Good day, everyone, and welcome to the Copart Incorporated 4th Quarter Fiscal 2014 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, Tiffany. Good morning, everyone, and welcome to the Q4 call for fiscal on financials. I'll give you an update on the company and then we'll open it up for questions. And with that, it's my pleasure to introduce Will Franklin. You, Jay.
Before we begin our comments, I would 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 and comments. The company expressly disclaims any obligation to update or analysis and the risk factors contained in our 10 ks, 10 Q, analysis and the risk factors contained in our 10 ks, 10 Q and other SEC filings. With that, I will begin with some brief comments about our financial results for the quarter. Total revenue grew by 23 point $8,000,000 or 9%.
Purchased car revenue declined by $9,300,000 which was driven primarily by reduced on a principal basis in the U. K. Service revenue increased by $27,700,000 or 13%. Excluding the residual Sandy sales activity in our Q4 of last year, the increase would have been 14.4%. The increase resulted from growth in our international operations, which includes Germany, Spain, United Arab Emirates and Brazil of approximately 1 point $5,000,000 Growth in the U.
K. Of $8,700,000 which was tied to market wins and growth in North America in North America of $17,500,000 In North America, on a same store sales basis and excluding the Sandy activity, grew by 4.6%. In the U. K, our same store sales unit volume increased 19.3%. All growth came from market wins and growth in the overall market.
In North America, non insurance car volume grew by 5.4% and represented over 20% of the total volume. The yard operation expenses increased 16,200,000 The growth was driven by increased volume and an increase in average cost to process each car. The growth in processing costs were driven by a general increase in sub haul and employee link costs and costs associated with additional services provided to the sellers. In addition, costs were impacted by the increased residual QCSA integration cost and growth in our international activity outside of the U. K.
As these operations are in their developmental stages without the benefit of scale. General and administrative costs remain relatively consistent with the same quarter last year. We expect to see a reduction in our quarterly G and A expenses on an absolute basis by the end of this fiscal year as we rationalize costs associated with our prior technology strategy. We ended the quarter with over $158,000,000 in cash. We generated $55,000,000 in of $18,200,000 primarily for yard expansion, technology and equipment.
Finally, during the quarter, we had no open market share repurchases. We have almost $48,000,000 share 48,000,000 shares remaining in our current repurchase authorization. That concludes my remarks. I'll now turn the call back over to Jay Adaire, our CEO for further comments on the quarter. Jay?
Thank you, Will. And just so everyone's aware, Will and I are in different locations today. So when we get to the Q and A section, if you can specify who you want to answer the question that'd be great. So we started the year with the acquisition of QCSAA and Desert View Auto Auctions and Crash integrating those 3 companies into Copart. And I'm happy to report that at the end of the fiscal year, we have done that.
QCSA was fully integrated into the Copart locations, Copart systems, technologies and culture at this point. DDAA, the Desert View Auto Auctions, we've integrated onto our systems, but it is a standalone business with its own are and we've taken a number of things that they did to differentiate themselves from both Copart and our competitor in the marketplace and implemented those inside of Copart. So a lot of their best of class practices are now have become policy at Copart and become differentiators for us going forward. And we've got that team now in the leadership roles within Copart and helping us to grow the business. So that's all real exciting stuff that occurred in the year.
That growth plus new volume really is sense in really repeating that. What I would specify is that you see an increase in G and A costs and G and A literally Q4 of 2013 to Q4 of 2014 are relatively flat, but they were high throughout the year. So there's a focus going into fiscal 2015 to work on operating costs both in the field and to work on yard and fleet I'm sorry to work on G and A at the home office to reduce those costs. So there are some yard and fleet expenses as Will just discussed that are not going to be coming down. But there's other expenses that we think we can achieve some additional efficiencies on.
So there we'll be focused there. We're really not in a position to give estimates on what that's going to be because it's something we're all working internally on seeing if we can find additional efficiencies in the field. As a home office, same sort of story. We clearly know there are some areas where we can cut some costs. So we're working on that.
If you look at the last 3 years, there was the move out of California. There was position of trying to call out every single quarter. The point is this, 2015 this fiscal year will be the last year where we see any kind of non recurring one time expenses both in the field and at G and A. Additionally, we announced in the last quarter that we had changed our strategy on our technology. And net income and EPS for fiscal 2014 were substantially adversely affected by $29,000,000 in capitalized software development and impairment that we took in the Q3 of 2014.
In particular, the impairment reduced EPS by $0.15 And I dollars And I mentioned this on our last call that the impairment related to our discussion not or a decision rather not to proceed with replacing our legacy enterprise software system with a new SAP based system. And our Form 10 ks will also be disclosing pending litigation We initiated against Sparta Consulting related to this impairment. So let me give you a little color. We hired Sparta Consulting, which I believe is now called KPIT to implement the new SAP system. And KPIT had originally agreed to deliver the complete SAP based replacement for our enterprise system with a targeted final deployment of March 1, 2013.
By September of 2013, the project was not closed to completion. And over the life of the project, KPIT failed to meet key contractual milestones and the coding consistently failed user acceptance testing. As a result, we determined that KPIT had not delivered and could not under its contract with Copart and we terminated with KPIT. We also concluded that most of KPIT's work was a no value to Copart and that the most appropriate and cost effective option was to scrap the project. As a result of this decision, we were required under applicable accounting rules to take a $29,000,000 impairment charge in the Q3 of 20 14.
We are also currently in litigation with KPIT over its deficient performance under the contract related misconduct. The litigation is now pending in federal court in California and Copart intends to fully pursue its remedies regarding KPIT's failure to provide DSAP based system required under the contract. And we will update you concerning developments in the case as appropriate in our future SEC filings. So this is not something that we plan on discussing more going forward, but we wanted to make you aware of this. It goes in line with what we discussed before that the SAP system when we took it over and got more involved in looking at trying to have that as the replacement for our existing operating systems that it was just not it was not going to work.
There are a lot of reasons why we didn't feel that it was the right strategy for Copart. So that is that's where we're at on that. We are currently working on modifying our existing systems such that they will work internationally. The systems are great domestically. They're integrating those systems today with SAP Financials because we are removing or replacing the JD Edwards systems with SAP.
And all that's all good. We're happy with every part of that. There's nothing that I can say that isn't going to where we thought it was going to go. But we went into this thinking that we could replace our systems with an SAP product and the cost and the delay and the failure and a number of areas there just made it the wrong strategy. So we've got new system that we're working on, integrating with our existing systems and that will allow us to go international.
So there's going to be some delay till we get that done. Okay. Let's talk about marketing update for a bit. So we launched our mobile product 2013. In fiscal 2013, 8% of total auction attendance was through mobile.
That number the end of fiscal 2014 jumped to 23%. So 23% of all auction attendance now is being done on our mobile app. And those that use the app daily represent 85% of our customers. So it is obviously physically to the location and along came the Internet. And get physically to the location and along came the Internet and yet now you've got to have a laptop in front of you.
And so with your with the mobile app, literally, you open your phone from anywhere with a signal and get. In 2014, we saw a 2 48% increase in inventory searches related to mobile. So they're not just attending auctions, they're doing searches. And then we saw 122 percent increase in the number of new registrations members actually coming on through mobile and accessing the system. So that's good news on the mobile front.
Crashtoys.com went live in the fiscal year as well. And we've got that specialty division that we bought into the Copart family a year ago and we are heavily focused now on differentiating on all toy type product everything from motorcycles and boats to exotic vehicles. So that is all live and you can check it out at crashtoys.com. And then topping over 1,000 per month just for Crash Toys. A lot of topping over $1,000 per month just for Crash across the Copart family, across the Copart company.
So, real big increase this year in number of new members coming into the site and getting those converted. Customers that want to buy the product we're selling. And then it's about once you've got those members making sure that they can find the product that we've got for sale. So having all the right filters and all the different ways that you can look for product is critical. So again, big differentiator.
And then the final point I would make is that a third of all new members that came to Copart were referred to Copart from people that already know about the company, which is good news. It's nice that the number is that large. On the flip side of that, it was 2 thirds of the new members that we signed up in the year didn't know who we were. So again that push to get more and more and more customers out there to become aware of us is front so I'm not going to repeat all that. So with that, so I'm not going to repeat all that.
So with that, I'd like to open it up for questions. Tiffany?
Yes, sir. Thank you. Our first question will come from Bob Labick with CJS Securities.
Good morning. Thanks for taking my questions. Hi, Bob. Hi. So Jay, I know you just said you don't want to get into the weeds in terms of some of the expenses and helping us down there in terms of like 500,000 relocation this or that.
But I was hoping you could take a step back and just give us a sense on the gross margin on the service side even from a macro basis. Over the course of the year, you've had QCSA and you've been pulling out costs, but consistently it's been higher than we've modeled. I'm just trying to get a good sense of where the operating leverage lies on a go forward basis. And I know blending in international makes it harder, but if you could take a step back and just talk about operating leverage on a go forward basis as we see sales growth?
Yes. Sure. I would just throw out there to you Bob that it's not going to be back at the same operating margin that it was prior. And that's not just a QCSA or it's not a QCSA thing. It's just that the market that we're in, we've just got increased costs, labor costs are up, fuel costs are up.
So there's a number of costs that are up across the board. But then some of it is the integration and the putting the 2 companies together. So we anticipate it's going to come down and I appreciate your comments. It's just I don't think it's wise. Will and I discussed it this morning and we just don't think it's wise to try and lay out every single expense that we've got.
So we anticipate in the next year, we're going to get the operating margin by the end of fiscal 2015, we're going to get our operating margin to as good as we can get it. It's not going to take more than 4 quarters to do that. And we're going to get our G and A where it needs to be and then will be it. I don't see on the horizon another large acquisition to put with the company domestically. And so it's going to take us about a year to get those transitions completed.
And trying to single out the actual expenses is just really tough to do.
Okay. Fair enough. And then looking ahead at the U. S. Side, obviously, you had some great wins in RFPs in the last couple of years last year and some national account wins.
What are the your share is pretty high. What are the drivers for domestic growth going forward from here?
Well, it's still the push non insurance. I mean the insurance market I would call it mature at this point. We're we and our competitor are handling the majority of the volume domestically and the real growth is to push for non insurance volume. The other driver I would say is just the overall market increasing. The market really got slowed down back in 2008, 2009.
And so there's, I would say fundamentally off the top of my head 2 drivers. 1 is ASPs going up and we may see ASPs increase in the future because I think they're while they're at a record high, I think they're lower because we've got an aging fleet and there weren't as many new cars. And so as they start to sell more new cars again, I think that's going to I know that's going to increase the quality of vehicle we sell in the ASPs that go up. The other driver is because we haven't sold so many vehicles new. We've got an aging fleet and we're seeing unit volumes increase.
So we will see from the data that we've looked at an increase in the number of units in the next year, 2 year, 3 year out. As vehicles get older, they just become that more likely to total. So those are the drivers on the insurance side. And then on the growth for Copart is non insurance volume, which is about 20% of our company today and we want to obviously make that number larger. Okay, great.
Thanks very much.
You're welcome.
Thank you. Our next question will come from John Lovallo with Bank of America.
This is Liz Suzuki on for John. A question on acquisitions. Are there any particular geographic markets that Copart is particularly focused on?
Domestically or internationally? Either. Yes. So yes, right. I would say internationally what we're trying to do right now is finish some integration work that's got to be done with systems and then we'll be looking at expanding in the markets that we think fit our model where we think it will be easiest to implement our model or easiest to make acquisitions in those markets.
And then domestically as I said, the market is pretty it's pretty mature at this point. So I don't think there's a lot of core business acquisitions in the salvage arena domestically. I just don't see it as we sit here today.
I guess most of the opportunity is international then. And just a quick one on regarding the tax rate. At 30.9%, it was pretty low in the quarter. And what was the cause of that? And should we expect it to return to closer to 35% going forward?
No, it shouldn't return to 35%. It was a unique quarter and as much as we had some discrete tax adjustments that reduced our rate, but now it would be I would say up just a little 34%. I would expect that as international becomes a more meaningful side part of our activity, I would expect that to decline.
Great. Thank you very much.
Thank you. Our next question will come from Ryan Brinkman with JPMorgan.
Hi. This is Samik here on behalf of Ryan. Just wanted to sort of get an update on the inventories. First, I didn't really hear anything in terms of inventories. How much were they sort of up year over year on a same store basis in North America?
Can you just help us with that?
Sure. Inventory is up a little over 5% on a same store basis.
Okay, great. So is there any portion I mean just on the trends on processing times and if that's contributing that processing times are coming down. Is that still to be the trend?
The insurance companies are addressing that. And so some insurance companies are doing a companies are doing a better job than others. In general, days inventory are starting to subside.
Okay. Great. And my next question is primarily around international expansion and your strategy there. When we look in terms of the expenses that you've been incurring or the investments, which sort of fees are you in? Do you think these expenses or investments will accelerate for the next year as you continue to build scale in those markets?
Or are they going to sort of normalize? And what is probably your updated outlook on being profitable in these international markets obviously outside U. K?
Yes. So I'll comment. You didn't hear you specify. I guess from the perspective of profitability in international markets, that's always hard to predict. I would say, we're going to have some technology completed in the next year and that's going to allow us to we don't anticipate G and A going up in the next year.
We anticipate it coming down. That's fully loaded G and A. That's not domestic, that's international, that's everything. So we've got teams in place. We've got expense in place.
And at this point, we don't anticipate costs going up at a G and A level. We anticipate revenue going up.
Okay. Great. Thanks for taking my questions. Thank you. You're welcome.
Thank you. Our next question come from Bret Jordan with BB and T Capital Markets.
Hi, good morning. Good morning. A quick question on yard operating expenses. Is there something structurally changed in that pass through in some of the services that you're spending on? Are they related to the RFP businesses that you've got more labor and or expense built into some of these insurance contracts?
Yes. Part of it is. Part of it is we're just providing more services to the sellers and that's a part of the RFP process. Part of it is a structural change in our cost. Our sub hauling costs have increased.
With the increase in volume, we have a diminished ability to utilize the low cost providers. We had to expand the sub haulers that we use. And by so doing, we have to utilize those that charge a higher rate. And we have a natural increase in our labor cost and our benefits cost. And all those have had a permanent structural change in our yard operating cost on a per vehicle basis.
Okay. And then sort of a qualitative question. I think you began to address sort of the inventory bulge and some of the cycle times that we've talked about in the last couple of quarters, but it sounds like inventory is beginning to work down. Could you give us a feeling sort of where we are relative to a normal base level in the inventory work down? Are we 20% of the way to where you'd expect us to be in a base case scenario or 50% or hard to predict.
But currently our same store inventory levels are about 5% or same store sales are about 5%. So it seems to suggest that's about the new norm, about 5% growth. Okay. All right. Great.
Thank you. You're welcome.
Thank you. Our next question will come from Gary Prestopino with Barrington Research.
Good morning, guys. Good morning. On the non insurance side, can you if it's charity in that non insurance as well?
Yes. Charity is included in non insurance.
So what I'm trying to get at is, if you could bucket how that 20% split goes between those three areas and those markets if you would and give us a thumbnail look at how each of those particularly the dealer are more interested in? And what the growth profile has looked like here this year?
So we've had growth in both dealer cars and charity cars and we've had a slight decline in what we call our core cars. Those are cars that come from individuals and companies that just make a living buying and selling cars on our platform. Those are the 3 major buckets. In addition to that, we have other institutional and seller's banks for the repossession fleets like Southwest Bell and AT and T that utilize us as well. But primarily most of our volume comes from those 3 buckets charities, franchise and dealerships and individual car brokers.
All right. Is charities still the largest of all of those 3 followed by maybe fleet and then dealer? I'd say charity
go ahead Jay. I just going to say no dealer is clearly the largest. I mean it's bigger than the charity side. Okay. It is clearly
the largest. And you say obviously the focus is on that area that non insurance segment for growth. Are you devoting much more marketing efforts, selling efforts there? Have you increased your feet on the street to get more business there?
There has been some increase. We've made some changes in the last year. And so we've got
some we've got I guess you'd call
it some cost creep that's come in through some of those efforts. But I look at that as an investment. We think it's the right thing to do to drive that book of business.
Okay. And then you also mentioned that you've adopted some best in class practices from QCSA. Could you maybe elaborate on
Well, they're I'm hesitant to Gary, because they're differentiators in the space and we've done some things with clients that our clients like those kinds of differentiators as well. And so some of it is some simple that's technology based, some web changes things like that. But some of it is process driven and it's definitely something that we use with clients to give them a better experience than what they would get elsewhere. So it's proprietary stuff.
Okay. That's fair. All right. And then lastly, not looking for any actual numbers, but as we go through the year, should we sequentially see declines in G and A expenses as you do this finish off what you need to do to get that in line?
No, I don't think we're prepared to make that assertion. I think our comment stands that by the end of the year we'll see a decline. Okay. There's a lot of work that needs to take place between now and then.
Okay. Thank you.
You're welcome. Thank you, Gary.
Thank you. Our next question will come from John Lawrence with Stephens Incorporated.
Good morning,
business obviously on the yard cost and as far as that operating metrics and then offset that with G and A. And then just put it in perspective, I guess a couple of years ago we were at a closer to 32% operating margin. We've lost there's 500 basis points of erosion. Is there a certain amount of that 100 basis points to 150 basis points that you could point to that you can't recover? Or can you give any kind of I'm not talking about timeframe, but just what would be the limiting abilities to get back?
I mean, can you offset SG and A with some of those operating costs?
Yes. It's hard to look at our business on a margin percentage basis or an EBIT percentage basis, because of the impact that purchase car revenue has on that. And as that fluctuates, it has tremendous impact on that percentage. So we look our business on an EBIT per car basis. And when you look at on that basis, we're fairly happy with where we were this year.
We're certainly not where we were in 2012, but we're where we were in 2011. So we anticipate to increase that next year as we go through the rationalization of certain costs. But it's hard for me to talk about it on a percentage basis.
Okay. Thanks. Welcome.
Thank you. It looks like we have no further questions at this time.
Right. Well, thank you again everyone for attending the fiscal 2014 Q4 call for Copart and we look forward to giving you updates on the next quarter. And this concludes our call. Thank you. Bye.
Ladies and gentlemen, thank you for your participation. This does conclude today's conference.