Good day, everyone, and welcome to the Corporate Incorporated Second Quarter Fiscal 20 15 Earnings Call. 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.
All right. Thank you, Noelle. Good morning, everyone. Before we start, I'm going
to pass it over to Will
Franklin, CFO, who will give us an update on numbers. I'll give you a quick update on the company. And then we'll keep those remarks brief and then we'll open it up for questions. With that, it's my pleasure to turn it
over to Will. Thank you, Jay. 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 and 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 and 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. So with that, I'll begin by making a few remarks concerning the financial performance of our company in our 2nd quarter. Total revenue declined by 10 $200,000 or 3.6 percent due to a change in the mix between cars sold as an agent and and cars sold on a principal basis, which we refer to as purchased cars. Purchased car revenue declined by $13,000,000 As
a percentage of a percentage
of total revenue, it declined 4 percentage points to 13.7%. Purchased car unit volume represented 6 of the total volume in the current quarter versus 6.8% the same quarter last year. The decline in purchase car revenue was driven primarily by reduced volume as direct purchase activity in both the UK and North America and cars purchased on behalf of insurance companies on a principal basis in the U. K. Declined.
Service revenue increased by 2 $800,000 driven primarily by volume as revenue per car remained relatively constant.
On a
year over year basis, in North America, unit sales grew by 2% and inventory grew by 10%. On a consolidated basis, unit sales grew by 1% and inventory grew by 8% as the UK saw a reduction in both unit sales and unit inventory. Our operation expenses decreased by $1,100,000 Adjusted for one time QCSA integration cost of 2,200,000 dollars incurred in the same quarter last year, costs were up $1,100,000 or 1%. The increase was due to growth in volume as the cost to process each car remained relatively constant. General and administrative costs declined by approximately $4,900,000 Same quarter last year contained 2 point in California to Texas.
We have completed the QCSA integration and the IT department relocation. In addition, we have completed the transition in IT strategy in which we have moved away from the 3rd party ERP system and from a 3rd party solution for infrastructure and support. During the quarter, we expended $16,100,000 for yard expansion, technology and equipment. This number also included one lease buyout. Finally, during the quarter, we refinanced our debt.
We replaced our term loan A with a credit structure utilizing placement debt in the amount of $400,000,000 due in 4 tranches ranging 10 to 15 years.
A Term Loan A $300,000,000
due in 2019 and a revolver of $300,000,000 also due 2019. At the end of the quarter, $681,000,000 was outstanding, none of which was from the revolver. Currently, the blended interest rate is approximately 3.35 percent. Refinancing added approximately $2,500,000 to our interest expense this quarter compared to the same quarter last year. That concludes my remarks.
I'll now turn the call back over to Jay Adaire, our CEO for further color on the quarter.
Thank you, Will. In an effort not to repeat some of the information that Will just discussed with you, I'm going to go ahead and give you some additional information that maybe put some color around some of the things that we're doing. I discussed the fact that revenues were flat. We had one less business day in this quarter as compared to the same quarter a year ago. The rest of it, I would say, is timing due to a very strong Q1 this year as was witnessed.
And so some of those it just depends on when vehicles come in, when they're going to sell. And we saw some heavy sales in Q1, a little slower in this quarter. And I suspect we'll see a good sell off in Q3. Inventories, as you heard, are up 10% in North America. And more importantly, right now is the G and cost down.
I think that improvements that we're making in the home office, both on a spend per person and how we're actually executing on the dollars that we spend in G and A as well as the fact that total dollars are down. So we're getting more, as they say, more bang for the buck on the dollars that we are spending and we're actually reducing those numbers as well. So we're happy about that. Sale price was down in the quarter. We believe this is primarily due to scrap.
Scrap pricing has come off substantially, not only year over year, but Q1 to Q2. And cycle times have remained relatively flat at this time. So we try to anticipate the questions, but I'm sure there's something that we've missed. So at this time, I'd like to turn it over to Noelle and we'll go ahead and open it up for questions.
Thank you. At this time, we will open the floor for questions. Our first question comes from Bob Labick with CJS Securities.
Good morning. Thanks for taking my question. Hi, Bob. Hi. Just to start with a simple one.
In terms of FX, obviously, there's been a huge currency swing over the last quarter or so. Could you tell us what if any FX impact was on the top line sales on the quarter? And then just a little further what you expect if it impacts your export sales or how you expect the stronger dollar to impact you going forward?
Well, we're seeing a negative in both aspects. So it had a marginal impact on revenue. In the quarter, it was about $3,000,000 and primarily that's due to the change in the FX between the dollar and the pound. At the EBIT level, it represented slightly less than $1,000,000 of negative impact. It's also had a detrimental impact on our export business slightly.
So I think we've gone from about 25% to about 23.5% of our total volume being exported.
Got it. Thank you. And then in terms of obviously you have record volumes and proceeds are I think near high certainly for your customers. You're just starting to get back to that gross margin recovery from the fact that you've increased your service levels. Is that is this trend of 2 quarters of gross margin recovery sustainable?
And can you describe some of those services that you did increase to impact margins right now?
Well, as I've said many times, we don't focus on the gross margin percentage, because that's subject to the percentage of our sales that are purchased car versus agency car. So we focus on EBIT per car. And when you look at that level, we're we've been growing for the last three quarters year over year. And the target is to reach what we were in 2012, but we're not there yet. But like I said, we've had nice growth in that metric in the last three quarters on a year over year basis.
Got it. I suppose you won't say exactly what the target is in dollars or how close you are?
I'm sorry. We don't disclose that Bob.
Right. No, no. I assume not, but I figured I'd ask since you put it that way. And then last one, obviously, you said good control on the G and A side down to the 31%, 32% level. I think we've spoken about 31% to 33% being the sustainable run rate once you got rid of the redundant expenses from QCSA and the IT transition.
We're expecting that a little later in the year. Is the current level the right base and sustainable going forward?
Well, we think it is based on our current activity. So as we've talked about, there's a focus to expand internationally and we think that that will probably come into play in 2016 far more than it is 2015. But any change in our fundamental activity level will have a change on G and A. But at this activity level, the sales and volume level, this is probably an appropriate G and A level, G and A spend.
Okay, great. I will let others ask. Thanks very much.
Thanks, Bob.
Thank you. Our next question comes from John Lovallo with Bank of America.
Hey, guys. Thanks for taking the call.
Good morning.
First question, Jay, I just want to make sure that I understood your comments correctly on the timing of the service revenue department here. So service revenue was up a little over 1% in the quarter. And I think inventory at the end of last quarter was up about 9%. So you're talking about timing, but were the I guess was the flow through of those vehicles slower than expected? What am I missing, I guess?
We had a real big Q2. So we were able to not only build inventory, but we had some large sales.
You can compare that to I meant
Q1, if I said Q2, Q1 of fiscal 2014 and see that the growth in those two quarters as opposed to growth in Q2 a year ago versus Q2 this year. So some of it's just timing. I mean, it's the type of vehicles you get the mix, meaning some of our accounts move vehicles that are far more profitable because they're dealer cars and then as opposed to a mix of vehicles that are more charity focused. So it depends on mix. It depends on timing.
And I just want to give you a little color that why the quarter when you look at it may look in terms of revenues a little soft. And as Will said, he pointed out the purchase car activity. I was really just focused on the fact that the revenue aside from purchased cars and the fact that we had one less business day in the quarter this year than we did a year ago. So those are the main factors I was trying to
point out. Yes. Let me add one more element to that. So our inventory grew at the end of the quarter. I mean, we had a significant increase in assignments towards the end of the quarter, which did allow us to cycle that through the sales process that will flow through in our Q3.
Okay.
That's helpful. And then just, I guess,
on the vehicle sales line, the principal business here, is
this a business that you purchase cars? No. We'll continue to
purchase cars? No. We'll continue to do that. We just we've become focused on trying to sure that when we process volume, we make a certain margin. And if we're handling cars and we're not making enough of a profit, we're exiting that type of business.
So now we'll continue to handle vehicles like that and you'll continue to see that and I suspect it will grow actually in the future. What we've done right now is made some corrective changes that will bring it down and then we'll come back, but at a higher margin. We're just at the end of the day, we're not willing to grab market share in a particular segment like vehicles where we're purchasing them and then and do it at a low margin.
Okay, great. And then final question. You guys historically have been and I think you still are today very big believers in
the business and I think
you've demonstrated that through buying back a good amount of shares over time. I think we over the past few years we've been hit with a number of things like the reconversion noise, the acquisition integration, some of the ERP system stuff that went on. With a lot of that behind us now, I mean, you guys took on a turn of leverage. I mean, is it how are you thinking about share repurchases going forward just broadly? I mean, is this something that we should be thinking about could accelerate?
Well, we might want to add Sandy to that mix of all the items that you threw out as well. But we've said historically that it's something that we view as an opportunity for us to deploy cash as well as acquisitions, buying companies, expanding locations, buying out leases. So it's one of the many and we've never given any guidance as to what dollar amount we'll buy it back or when we're going to buy it back. But it is still something that we consider an option and something we discuss at the Board level.
Okay.
Our next question comes from John Healy with Northcoast Research.
Thank you. Jay, I wanted
to follow-up on that question there. Can you help us think about the decision to add the internal leverage in the month of December? I understand the opportunities for acquisition or land assets or even buying back stock. But what was the trigger to say, okay, we need now bring this on to the balance sheet and pay money to have this flexibility? And how do you think about timing of
example. Back in 2,000 and 8, we went out into the market and bought back stock, split adjusted off the top of my head. That's my qualifier there. I think it was in the 20s. And subsequent to the financial crisis, our stock was in the 12s.
We were sitting with a very low cash position and we reached out to the banks. And as you can appreciate, nobody was willing to loan money at that time. So having cash on our balance sheet is part of our thought process in terms of a fiscally prudent approach to the markets. We think interest rates are very low right now as a company, as a Board. We were able to borrow that goes out 10 to 15 years before it has to be paid off and it's cheap as Will gave you the rates earlier.
So we view that as a smart move to go ahead and increase the amount of debt on our balance sheet to refinance the 100,000,000 I believe that was coming due this year and that debt now has been pushed out roughly 5 years. So part of the restructure was it was the right thing to do, part of increasing the debt, we felt was just a prudent approach to hedging, if you will, the future. So we're not sure what the market will do and we're not sure if we'll be able to you don't know what your stock price is going to do. We're very bullish on the company. And if for some reason we had a financial issue again in the future as a country, we want to make sure we've got cash on hand and we're not in a position where we're trying to reach out and borrow money at that time.
So as a company and as a Board, we felt it was important to go ahead and refinance the debt and also increase the amount of debt on our balance sheet.
Makes sense. And along those same lines, I wanted to ask, I know you guys kind of made it known that Will is going to be transitioning to more an operating role. And I was curious where you guys are at with the CFO search process?
Yes. We have a SVP of Finance in the company sitting in the room right now. His name is Bruce Bishop and we love Bruce. Bruce is a great guy. Thank you.
And we've Will has gone into a heavy operating role and that's great. He's doing a fantastic job and a fantastic job and Bruce has been taking over the finance roles. And so I'll leave it at that. And in the future, if there's a change in CFO title, we'll make that announcement. Okay.
Thank you. Thank you.
Thank you. Next question comes from Ryan Brinkman with JPMorgan.
Hey, thanks for taking my call. I guess I'll tackle the stock buyback, cap allocation, capital structure question in maybe a different way. This is the first time that you've ever had long term debt on your balance sheet, 10 to 15 years you mentioned. You've levered once before in the recent past really only to buy back stock, but that was with a medium term duration term loan and revolver, which the contractual terms have you then immediately begin paying down. So is there anything philosophically that you're thinking differently when it comes to capital structure with having that long term debt on the balance sheet?
Well, this is the 4 $100,000,000 of debt over 10 years before we have to pay it back and at a rate just over 4%. And that really is the first time that we saw an opportunity like that, A. B, we historically, many of you in the analyst community, I believe know this, our founder, Willis Johnson has historically built the company before we went public on debt and historically has been debt averse in the past when interest rates obviously were much higher than they are today. And so when interest rates got lower back in 2010, 2011 and the opportunity to put some
debt on, we all
agreed, including our Chairman, that it was something we should do. Now that we've seen interest rates get low for long term debt, we believe that was again something that made sense long term. Then the last piece I'd throw is because of the relationship that we have between our international entities and our U. S. Entity, there's some tax advantage that we get by having debt.
And if we didn't have the debt, we'd actually lose we lose that tax advantage basically. So there's a benefit to having some debt, especially at these levels and especially at these rates for the foreseeable future. And that was really the on the
quarter, it looks like general administrative
expense fell on the quarter, it looks like general administrative expense fell nicely sequentially down I think like $7,000,000 Is this the savings that was previously communicated regarding the non implementation of that earlier planned ERP system? Is this quarter's run rate now more or less clean? Or is there still some noise running through their data centers, headquarters, etcetera, FX?
Well, the change in IT strategy is certainly part of that. We did incur a significant amount of cost that reflected in the prior actually three quarters ever since we took the impairment Q3 of last year to make that change. The other elements which I spoke to were the costs associated with moving our IT department out from California and just the cost of integrating QCSA, which was a significant operations. And at this point, we think those costs are primarily behind us. There will always be one time cost.
And frankly, if they're not significant, we won't pump them out. But in general, at this activity level, we think this is appropriate run rate for our G and A spend.
Okay, great. And then sticking with the quarter, one of your competitors recently mentioned lower scrap prices weighing on pricing at salvage car auctions. Are you seeing that? And can you kind of just directionally proportionally size up how important is scrap metal versus the lower U. S.
Dollar ARPU pricing versus used car prices, which seem to be holding up the best of all
factors? Well, in the North America, the scrap metal pricing had a significant impact on our lower end cars. On an overall basis, it was a marginal decline on a consolidated basis, because we had growth in revenue per car and other areas of our operations internationally. It was relatively flat. In terms of importance, scrap metal pricing is a significant factor.
So I mean, we look at 2 primary drivers when we correlate our pricing and that's used car pricing and commodity pricing. In terms of significant, I would weigh used car pricing as slightly more significant.
Okay. That's good to hear. And then just last question for me if I can on the weather. I'm in Miami today, but we've had a lot of snow in New York, a lot of snow in Boston. This seems the sort of weather that is good for you that it's not significant storms that leads to like extra expense in your part.
Can you kind of confirm that? And then of course you have very difficult compares with favorable weather for you a year ago. So how is weather going to play on your results over the next couple of quarters maybe on a year over year basis? Thanks. Sure.
I would just say this. It's hard to isolate on a call how weather compares in the Northeast compared to the Midwest compared to the West Coast, etcetera. We look at when we peak and we peaked in inventories at the end of January and we've been selling off those inventories now in February. So we continue to see strong volumes coming in, but we have seen the peak come in. Sometimes that peak is the 1st week of February, sometimes the 2nd week of February.
Right now, it peaked at the end of January. And once you peak and you come off, which we have, you won't it won't go back to those levels. We are now selling off substantial amounts of units in February. And so again, I think it's going to be a good quarter based on the inventory build, based on the volume we're seeing come in. It's definitely not a bad winter, but we have peaked already.
And I'll add one more
comment on that is I talked about the decline in volume in the UK and we can trace that back to significant influence of weather. So this time last year, they were incurring floods in a number of areas in the U. K, which made the comp for volume more difficult for us this quarter.
Okay. Helpful. Thank you.
Thank you. Our next question comes from Craig Kennison with Baird.
Hey, Craig.
Good morning. Good morning. Thanks a lot
for taking my question as well.
On market share, your largest competitor reported 11% revenue growth in a similar period versus your 1% service revenue growth. And I recognize very much that it's apples and oranges when you're looking
at those 2 metrics.
2 metrics. But to what extent if any does it suggest you're not gaining share
as quickly as your largest competitor?
I think both of us have been relatively mature in the last year. There was quite a few RFPs that went out over the last 2 years and the mix has been very steady over the last year. And again, it's they're not completely comparable quarters. There's ends December or ends January. And January is the biggest month in terms of cost and building inventories and that process.
So I think the easy answer to give you is just that the mix hasn't really changed between either of us in the last year.
Okay. Craig,
let me find one other thing. We're in a number of different markets. They tend to focus on just the insurance market, but we're in the charity market and we're in the repo market. And we're on what's called the in the market folks just buy and sell cars on our platform as part of their business. And so you have to look at each of those individually to conclude about where our market share resides.
So for example, in charities, enters into our total volume mix.
Did you see relative weakness in those non insurance categories?
In certain categories we did.
Okay. Shifting gears to gas prices, just Will, give us a sense for how lower gas prices will impact your revenue and cost structure?
Well, it typically has an impact on our sub haul cost and that's one element to those costs. I can tell you that there's so many other factors that enter into our average cost to pick up the car and probably the main one is the volume. When you have more volume, you have reduced opportunity to select Our pickup time is well below one day and it's declining. Our pickup time is well below one day and it's declining. When you're trying to provide better service to your insurance halls.
So you have more single halls in the total mix. So despite the fact that we have declining diesel fuel pricing, we're challenged to reduce our sub haul costs on a per car basis.
Good. That helps. And then maybe finally, Jay, on the dealer to dealer market, on that whole car side, we've seen a number of business models pop up in this dealer to dealer space where technology essentially disintermediates the physical auction to some extent. I'm just curious, you tend to like these disruptive models and have done well with technology. How do you see that market as a potential addressable market for Copart?
Well, for the industry, I think it's been slow to adopt. I vehicle off their lot. And I don't see that technology. Vehicle off their lot. And I don't see that technology disrupting our business because the dealers got limited space on the lot.
They want those vehicles that they're not going to sell off the lot and they've basically got 2 quick options. They can wholesale it or they can take it to auction. In both scenarios, it gets off a lot immediately. And if you're talking about using a technology to do a B2B process and get rid of the vehicle, It's sitting on the lot while they go through that. So I suspect that those vehicles will continue to be vehicles we'll get and will continue to grow in that segment, because it's not just returns.
It's not just vehicles, the fact that it's being physically moved. We don't sell vehicles typically at the lot. The vast majority of our vehicles are being moved to our sites. And so it's out of their facility and that's
a big improvement for them. Got it.
Bret Jordan with BB and T Capital Markets.
Hey, good morning. Hi, Bret.
Just a follow-up question on sort of the Good morning, Brad. Just a follow-up question on sort
of the capital allocation. And I think there was a comment about M and
A and international expansion potential now that you've got liquidity. How are your thoughts about international growth via M and A given the fact that you wrote off the ERP system last year? Are you thinking smaller size or relative lower risk transactions because the lack of an IT system or does that really change the model? Well, the ERP was really I put that separately. And our reasons for doing the ERP and our reasons for exiting ERP are really separate from international markets.
I mean, we can grow internationally without the ERP and we're doing that. We're building systems to do that. Our desire to desire to have an international footprint is the same as it was 10 years ago when we first expanded into Canada. It's been a strong desire and eventually brought us to the U. K.
And Brazil and Dubai and everywhere else that we do business. So we'll continue to develop tools necessary to expand in those markets. And when the opportunities arise for us to make an acquisition in those markets, we're going to do that. Okay. Thanks.
So that was not a critical backbone for M and A integration. That was just another piece of the puzzle? Correct. All right.
You. Thank you. Again, our next question comes from Bill Armstrong.
Good morning, guys. You already answered my question on market share, but I did have a question on the other income line. You had a spike there to $4,100,000 I just wanted to dig into that a little bit. What's in
there? Well, it includes a number of different elements. It includes some rent. So rent out properties and we don't include that in our operating income. It includes gain on sale of fixed assets, but also includes an FX impact.
So our hedging strategy is pretty simple. When we accumulate cash offshore, we convert it to USD. Well, the accounting rules, which I can't explain, but we hold this cash in USD to eliminate economic risk to the business. Nevertheless, accounting rules make us recognize a gain and loss on that cash relative to the home currency of the country that owns the cash. In this situation, we had USD owned by our U.
K. Entity and that generated a gain on FX in the U. K. And that was the primary driver in the spike.
How much was that out of that $4,100,000 that Forex gain?
Hold one
second. It was about 3,000,000
dollars Okay. So going forward, are we looking at maybe a run rate of roughly $1,000,000 a quarter on that other income line?
Well, it's impossible to predict. It all hinges on the movement of the relative values of the different currencies.
Right, right. Understood. Okay. Thanks.
Thank you.
Thank you. Our last and final question comes from John Lawrence with Stephens. Good
Would you comment just a little bit Will?
I don't know
if you'll give us this number, but what's the delta from when you talk about 12 at the peak of EBITDA or EBIT per car? How far are we away from that peak at this point?
No, I'm sorry. I can't give you that. I talked about directionally. Yes. And directionally, like I said, we've seen a consistent growth in the EBIT per car.
We can't look at it on a sequential quarterly basis because of the seasonality in our business. So we've got to reach back 2 years and look at what we did in the Q2 2013 or 2014 and we've had a nice growth.
Yes. I mean is it unfair to compare that to that operating margin 32, 32.5 back in June of
have to look at it on an EBIT per car basis.
Got it. And secondly, to follow on Brett's question, Jay, can you comment just the environment, what you're seeing over there, expand that internationally the environment, what are you seeing over there as far as progress in the industry that may or may not want to expand and at what point?
Well, I guess I just I would just comment by saying that we have people on the ground, we've got operating businesses. The first step would be expand the operating businesses that are already there. And then we've people on the ground in new markets that where we don't do any volume yet and we've got relationships with Oportun acquisition targets. And when the time arises and when we feel it's the right time to do that, we'll step into those markets as new markets. So right now, we're really focused on improving the markets we're already in before we expand into new.
And there is nothing that's changing that's causing you to
think about pulling back or anything like that?
No. I mean, we're always each market you look at, they're going to have their own tax laws, they're going to have their own process. Sometimes we've got to build systems around the new tax law before we can get into that market. Sometimes we've got a completely different process than we're familiar with in the U. S, UK, Brazil as an example, and Dubai.
And so we have to go into a market and convert that existing process that they've got to a new model and show them that the model is better. So it just depends market by market and some markets you can move quicker than others, but we're committed to that call back over to Jay
further questions at this time. I would now like to turn the call back over to Jay Adair.
Thank you, Noelle. And thank you everyone for coming on the Q2 call. We look forward to reporting Q3 in 90 days. Bye bye.
Ladies