016. Excluding this item, G&A was $30 million, marginally lower than the same quarter last year. We expect G&A to grow as we continue to expand our international efforts and increase our IT resources. Finally, our capacity expansion efforts continue. During the quarter, we added two yards, and we expanded five existing yards, increasing our total capacity by approximately 140 acres. In our second fiscal quarter, we expect to add another five yards, five sublots, and to expand nine existing yards, increasing capacity by another 529 acres. That concludes my comments.
David, I'll turn the call back over to you for the Q&A session.
Thank you. Ladies and gentlemen, at this time, the floor is open for your questions. If you would like to ask a question, please press star one now. If at any time your question has been answered or you need to remove yourself from the questioning queue, please press star two. Again, to ask a question now, please press star one.
David, do you have someone in the queue?
Yes, sir. Our first question comes from John Healy with Northcoast Research.
Hi. Thank you. Guys, I wanted to ask just kind of a big picture question about your buyer base. I was wondering if you could give us some color in terms of the number of vehicles that are probably leaving the U.S. and maybe the amount that are headed to Latin America, maybe the amount that are headed to Europe and the Middle East. Just trying to conceptualize what some of the volatile movements in the global currency market, what those could mean to ASPs and buying behavior by your customers.
Sure. I can tell you that the trend is down. We were at one time up to 23%, 24% of cars being sold to international buyers. That currently is below 20%.
Do you have the exact numbers?
If you'll bear with me one second, I'll get you the exact numbers.
No problem.
Like I said, expressed in units and expressed in value is about the same. It's slightly less than 20% of our volume, and about the same amount of value of cars sold are sold to buyers that are registered internationally. I will say this, though, that understates the number of cars that are leaving the country, because there's a number of buyers that are registered domestically that do nothing but export.
Okay. Is there a way to.
I was going to say, obviously because of the strengthening of the dollar, it's had a detrimental impact on their activity.
Sure. Is there a way to think about just Mexico or Latin America, what percentage of the buyer base is represented by them?
Well, in terms of activity, about 7% of our volume goes to Mexico currently. That's down from about 9%, nine quarters ago. You're seeing a slight decline in their participation in our auctions. They're.
Okay
by far the largest international buyer.
Okay. Well, that's helpful. I wanted to ask, you mentioned kind of the acreage in addition to the number of yards and the expansion. Is there a way to think about acreage in the business today, and maybe what an acre of land translates into the amount of capacity in terms of vehicles you can store or kind of marshal for the insurance folks?
Yeah. Generally, it's 125 cars per acre. That changes depending on the nature of the situation we find ourselves in. That's the most efficient layout for the operations of a yard. In times of a CAT, we can squeeze far more cars onto a yard, but we operate far less efficiently. In fact, you'll see part of that expressed in our margins this quarter.
Okay. Thank you.
Our next question comes from Bret Jordan with Jefferies.
Hey, good morning, guys.
Hi, Bret. Good morning.
Of the inventory growth, could you carve out what might've been a market share contribution to that as well?
Well, if you're talking about just insurance, you can kind of back into that. Of the growth in inventory, well, in terms of volume sold, the growth, about a little less than 3% is from CAT. Like I said, we think 8%-10% of that's just because of organic market growth. That leaves you about 7% in market share gains.
Okay. Is that a trend that's accelerating? Is there anything changing or any changes as far as insurance RFP activity going on now or maybe going on in the near future?
There's always activity. We're always out there competing aggressively to get new business. I can't say that what's going on now is any different than what was going on a year ago.
Okay. Could you give us an update on Germany, as far as the international business goes?
Sure. As we announced, we had our first auction in September. Since then, we've had two more auctions. I should distinguish or I guess clarify the nature of these auctions. These are test auctions. The insurance companies are not participating in these auctions. We have another one scheduled December 14th. We're taking a very measured approach to rolling this out to the insurance companies. We want to ensure that we have it right when we do introduce our product. We're very confident that that will happen in this fiscal year. We're very optimistic and pleased with the interest that we've seen from the insurance companies. We're going to be measured in our rollout, and it may delay. Like I said, that may mean it will be a few months from now before we do introduce it to the insurance companies.
Hey, Bret, I'm going to add to that. I was in Germany two weeks ago meeting with our team. We currently have a location that is north of Hanover, and we're going to be opening up additional locations across Germany in the next 18 months. We're very committed to the market. When we're done it's going to take about a half a dozen locations to service the market from a logistical standpoint. If we're mature in the market, it'll take more like the U.K., about 15 locations. In the interim, you just want to be in a position where you've got coverage and you can logistically pick the car up anywhere in the country. As Will stated, we expect to go live this year, and then we'll be expanding in fiscal 2018.
Okay, great. Thank you.
Thanks, Bret.
Our next question comes from Ben Bienvenu with Stephens Inc.
Yeah, thanks. Good morning, guys.
Morning.
Morning.
Really nice unit growth in the quarter. Looks like from the inventory growth numbers that should continue going forward. You called out 5.4% of the inventory growth was CAT volume. I'm curious, are you able to quantify the amount of cost you may have incurred in the most recent quarter for units you've yet to sell that are sitting in inventory? Is that an easy number to carve out?
Yeah, it's in the millions. In some of the CAT situations, we're spending as much as $500 a car to recover the car. Millions of dollars to locate new land and to bring people in from different parts of the country to man these operations. Very little of that gets put on the balance sheet. That's flushed through at the time that we recover the cars. As I mentioned earlier, that suppresses our gross margin percentage.
Understood.
Ben, trying to give you just a sliver more color on that.
Yeah
Broadly speaking, even ex catastrophic events, when Copart grows inventory, in particular sequentially, as we have done this quarter, we incur a meaningful portion of the cost in the period in which we grow it, even before we sell it. We also recognize a portion of the revenue due to certain revenue recognition requirements. The net effect of growing inventory is a depressive effect on gross margins. I think to Will's point, that is further enhanced by catastrophic events in which the costs you incur in the current period are still higher.
Understood. That's really helpful. Maybe shifting gears a little bit to the yard expansions. Obviously underscores your confidence in sort of the structural step-up in volume you expect to experience over the long term in the business. I'm curious, how far along are you there? Have your goals around 20/20/20 changed from the last time you communicated them? As you're building out the yard expansions and adding new acreage, is there any material cost deleverage that results from that activity or is it negligible?
Let me, I guess, address a few of those. The 20/20/20 program has changed. It's expanded significantly. The 20/20/20 referred to buying 20 new yards, opening 20 new yards, expanding 20 existing yards in the next 20 months. We'll exceed that significantly, which underscores our confidence not only in the growth of the market, but perhaps a change in the way we approach how we operate. We look at land not only through an operational lens, but also through a strategic lens. We intend to be able to offer excess capacity to our suppliers, our partners in times of catastrophic needs. In order to do that, you have to have a significant amount of excess capacity, particularly in the high-risk areas.
Ben, I'm just going to jump in. A couple of thoughts in response to your question. I would say your point about reflecting our confidence in the business, I think is true. Some of these land acquisitions and developments projects are also, they're not speculative. They're responsive to existing cars on the ground. They're responsive to existing volumes that we're facing. They're not all just prospective bets on growth to come. I think that addresses your second question, which was the leveraging or deleveraging effects of these new yards. I think there are a few offsetting considerations. One is that our subhaul expense per car typically goes down with the addition of new real estate. By definition, a yard is closer to some accidents than your old yard network was, your subhaul expenses should come down per car.
There also is a cost of congestion. This was Will's point a moment ago, particularly in catastrophic events, when you have cars packed too tightly in yards, you have higher labor costs and higher handling costs than you otherwise might, which new yards helps to relieve. The third point, I think, is the one you were getting at, which is when you do add or when we do add new real estate, there is potentially some deleveraging of people costs as you staff a new yard with the general manager, with yard and office staff, forklifts, and the like. There is some offsetting effects. On balance, there are some offsetting effects.
Just one last very quick one. Your normalized tax rate has been a little bit lower the last couple quarters than we've seen in the past. I'm curious what your expectation for tax rate might be on a normalized basis going forward.
I think we previously said, or Will has said, our tax rate is in the 35%-36% normalized level. I think if you exclude the noise that we experienced this quarter, we're about in line with that. Our forward expectations haven't changed, barring, obviously, a major policy shift by one or more of our major countries.
Okay, great. Thanks and best of luck.
Okay.
Our next question comes from Craig Kennison with Baird.
Good morning. Thanks for taking my question. Jay, I wondered if you would simply review your IT priorities for the next 12 months or so.
Sure. We've got great systems domestically. Across the board, we're extremely happy with our web services, our mobile services, and the systems that we operate in our company. Without a doubt, the majority of the focus right now is on Germany. We always have some maintenance that will exist on existing operations, both U.K. and U.S., and other countries that we're doing business in. Right now, if you're thinking from the standpoint of resource, energy, effort, dollars, time, we are putting the majority of that right now into Germany and our ability to get into that market and succeed.
Thanks. A second question on the election. Just wondering what the broad implications of the election results might be on your business, especially as it relates to repatriation. I'm wondering how much you have funds tied up overseas, and whether you'd be interested in repatriating them if tax policy were to change.
Hey, Craig. A substantial portion of our cash is in fact kept overseas. If there is a policy change, I think we evaluate at that moment in time whether the investments overseas justify keeping the cash there or bringing them back here for general corporate purposes here. At the moment, I think there are growth opportunities, Germany included, as you heard from Will, that could consume some of that cash.
Any concern about regulatory changes, NAFTA, things like that?
No. I think the question earlier was about international exports. Off the top of my head, Will said it was just under 8% Mexico. Off the top of my head, it's just a little over 10% to all Latin American countries. I don't, at this point, see why the export of used vehicles, these aren't new products, so I don't see at this time why the export of used vehicles would be an issue. We are constantly interacting with Mexico, and have relationships with Mexico on shipping vehicles south of the border. I don't anticipate anything negative at this time.
Great. Thank you.
Thanks, Craig.
Our next question comes from Elizabeth Suzuki with Bank of America Merrill Lynch.
Good morning. Can you guys give an update on your expected CapEx for 2017, given the investments that you're making in capacity growth?
Thanks, Elizabeth. We generally don't provide forward guidance on either our income statement or our cash flow statement. What I'll reiterate is this. When we talked about 20/20/20, the program initially, and that was in March of this year, we talked about spending an extra $100 million in the first calendar year, and it being approximately a two-year program, the 20 months representing the two years. We believe, if anything, that our expectations have increased relative to the total investments that we will make over the relevant multiple year horizon. At this moment, with real estate being episodic and lumpy as it is, it's difficult for us to pinpoint precisely how much we expect to invest over the course of this fiscal year. The elevated capital expenditures you've observed in the last five quarters, we believe, will continue.
Great. Thank you. That's very helpful. Just one other quick one, which is what are your internal forecasts, if you can share them, for movement in the dollar, commodity prices, et cetera, that could potentially change your strategy over the next couple years?
I don't think we have any differential insight relative to what you or your colleagues at Bank of America might. We don't perform meaningful bottom-up currency forecasts at Copart.
Okay. Thank you.
Our next question comes from Gary Prestopino with Barrington Research.
Hey, good morning, everyone.
Gary.
In terms of the catastrophic events with the hurricanes and the floods, have you taken in the majority of the cars that you're going to get from both of those issues?
Yeah, we have, Gary. When we look back, they're all different nature. We've had seven events that we characterize three of those as significant cat events. Matthew, the flooding in Baton Rouge, and the flooding in Houston, which exerted an extraordinary burden on our operations and our cost structure. Of those three cats, plus the hailstorms in Dallas and Colorado Springs, we've received most of those cars already, and most of those are in inventory.
Okay, thanks. In terms of your share gains in the U.S., are there many independents left
since you've been taking share, and I know you've got one big competitor, but what's that landscape look like? Are these smaller independents gradually just going out of business?
Yeah. At this point, I would just say that we've got one major competitor, as you referred to. There is a secondary competitor out there that we compete with. As Will has commented in previous calls, the market has been growing, and we foresee the market is going to continue to grow. Market share is an important part of our growth, and we're always, as I think Jeff or Will referred to earlier, we're always competitive, and we're always eager to win new business. Right now we have our hands full, if you will, with the fact that total loss frequency is up.
When you got a company the size of Copart and you're growing 10% a year just in the industry, there's a lot of work we have to do in terms of making sure we have capacity and people and the logistics in place to pick the vehicles up and store them, and then sell them.
Okay. Lastly, the majority of what you process or sell in the U.K., is that kept within the U.K., or is some of that exported into the European continent?
No. It's very similar to the U.S. About 80% of it stays in the U.K., 20% leaves the country.
Okay, thanks.
Our next question comes from Matthew Paige with Gabelli & Company.
Morning. I guess my first question.
Morning.
How do you view your non-insurance revenue growth potential looking forward, given the significant population of used cars coming back? Along those lines, how do you prioritize taking in those cars versus insurance cars from those trucks?
Boy, it was hard to catch all that question. I believe you asked what our growth strategy was for non-insurance cars?
Yeah.
Prioritization. We are focused on insurance company cars. We are focused on insurance companies, period. That is our life. That is all we live and breathe around here.
Okay.
The extent that we can, without distracting from our ability to perform for the insurance companies, add these non-insurance cars, then we do so. Our focus is not on the non-insurance cars.
Okay. Then that's similar to your acreage growth strategy in terms of that is focused for the insurance companies, it's not on building capacity to be able to take on more non-insurance volume.
It absolutely is to take on more non-insurance volume as well as insurance. Will was being very clear that we're focused on handling insurance companies, but Copart's not in the business of saying no. We take business in, whether it comes from a dealer or a charity or an insurance company. Our goal is to say yes and take those cars in. We're building out that capacity for the whole organization, not just one component of the organization.
All right. I appreciate the time, and good luck.
Thank you.
Our next question comes from Bob Labick with CJS Securities.
Good morning.
Bob.
Hi. I wanted to dig a little deeper in some of the answers you've given particularly in the yard expense. You've obviously been investing a lot, and the yard cost was up a lot year-over-year. I know you won't give us specific numbers, but could you maybe rank the four, or if there's more, tell me more, causes for that growth? New fixed domestic yard cost, new fixed international yard cost, increased sequential inventory growth, and then CAT expenses. Can you tell us which of those just rank those in terms of the year-over-year cost in the yard costs, please.
In this quarter, it would be the CAT expenses would be the highest, have the highest impact.
Got it.
Bob, to your question, I think I'd almost view it as you kind of have to call upon two different planes, right? On the domestic versus international, much more domestic. On the question of what's causing growth within the domestic realm, I think it is volume growth broadly with CATs, as Will pointed out, being a meaningful contributor in this past quarter.
Great. The CAT, theoretically excluding another CAT next quarter, goes away, and the rest of the stuff, obviously depending on inventory and volume growth, will stay. Correct?
Bob, I just want to jump in there because Will mentioned three major CATs, but we've had something like nine CAT events that he mentioned. I would say two things to that. One is we are building out capacity along a number of the coastal states for future CAT situations because the second point is, we don't think CATs are going away. There's enough weather, and we're national enough in our footprint that there is something happening, whether it's in Colorado Springs, there's a hailstorm, or it's a flood in Houston, or it's tornadoes in Oklahoma. There's always something going to be out there. We think the CATs are a regular part of the business, and obviously the smaller the catastrophe, the better it is on our margins.
The larger the CAT, the more negative it is in terms of profitability because of the sheer logistics of moving people in, picking all the vehicles up, the additional costs that you have, et cetera. Just so you understand, we are thinking about CATs as being a more ongoing part of the company.
Okay, great. Thank you for your commentary on Germany earlier. I was wondering if you-- we've also noticed you've had some new auctions in Spain. Could you talk about that market and then just what you've learned in each of those, and if there's other opportunities in continental Europe?
Sure. I think they're very similar. I went to Spain a couple of months ago, as I said, I went to Germany a couple of weeks ago. I think they're very similar in that you have the same problems in Europe that you have in the U.S. If you're selling a vehicle and it's not going into an auction or it's being stored, you have to deal with the owner of the vehicle, which is the insured. Having someone come to their home, typically pick the vehicle up, that experience can be a pretty bad experience. There could be anywhere from showing up late at night to pick the vehicle up to wanting to renegotiate the purchase price on the auction platform. We think from that standpoint, less friction.
We think from the standpoint of logistically allowing a buyer to buy vehicles and swing in with a nine-car hauler and pick those vehicles up, and all the other benefits that we have provided in the U.S. and the U.K., as examples. We think that that opportunity welcomes itself in Germany and Spain as well. Obviously, Germany is a much bigger market than Spain, and culturally, I suppose I would say it this way, culturally, the German market's very willing to test the model. If that model ends up proving to be better, which we believe it will, then they're committed to moving forward. That's why at this time, we're doing business in Spain as well as Germany, but there's more focus right now on our part to focus on Germany. You don't want to be spread out and trying to do multiple countries on something like this.
It's a large market. It's over half a million vehicles, and we want to make sure that as we test and then move forward with growth plans in Germany, that we succeed. That's where our effort's at right now.
Okay, great. One last one. I think on either last call or maybe one before that, you talked about a new retail location in Dallas for CrashedToys. Maybe if there's any update or what you've learned from that experience so far?
Sure. We've established a new brand and a new facility. It's called CrashedToys, and it's targeted to raising the returns on non-car assets. It's basically motorcycles, it's jet skis, it's boats, it can be recreational vehicles. By giving a new brand a new emphasis, we're targeting more retail buyers, and we're doing more marketing behind it. Once again, it's all in the effort to getting better returns for our insurance customers. We're happy with the results in Dallas. We're opening another location in Los Angeles, and then we'll evaluate that and determine what the next steps are afterwards.
Okay, super. Thanks.
Thanks, Bob.
Thanks, Bob.
Again, if you'd like to ask a question, please press star one now. This will be your last opportunity to do so. Our next question comes from Bill Armstrong with C.L. King & Associates.
Good morning, gentlemen. In terms of the CAT cars, the processing costs, could you remind us, are those costs recognized as incurred or as those cars get sold in your auctions?
As incurred.
As incurred.
We put very little of the cost on the balance sheet. The reality is, as Jeff has said, that principle holds true to even non-CAT cars. We recognize a portion of our revenue at the time we pick up the car, but that revenue has almost no margin. The majority of our costs associated with that car are the time that we pick it up, we receive it, we store it. There's a disproportional recognition of the profitability of that transaction at the time that the car is sold versus the time it's picked up.
Okay. In looking at those cars, like from the Louisiana floods and Hurricane Matthew in particular, have most of those cars already been sold, or will you get some of that volume benefit in the current quarter?
No, we have many cars yet to sell from those CAT events.
Okay. In terms of pricing trends, excluding scrap, which you addressed earlier, what sort of average selling pricing trends are we seeing across the board?
Within the U.S., I'd characterize them as stable. The offsetting considerations are that scrap has improved. Used car prices are flat or up slightly. I think folks have asked about the currency effect. The peso is certainly down year-over-year, which affects the selling prices of cars in the U.S. We're approximately flat.
Got it. Okay. Thank you.
Thanks, Bill.
At this time, we have no other questions at this time.
All right. Well, as we said earlier, we're very pleased with the results of the first quarter. Thank you all for attending the call. We look forward to reporting the second quarter in the new year. Wish you all a happy Thanksgiving. That concludes our call. Thank you.
Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day.