The following is a
recording for Cynthia Cross with Copart on Thursday, May 26, 2016 at 10 am Central Time. Good day, everyone, and welcome to the Copart Incorporated Third Quarter Fiscal 2016 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, Justin. Good morning, everyone, and welcome to the Q3 earnings call for Copart. With me today is Jeff Liao, our Chief Financial Officer Will Franklin, our Executive Vice President. And I'm going to turn it over to Jeff, who will start things off, pass it to Will, and then we'll open it up for Q and A. With that, I'll turn it over to Jeff.
Thanks, Doug. We'll start with the Safe Harbor. Our remarks today will contain forward looking statements, including statements concerning our views of trends in our business. The statements are neither promises nor guarantees and are subject to risks and uncertainties that could cause the actual results to differ substantially from those projected or implied by our statements and comments. We expressly disclaim any obligation to update or revise these statements or comments.
For a discussion of the risks that could affect our business, please review the risk factors contained in our most recent 10 ks, 10 Qs and other SEC filings. I'll start with a brief financial overview before turning it over to Will. Starting with the income statement, our operating performance included revenue growth of a little over $50,000,000 for the quarter year over year. That represents 16.9% growth on unit sales growth of 15.6%. We did experience a detrimental revenue effect of approximately $3,700,000 from currency effects due to a slight strengthening of the USD year over year versus the British pound.
Our service revenue grew by $46,900,000 or a little north of 18%. That's greater than our purchased car sales growth of $3,200,000 or 8% year over year. Within our insurance segment in particular, volume we experienced volume increases across virtually all of our major carriers. We've heard the carriers themselves referenced in their public discussions references to heightened driving activity, increased accident rates as well as elevated repair costs, leading them to render total loss decisions more frequently. That's the volume side of the equation.
As we look to the ASP portion of our revenue base, we've observed and talked previously about both scrap rates, currency rates as well as the used car index. We have experienced in recent months the stabilization of scrap trends, which have declined in the past year and change. We are still down year over year for the Q3 in comparison to 2015, approximately 9% for scrap rates for crushed car bodies according to American Recycler, but we are up sequentially, almost 14% relative to the 2nd quarter alone. We have noted the Manheim Used Car Index for the 3rd quarter was also down year over year, a little less than 1.5% and also down versus the Q2 about the same amount. As a result, our ASPs are remained decreased relative to last year, but they are up sequentially.
Moving further down the P and L, our operating costs did grow by 11.7% year over year, somewhat meaningfully less than our revenue growth, which led to some leverage at the gross profit level as we grew GP by 23.7%. Our general and administrative expenses were up $1,900,000 year over year, a reflection of higher volume and business activity, up sequentially versus the Q2, approximately flat versus the Q1 for us this year. As we've noted on prior calls, we do expect absolute dollar G and A expenses to rise over time as our volume grows and the complexity of our business increases. The bottom line is our net income grew by 28.6 percent for the quarter, while EPS was up 45.5 percent enhanced by share buybacks in July of last year, December of last year and March of this year, which I'll comment on a little later in the call. Turning to the balance sheet.
We generated cash flow with a reduction in accounts receivable. They declined sequentially as they do typically with the seasonal depletion of inventory, less so than in the Q3 of 2015 due to a growth in our physical inventory. Our capital expenditures of $66,600,000 to $66,100,000 compared to $56,000,000 change in our prior quarter, Again, approximately 85 percent for land development, lease buyouts and the like, largely an investment in our growing capacity. Last two notes on the balance sheet. The first is that we purchased 2,900,000 shares on the open market for $118,000,000 or thereabouts at an average share price of $40.13 a continuation of our program for an expense And the last note, we undertook a simple refinancing action.
We restored our term loan to the original balance of $300,000,000
that we had completed
in December of 2014. We extended the duration of full 5 years and expanded our revolver by approximately $50,000,000 In effect, we termed out the revolver balance that we had drawn, leaving us with a fully undrawn revolver. We reduced our interest rate
15.6%. I'll start with our financial results.
The distribution volume grew by 16.4%. First, we believe we're seeing a growth in overall size of the North America salvage market. Tax and frequency is up, driven by lower fuel prices and higher employment trends, which is leading to increases to miles driven and the average speed of travel and consequently to more frequent and more severe accidents. And we believe this trend will continue. At the same time, we are also seeing growth in salvage frequency.
By salvage frequency, we mean the rate at which cars involved in accidents are deemed an economic loss and totaled as opposed to being repaired. We believe there are several reasons for this growth. The first is the growth in repair costs driven by industry consolidation as more independent repair shops are being purchased by MSOs. And more importantly, the greater complexity of new cars as they incorporate exotic and lightweight materials, extremely tight repair tolerances, sensors, cameras and other electronics, all of which demand at shops are deploying new equipment, as well as requiring more replacement parts for repair. The second is the increase in average age of the car parts, which reached 11.5 years in 2015 and is expected to grow.
As car age, their value declines making it less likely that they'll be repaired. And third is the increasing length of time policyholders must be without their cars during the repair process, whether as a result of the process itself or a longer queue time waiting to get into the collision shop. This increases not only the total cost to repair the car, but also impacts the customer satisfaction metrics. Insurance companies are increasingly sensitive to the quality of the policyholders' claim experience. In addition to the growth of the size of the overall salvage market in North America, we saw growth in our market share as the impact of several recent contract wins for the most part were fully represented in this quarter's volume numbers.
And finally, we saw 10.4% growth in volume from our non insurance suppliers. This growth was led by increases in charity and donation cars as well as cars from dealers and brokers. Now I'll turn to make a few comments about the UK, in which we also saw growth in volume increasing by 11.1%. In the UK, insurance volume grew to increases in both market size and market share. In addition, in the UK, volume from non insurance sellers grew by 23% as a dealer and direct purchase programs grew in both volume and profitability.
While we grew consolidated revenue by 16.9%, we grew our gross margin by 23.7% and our operating margin by 28.7%, once again demonstrating the operational leverage in Dimmitt and our business model. Despite the additional costs associated with operating in cat environments, primarily Houston, we have kept our cost to process each car remarkably consistent over the last 7 quarters. As efficiencies derived from processing higher volumes have offset the natural increases, We also remain focused on controlling our G and A expenses. While G and A of $31,700,000 for the quarter was up both year over year and sequentially, We remain well below the run rate of fiscal 2014 of $36,800,000 per quarter. The growth year over year and sequentially was driven primarily by increased cost on brand development, litigation, conferences, headcount and compensation.
And finally, time growth that we have experienced and the future growth that we anticipate. Last quarter, we announced an initiative to open 15 new yards during the next 12 months. Are reporting that during the current quarter, we acquired 5 yards, 2 of which were placed in service. We closed on those 2 yards, 1 in Wilmer, Texas and one in Temple, Texas in April. And currently, they have approximately 4,600 and 1800 cars on the ground, respectively.
That concludes my comments. Justin, at this time, I'll turn the call back over to you for Q and A.
The first question will come from Bob Labick with CJS Securities. Good morning. It's actually Robert Majic filling in for Bob today.
Good morning, Robert.
Can you discuss the inventory growth this quarter?
Sure. So our inventory for the quarter grew at approximately 20.7% year over year. That's a global number. As a reminder for folks who haven't followed us for a long time, when we talk about inventory, this is difficult assets that go far as opposed to balance sheet inventory, which is a different animal altogether. The growth is approximately 20.7%.
If you isolate the effect of weather events that we experienced in Texas, excluding the growth from that alone, we were still we still observe inventory growth of approximately 18% year over year.
That's helpful. Thank you. And in previous calls, you just discussed the
top 5 insurance RP wins.
Did we see the volume from that contract in the Q3? And was that the full impact? Or should there still be additional incremental volume in the Q4?
No, I think we addressed that in
our comments. We did we feel that that volume is fully reflected. We don't see any future growth from those recent market wins. And I should mention, it's just not one. There's several market wins that we've had over the last 3 or 4 quarters.
Appreciate our time back. Thank you.
Thanks, Rob. Thank you.
The next question comes from Ben Bienvenu with Stephens Incorporated.
Yes, thanks. Good morning. Congrats on a nice quarter. Good morning, Ben. Just curious on the gross margin front, you spoke to the leverage, the operating leverage inherent in the business.
I'd be curious what cycle times looked like in the quarter given the really strong volume growth you called out? And then maybe any other things that you might be doing to capture incremental efficiencies to drive that leverage?
So our cycle times then were approximately the same as they were a year ago for the Q3 as well. So that's not a major driver of the unit performance for the
quarter. Okay. Great.
And to comment on what we're doing to become more efficient. We're really a very efficient company already. We are looking through technology to help us in that process and that's in a couple of areas. One is in the dispatch area. The other is the pickup cycle.
And we anticipate rolling out these products and have these operations over the next 3 or 4 quarters.
I'll add to that, DMV as well. So as we process DMV in house as opposed to sending it to the state, we've seen improvement. And the final point I would make then is the you really can't crunch the cycle times too much. I mean, if you look historically over the last 20 years, they haven't changed enormously. There's a period of time from day of loss, the first notice of loss, the pickup to receiving title to sending title estate to selling the vehicle.
And as Will pointed out and on the DMV, that's about really all you can do to suppress those times. So they're always going to run somewhere north of 60 days as an average.
That's really helpful detail. Thanks. Looking this year at FX and relative to last year when the dollar was quite strong and the presumably pressure that put on the foreign buyer appetite at auction, what are you seeing from foreign buyers this year, year to date with the dollar being a little bit more subdued, have you seen any trend shifts there?
Yes, we have. Actually, Sequentially, participation by our foreign buyers is down marginally, not a lot, but it is down marginally and it's down year over year as well.
Okay. And then one last one for me. When you look at your balance sheet, you've raised some debt to support the tender offer, but leverage is still pretty modest. I'm curious to get your comfort level on leverage. And then what sort of capital deployment opportunities would you need to raise that comfort level?
Would you be willing to take on incremental debt to fund repurchase? Or would you prefer to do that out of free cash flow? We're comfortable with
the amount of debt we've got right now. With respect to future debt, we analyzed at that time. So I think it'd be premature to talk about what scenarios. We would have to know at that time what all the factors were to decide what to do. I think the biggest point I might make on this question is that insiders control a large portion of this company.
And so we'll always be prudent in our analysis and
our thought process with respect to debt.
Great. Thanks and best of luck.
Thank you. The next question comes from Ryan Brinkman with JPMorgan.
Hi, great. Thanks for taking my questions and congrats on the quarter. Very well. First question was though that industry volumes are up in North America, they're now driven, etcetera, and I think we can see that. But are you able to say how much of your volume growth in the quarter is from industry tailwind as opposed to how much reflects the market share gain, including as a result of the new contract?
Now we could if we made some assumptions and because it would be based on assumptions, we're just we're probably not going to share that on the call. I will tell you this though that the salvage has a very unique spot in its collision repair ecosystem. And when you see an increase in overall volume of assets, it's much easier for us to increase capacity than it is for the repair shops and increase capacity. And it's not because it's difficult to build new repair shops, but it's very difficult to accommodate this higher demand. And consequently, we're seeing a higher portion of these accidents in terms of, we believe,
The currency again, I mean, you just mentioned about the lower interest from overseas buyers in U. S. Auction. But what about the currency translation impact on your profits in the UK? How has that been impacted?
And then could you comment at all on how the business there might be potentially impacted by Brexit?
So I think the data we shared at the top was that we experienced a detrimental revenue effect of about $3,700,000 in the translation from the GBP back to USD and that's because year over year we've experienced relative U. S. Dollar strengthening. So when you quote trade the profits from the pound back in the U. S.
D, you get fewer U. S. D. Than you did a year ago. So that's the effect we've experienced there.
As for Brexit, I think we probably aren't well positioned to speculate. I think there are experts who believe that the euro would then in turn suffer as a result. I think that's probably better left other experts speculate on. We don't foresee a meaningful effect on either.
10% in the U. S. Can you just remind us of the size, the materiality of this business relative to your overall business? And then provide an update just in terms of what the volume drivers are that are causing the non insurance cars also to increase in volume? Thanks.
Sure. As a percentage of our total loss of America volume, it's actually drifted slightly below 20%, and that's not that it hasn't grown because it's growing nicely. It should very change, so much
associated with new partners or how much of the growth is associated with new partners?
Well, once again, in order to do that, we'd have to take the
overall growth and a portion of
part of that to change in the business environment, how much of that is simply market win, those that are 100%, and it's very easy to do that. And like I said, because that would be based on some assumptions that we have to employ, we're probably not going to make that speculate on that on the call.
Okay. And then I guess if we look regionally and some of the collision guys are specifically Boyd was talking about some of the northern markets seeing some softer collision repair trends this winter with a general lack of winter. Could you talk a bit would the quarter have been meaningfully stronger or was any real regional dispersion as far as strength or weaknesses in the salvage volumes?
It's really hard
to point to weather as a driver of our business because we're nationwide. And when you include the UK, we're worldwide. And when you might have inclement weather in one region, you might have unfeasily good weather in another region. So the only time we really point to weather advances is when we have what we call a cat. And we had 3 cats last quarter in San Antonio, in Fort Worth and in Houston.
And we I think we just addressed the impact of those cats and his inventory numbers. We could tell you that on the sales side, we calculate a few 100 of those cars are actually representative of the sales volume. Okay. And I might have missed this.
Did you give any update on Germany?
No, we didn't. Outside of North America and the UK, those businesses combined represent about a percent of half on revenue and really no EBIT, about breakeven. And so
we
have concluded that until they become a meaningful driver of our business and be the direction up or down that we're really not going to talk about their performance. That being said, we will say that we're extremely happy with our international strategy and we're also very happy with the recent execution towards that strategy. And hopefully, we'll have some more comments in the next few quarters on the results. Yes, that's what I was getting at.
I was under the impression that maybe you were going to accelerate your investment in Germany. I just had an
update as to where we were in that.
Okay. Just to the question you opened with regarding inventory growth. I think Will noted how difficult to analytically it is to isolate the different effects. I think it is accurate to say the strong majority of our inventory growth is not due to new accounts per se, that it's more like for like growth across our own customer base.
All right, great. Thank you.
Thanks,
Brett. The next question comes from John Healy with Northcoast Research.
Thank you. I wanted to ask
kind of a bigger
picture expectations going forward. You're adding the 15 or so yards or adding capacity to a number of yards. And when I hear you talk about the growth prospects
of the business, I hear
you guys talking more about salvage frequency than this, the number of collisions on the road actually increasing.
Where do you guys think we're at?
And what are the insurance companies telling you we're at in terms of salvage frequency, the outlook for that maybe over the next 3 or 4 years?
I think we want to
be clear on that. It's a combination of both. So we live in an environment right now where we'll start to mention or in his remarks mentioned the technicians, but the difficulty in hiring technicians today versus 10 years ago is the complexity of vehicles. So we live in a world where there are more accidents. And then when those accidents occur, total loss frequency goes up.
The likelihood of that vehicle becoming a total loss goes up. And much of that is driven, this to me is very analogous to 20 years ago when we saw airbags and antilock brakes going to cars. There'll be offsets where one reduces the amount of accidents and there'll be another offset where when there is an accident, one increases the likelihood of the total loss. So we're seeing that right now and we are opening up and expanding a number of locations in the next year because frankly, we've got record capacities and we anticipate that, that will be the same a year from now that we'll be looking at another record inventory build with record sales.
Got you. And I wanted to ask about the cash toys business.
To me, it seems like you guys are
putting a little bit more resources towards marketing that business and maybe doing some things there. Can you
kind of talk about what the plan is
for Cash Toys? And it
almost even seems like that there's like
a retail aspect of it
that you guys are marketing. I was just hoping you could give us some more color on that.
Sure. So we
bought the company in June of 2013 when we made an acquisition of Quad Cities and Desert View Auto Auctions with that came CrashToys. We have continued to run the company and understand the brand And what we've decided at this point is we want to build the brand. And so we've opened a location in Dallas, Texas. The retail aspect that you said, it is a retail operation. So that is accurate.
But it's more than that, it's an experience. And the retail side that we're really pushing towards, folks come out, hang out, learn about what we do and eventually become buyers. So it's very much an incubator of future buyers of product and it is a differentiator for us on the toy side. So just in the last quarter alone, we sold Porsche 918 for over $400 We sold Denali for almost $200 And then we sold Harley Davidson for $8,000 and Hondas for $3 So it's an across the board product line, but it's everything related to toys and we're testing it right now at this location in Dallas. And as we decide or put our strategy together, we'll report on that in future quarters.
Great. Thank you. You're welcome. The next question comes from Matthew Pade with Cowen and Company. Good morning.
Thanks for taking my call.
You had noted an increase
in volume from dealers. Is this a
trend that you expect to continue as a large number
of vehicles are expected
to come off lease moving forward?
I think we did. We were running our process of higher yields. We've seen growth year over year and we see no reason for that trend not to continue. And the really attractive part of that is that these are the most profitable cars that we process. The cycle times are short, the ASPs are very high.
And we're beginning to build more tools to help us in this arena. Once again, we're starting to roll out. Our IT department is doing a great job. They're starting to roll out a lot of product. And the tools that are helping us in this arena are in the queue, and we expect those to be available to us to use in the next 3 or 4 quarters.
Got it. Thank you. And then the last question for me is, how do you view repurchases moving forward as well as the different repurchase tools available to you in the past? You've done Dutch auctions as well as open market. So I'm just kind of curious how you think about it looking forward.
Sure. And I think big picture, as Jay noted, capital allocation questions are ones we address on a regular basis as we consider organic uses of our cash for our business internally as well as other possibilities including debt pay down, share repurchases and the like. So share repurchases over the long term will likely continue to be a tool or an arrow in our quiver. We don't comment or speculate precisely on when or how much we would do. As for the tools, the specific path to share repurchases, whether they are tenders, Dutch tenders, open market purchases and the like.
Again, that's circumstantial. We evaluate given our own assessment of the pros and cons at the time of those decisions.
Perfect. All right. Thank you, gentlemen, and good luck to the next quarter.
Thank you.
The next question will come from Gary Prestopino with Barrington Research.
Hi, good morning. This is Matthew Ball filling in for Gary.
Just wanted
to quick question. I think, Will, you had mentioned based on being up due to certain factors that has increased miles per hour and higher repair costs. One thing that I think was I hadn't heard before was kind of the speed of travel. But if you could maybe just kind of expand upon kind of that dynamic?
Sure. So of the freeway driving activity, which is at a higher rate of speed, which leads to more severe accidents.
Got it. Okay. And then as far as the international buyers with FX impact, is that kind of similar to what it has been in terms of far as purchases from North American Auctions? Or is that down a little bit? Or kind of indirectly, was that in 20% of units purchased?
Yes. No, it's down slightly, but it's ever so slightly. I believe it went from 21% to 20.3%.
Okay. And then lastly, as far as the ASPs have kind of started to stabilize down year over year but up sequentially, is that consistent on the non insurance side? Or kind of how
do we look at that as
part of the ship mix
from where you've been?
When you look
at the non insurance, you have to budget them because a charity car is completely different than a dealer car. And so we've seen growth in our ASPs for our dealer cars. As I mentioned previously, those are the most profitable cars we process. And actually, we've actually seen growth in our ASPs for our charity cars and I can attribute that to a couple of factors. One of which is because of the scarcity of our land, we've been intentionally targeted certain customers for and we visit them to ensure that we're getting the type of cars that are appropriate for us.
So we've been very selective in those that we allow to use our land, especially in the more precious areas like Southern California and New England area. And because we've been more restrictive on accepting the low end cars, we've raised the ASP on overall basis for the charity cars.
Great, great. Thank you very much. You guys on the quarter.
Thank you.
I'm currently showing no further questions. Would now like to turn the conference back over to Mr. Retaire.
All right. Thank you, everyone. We appreciate you making time to listen to our call. We look forward to reporting on the Q4 in the new fiscal year. And that concludes our meeting.
Thanks.
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