Excuse me, everyone. We now have our speakers in conference. Please be aware that each of your lines is in a listen only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time, instructions will be given if you would like to ask a question.
I'd now like to turn the call over to Mr. Jay Abare, CEO. Sir, please begin.
Thank you, Katie. Well, good morning, everyone, to the Q3 conference call for Copart. We are very pleased with of the Q3. Will Franklin will give you an update on the quarterly financial results after my brief introduction and commentary on Q3. I'd like to start with a review of average selling price.
Hey, do the Safe Harbor.
Oh, I'm sorry. I was fired away. I was ready to go. All right. Yes, we've got Safe Harbor, then I'll jump in.
Okay.
All right. Good morning, everyone. This is Will Franklin. Before we begin our comments, I'd like to remind everyone on the call that our remarks will contain forward looking statements, including statements concerning our views of trends in our business. These statements are neither promises nor guarantees and are subject to certain risks and uncertainties that could cause the final results to differ substantially from those projected or implied by our statements or comments.
The company expressly disclaims any obligation to update or revise these statements or comments. For a more complete discussion of the risks that could affect our business, please review the management's discussion and analysis and the risk factors contained in our 10 ks, 10 Q and other SEC filings. With that, I'll turn the call back over to Jay Adaire, our CEO, to begin the comments on our Q3 results. Jay?
Thank you, Will. We were just saying before the call that this is probably the 80th conference call we've done since we've been public for over 20 years now. And I think that's the first time I forgot to introduce Will for the safe harbor. So as I said already, we're really pleased with the quarter. And I want to give you an update on the quarter, just some brief commentary and then we'll give you an update on the financial results for the quarter.
So I'd like to start by talking about average selling price. In the quarter, we saw further softening of average selling price or is what we refer to as ASPs compared to the Q2. Looking at May data, average selling price has dropped again, but we believe we are currently at the bottom in terms of where salvage values will end up for the Q4. Additionally, we expect this trend of low ASPs We believe the cause of this lower ASP or average selling price is due primarily to lower scrap prices and softer international bidding. The lower scrap prices affect many of the lower end vehicles that we sell.
The lower scrap price is caused by weakening global demand and and
the U. S.
Fleet increase for the past 7 years. And as we discussed on previous calls, older vehicles will sell for less at auction. With the older fleet, we have seen total loss frequency increase. We believe this trend will continue as the fleet ages and so will the likelihood of the vehicles prices being lower are causing miles driven to go up again causing more accidents and more total lost vehicles. We believe the trend of vehicles aging will continue.
Therefore, average selling price should continue to be soft and volumes should be up for the foreseeable future. As we have also discussed on previous calls, there is a natural hedge in our business that when ASPs fall, volume increases. This will cause our revenue per car to drop, but volume to increase, offsetting for the most part the drop in revenue per car. Cycle times for the quarter did not increase materially and inventory increased 12% comparing the Q3 of 2014 to the Q3 of 2015. More detail in his update on the financial results.
That concludes my remarks. At this time, I'm going to pass it to Will for a financial update and then we'll open it up for question and answer. Thank you.
Thank you, Jay. Let me provide a few details on our financial performance before we open it up to Q and A. Revenue declined by $12,600,000 or 4.1 percent. We saw good growth in volumes, increasing by 5.4% in North America and 5.2% worldwide. We saw a reduction in the revenue per car due to a decline in the auction average selling price.
The decline in ASPs resulted from lower commodity pricing and the impact of the stronger dollar. In April 2014, the index for crushed car bodies as issued by American Recycler stood at 2.73 dollars per ton. That same index was at $143 per ton at the end of April 2015. We believe this index to be highly correlated to dismantler and junk buyers behavior. In addition, the strengthening dollar suppressed participation by our international buyers as the percentage of units sold to international buyers was the lowest since our Q3 of fiscal 2,009 and the percentage of value sold to international buyers was the lowest since our Q1 of 2 1005.
Finally, the stronger dollar against primarily the pound, the real and the euro on a year over year basis resulted in reduction of total revenue of approximately $6,800,000 compared to the same quarter last year. Purchased car revenue declined by $14,100,000 or 25.8 percent. The decline resulted from reductions in both the number of vehicles and the average selling price of those vehicles. As a percentage of total revenue, purchased car revenue declined by 4 percentage points to 13.7 7%. Purchased car unit volume represented 6% of total volume in the current quarter versus 6.4% in the same quarter last year.
The purchased car volume was impacted by the reduction of insurance vehicles processed through purchase contracts in the U. K. In addition to the impact of commodity pricing in the stronger dollar, the average selling price of purchased vehicles was also impacted by a change in mix, as a higher percentage of cars came from our direct purchase program versus our insurance suppliers. In our direct purchase program, we buy and sell cars for our own account. A reduction in revenue per car.
Yard operation expenses increased by $2,900,000 or 2.3 percent and was driven entirely by increased volume. Cost to process each car declined marginally. General and administrative costs declined by 6 $100,000 In the same quarter last year, we had $1,400,000 in severance, lease termination and relocation costs associated with our QCSA acquisition and the move of our technology team from California to Texas. Further reduction came primarily from savings garnered from the rationalization of technology resources associated with the abandonment of certain software and technology strategies. This change in strategies, which began with the $29,100,000 impairment in the Q3 of last fiscal year is now complete.
On an overall basis, the change in FX reduced EBIT by approximately 1 $300,000 compared to the same quarter of last year. During the quarter, we expanded $9,600,000 for yard expansion, equipment and technology. In our Q2 of this year, we refinanced our debt. This refinancing added approximately $3,800,000 to our interest expense this quarter compared to the same quarter last year. Finally, we exited the
Our first question comes from Bob Labick from CJS Securities.
Good morning. Good morning, Bob. Hi. Will you
just touched on this in
your comments. I was hoping maybe you could elaborate further. You mentioned that the yard cost rose slightly faster than the overall sales service costs. And so therefore, I guess gross profit on a service revenue basis was down slightly. It's been growing the last few quarters.
Can you talk about the drivers there and where you expect the yard costs to go? And is this all as you said volume related? Or what are the other moving parts there?
Sure. I mean it's real simple. It's volume and it's cost to process each car. So we have far less volatility in our cost to process each car. Its movement's been far less than the revenue associated with those cars.
So when we see a decline in revenue on a per car basis, it's detrimental to our
getting closer to a bottoming in
that trend certainly in the current quarter. Getting closer to a bottoming in that trend certainly in the current quarter, but you don't expect it to rise anytime soon. Is that what you said?
Yes, that's right. If you look at Q2 to Q3, we saw softening in average selling price. And if you look at the month of May, which is the 1st month of our 4th quarter, we're at a number right now that we believe will be consistent with the quarter. We don't think it will drop more than that in the Q4 than where we're at currently. And barring U.
S. Dollar, barring fuel price changes and other what I'd call macroeconomic factors, we think that the continued trend of the ASP where it's currently at will continue. And that's looking as well Bob at volume. So, looking at existing inventory levels and current volume coming in, that's driven by volumes go up as I stated in the commentary that volumes go up when ASPs come down. And so we haven't really seen used car pricing come down yet.
We think it's going to come down. We think we tend to be a leading indicator for that. Looking back at data that we had back in 2 and 8, we could see that. So we would anticipate that used car pricing will probably come off in the coming quarters. And we don't anticipate our pricing coming down further from where we're already at.
And then if those obviously, if those change, used car pricing goes up, scrap goes up, then we'd anticipate volume to slow a little bit. That's the natural hedge. Volume would and then ASPs would come back up.
Okay. Great. Very good color. Thank you. And then just excluding FX, but
I wanted to ask a
little bit about your international business. Can you talk just a little bit about Brazil, Germany, Spain and the Middle East? Where you stand in those? Are they still in investment phase? Are they breakeven profitable?
And where do you see them in 3 to 5 years?
Sure. Brazil I guess I could go through each country, but Brazil is profitable. The Middle East is profitable. Germany and Spain are profitable. There are that's to say there are quarters where we're down.
There are quarters where we're up. But in general, we're profitable internationally. We tend to view have further investment that we we have further investment that we're making in all including the U. K. That we've got technology that we're utilizing in all those markets to run those operations.
We're building technology currently that will help us technology company that replicates what we've done in the rest of the U. S, Middle East, U. K. Model. In Germany, we've got a completely different model as well as Spain.
And so we're talking about technology and service offerings that we're going to be bringing to the market that are really completely new in those markets. So I don't know specifically I think you asked are we still in the investment stage? Yes. We are going to continue to be at this point in terms of our product offerings. We've been there almost a decade now.
So when you get into Germany, Spain, the Middle East and Brazil and the other markets, we're going to continue to make improvements to the model. And a lot of that is technology, but a lot of that's footprint too adding locations and we're in the middle of doing those things those investments now.
Okay. Great. Thanks very much.
Thank you. Our next question comes from Robert Higginbotham from SunTrust.
Good morning. Thanks for the question. Your inventory is still up double digits. It was up double digits last quarter as well. You definitely certainly saw an acceleration in volume trends from 2Q to this quarter.
Should we think about seeing further acceleration in that in those volume trends as that inventory gets released?
Well, I would reply to that question by going back to 2012 with Hurricane Sandy. That was the first enormous bump we saw in inventories and we're in fiscal 2015 today. And we've seen an increase year over year from 2012. And I mean
an increase that historically you didn't expect.
We've always seen inventory new accounts, let me say it that way as opposed to accounts that are just expanding because of the market. And what we've seen over the last three years is just an expansion of inventory and an increase in volume specifically in the last year associated with accounts that we know we have 100% of their business and yet they've increased. So this is some of the color we were trying to give you in the beginning about we believe that right now with the increased aging of the fleet that we see and it's not just U. S, but also U. K.
So we tend to think of it globally. And with the increased aging of the fleet, we're seeing more total loss vehicles. And so it's a little bit of a transition, so it's hard to predict. If you'd have asked me a year ago, would we have anticipated year over year inventory growth of 12% in the Q3, I would have said no and yet it happened. So it's hard to predict at this point, how much volume we're going to see increasing.
I can you that from looking at May, we're anticipating some high sales in terms of volume in the Q4. But of course as I said earlier, we've got a softer ASP in the Q4 than we had in the Q3. So we're going to be seeing some erosion of margin associated with that, but we're going to see an increase in volume associated with the relieving of that inventory.
Got it. Thanks. And on your balance sheet, I think many are still surprised that you haven't deployed the you raised recently in some form or fashion. Could you remind us kind of what your preference is for capital allocation are? And maybe as part of that, meaning what's how that cash would be likely to be deployed?
And then as part of that, what the potential acquisition landscape looks like? Are there a fair amount of willing sellers out there? I mean, you probably can't talk to anything you might be currently involved in, but kind of what does that opportunity set look like?
Yes. We get quite a few opportunities throughout the year for acquisitions. And the ones that you would be familiar with are the ones that we actually close on. So the ones that we pass on obviously we never comment on. We tend to view I wouldn't say there's a priority of whether it's expanding locations, adding footprint, buying companies or buying stock back.
The priority is set based on value. So we tend to look at what is out there, what can we buy and what's the ROI. And we go for that would be 10 year or greater maturity. Debt on that would be 10 year or greater maturity. And then we've got the remainder of that debt that comes due in less than 5%.
And that was to afford us the opportunity to basically execute on our capital strategy, which is to either acquire businesses, open up additional locations, expand locations or to buy our
stock back. Got it. Thanks for that. I'll hand it off
to someone else. Thank you.
Thank you.
Thank you. Our next question comes from Ryan Brinkman from JPMorgan.
Hi. This is Samik here on behalf of Ryan. And thanks for taking our call. Now the first question I had is maybe just going back to your discussion on the impact from the stronger dollar at the high end of the vehicles at the auction and then the incense from the lower scrap prices. Can you help us with what portion of your vehicles at your auctions are sort of at the high end and are getting influenced by the stronger dollar?
And what is the portion that's getting more influenced by the scrap prices? Maybe just break that out for us if possible?
I would in terms of scrap and it's we're looking at each other based on your question because in terms of scrap, I would argue 50 percent of the cars we sell are eventually going to be impacted by scrap and that may be high. It may be something less than that. But if we say 50% of the vehicles are impacted meaning that they may be parted either completely scrapped out in a self-service fashion or they'll be parted out in a full service fashion and eventually the scrap value will matter. It's much less significant when we get into the full service approach, but it still matters. When you go above that, let's just say the other 50%, those tend to be vehicles that are either ready to driven or they're going to be repaired.
And in that scenario, the dollar has a big impact, because we sell about a quarter of our vehicles historically overseas. And so when we start talking about overseas buyers and the impact of the dollar, it can weigh pretty heavily on overseas buyers to build a competed auction to buy product. So hopefully that answers your question in terms of both.
No. That's very helpful color. So maybe just on from that. Can you talk a bit about market share since I think your major competitor reported like 8% volume growth? And I was wondering if
you're trying to compare us, you're looking at their quarter that ends March and you're looking at us on a quarter that ends April and you can't compare those two quarters. The inventory peak ends up being the end of January usually for 2nd week of February somewhere in that period. And then we are unloading enormous amounts of inventory going forward. So it's hard to compare sales. It's hard to compare inventory.
And the other factor is you're looking at year over year data. So lot of it has to do with timing as well how 1 year, a year ago compared to this year this year. I just would give you that kind of make sure that you're looking at that component of the timing.
Sure. Sure. And maybe on the I remember on the last earnings call you were referring to inventory build sort of happening towards the end of the quarter and you were starting to see that strength come through in February I believe. So just wanted to sort of get your thoughts on the peak volumes in the quarter play out according to expectations? And I believe you said the inventories right now are like 12% up year on year.
Is that like adjusted? I believe you always gave like a same store number on the inventory or a like for like number. Is that the exact number to use?
Yes. That's total inventory. That's not a same store, correct?
Right. So I mean, it plays out exactly like we thought. Our same store sales were 5.6% this quarter. They were less than 2 Inventory was up, I believe, a little under 8% overall last quarter. And this quarter on an overall basis, they're up 11 in our business, our inventory is the perfect indicator of what our sales are going to be in the next quarter.
Okay. That's helpful. Thanks a lot for taking our questions. Thank you.
Thank you. Our next question comes from Bill Armstrong with C. L. King and Associates.
Good morning, Will and Frank Jay.
Most of my questions were answered, but
I did have one. The G and A was a little bit less than I was modeling. Should we be kind of looking at that $30,000,000 per quarter run rate going forward? Or were there any non recurring items in that number in the quarter you just reported?
Yes. Bill, I would expect it to grow. So we executed on this change in IT strategy and we've cut it to kind of the bone. And now we're seeing that we need to add resources to develop new products and to expand internationally. So I would expect that to grow.
I would say I'm not going to give you a number, but it's going to be north of $30,000,000 going forward.
Maybe in the low 30s, would that be a ballpark for us to use?
Fair enough. Low 30s.
Fair enough. Yes, low 30s. Okay, great. Thank you very much.
Welcome. Thank you. Our next question comes from Jon Laurent from Stephens.
Hi, Good morning, guys.
Good morning, John.
Yes. Will, on the financial piece of the business, looking at that with your expanded role, what's the status of CFO role? I know there's been some changes on that side of the business. Can you help us what's the prospects there? And what are the plans on that staffing side?
Sure. I mean, the important thing to understand is we've got a really seasoned and mature staff. I mean, we've got 3 VPs, a VP of Tax, a VP of SEC Reporting and Appliance and a VP of Transactional Accounting. So and additionally, we have other resources at the senior leadership team that help in that area. We will make a move when it's right for our company.
But in the meantime, you shouldn't worry about anything falling through the cracks. We're well staffed. We've got I think a wonderful team of accountants that look over our SEC compliance and 404 compliance issues. So we'll make that move when it's appropriate.
Yes. I was just yes.
I'm sorry. I
might add to that John because Will is not going to brag on himself, so I'll brag on him. He's been our CFO for the last 11 years. And the hiring process that we're going to go through and bringing in an SVP candidate is to eventually pass the CFO title to that person. That's a transition so that moves from Will to that new person, that new role and allows Will to fully function or fully focus on the EVP role that he holds. But he never has given up the CFO title since we started that transition just so you know.
Yeah. I understand. I was just looking at it from the standpoint from his standpoint to be more effective in that other role is what I was thinking.
That's right. And that's exactly why we're in the process of hiring for that SVP role so that we can eventually transition that over time and Will can be that much more
effective. Last question. I hate to go back to the buyback. Just can you give us a little bit more sense of just a deeper dive into that discussion on return on investment etcetera? I mean, I would assume with these changes getting the G and A out of the way, I mean, I understand the cycle of the business, but can you just give us another thought process of the stock at this point?
It appears to be a pretty good reinvestment?
We never comment on the calls about the stock price and how we feel about it or how we view it. All I can tell you or what price we buy back, all I can say is that it's something we do discuss at the Board level and we compare our company with other opportunities. We always view the acquisition of another company, the growth in our industry against our own stock price. And you have seen historically where we've acted upon that. So I'll leave it at that.
Yeah. And I'm sorry last question would just be the point of this cycle would be and I assume from a number standpoint is, Will to your point the G and A has come down, you've got that to the bare bones. Now the leverage point gets accelerated as ASPs go back the other way.
Of course. Absolutely right.
Great. Thanks guys.
Thank you.
Thank you. Thank you. Our next question comes from
sort of velocity of inventory working through the channel, could you sort of velocity of inventory working through the channel, could you give us sort of an update on where we are relative to maybe the old normal and what times look like today?
Yes. As I said in the opening remarks, it hasn't moved materially. It went up slightly. I mean, it's 2%, 2% is nothing. So it's not a material movement.
And I believe we're in the new norm. Over time, I also believe that the cycle times will improve, but I don't think that's going to happen in the next couple of quarters, especially with the volume
that we're taking just right now
from some of the country. We're already seeing some upticks in volume there. So I wouldn't expect cycle times to come down in the next couple of quarters. But in the long haul in the long term, we all expect that those cycle times will go more to like they were to what they were a couple of years ago.
Okay.
And so we should think about inventory levels assuming cycle times are longer but stable sort of cycling through a linear basis that what you're holding now we should see clear relatively soon?
Yes. What we're holding now we'd expect to move in Q4. The difference in that I'm cautious to say that and then we report a big inventory build in Q4. We may be selling off Q3 inventory and we're building a ton of inventory right now due to flooding and other components. So it's not as simple to say it's just going to flop.
It may we may end up high in Q4. But eventually to your point, this is the number. This is the we haven't seen cycle time continue to tick up. And so we're at a cycle time number we're comfortable with and that should start to move out through Q4, Q1, Q2 and it becomes the norm.
Okay. Thank you.
You're welcome.
Thank you. At this time, we no further questions. So now I'll turn it back over for closing remarks.
All right. Thank you, Katie. And again,
Will and I appreciate you all coming on the call and we
look forward to reporting
fiscal year. Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.