Good day, everyone. Welcome to the Copart, Inc. Q1 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, Debbie. Good morning, everyone. Welcome to the first quarter conference call for Copart. Before I start, I'll turn it over to William Franklin, our CFO, for safe harbor statement. We'll go ahead and give you an update on operations and some G&A and other factors before Q&A. Will?
All right. Thank you, Jay. Good morning, everyone. 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 and comments. The company expressly disclaims any obligation to update or revise these statements and 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-Q, 10-K, and other SEC filings. With that, I'll turn the call back to you, Jay, for initial comments on our first quarter's results.
Thank you, Will. Well, good morning again. As we talked about in the fourth quarter of the year, Copart completed the acquisition of Quad City Salvage Auction, QCSA, and had our first full quarter in the first quarter. I want to jump into some of the increases that you've seen in both G&A expense and in revenue and operating costs so you can get some clarity about where we think we'll be in the second, third, and fourth quarter of the year. Let's look at G&A. We finished Q1 with $38.5 million in G&A expense as opposed to $27.3 million for the same quarter a year ago. That's an increase of $11.2 million. That $11.2 million is basically divided into three buckets. International is up $1.9 million. That is associated with our expansion in the last year into Spain, Germany, Dubai, and Brazil.
That expense will be ongoing as we develop those markets further and grow further in those markets as part of our strategy for growth. As we look at the next bucket, let's look at information technology. On the IT side, Copart had an increase in the quarter of $4.7 million. This is associated with our final move out of California. As we talked about in 2011, we began a project called OverDrive, and the whole concept was about really transforming our company, both from an operational, from a services level, moving out of California to Texas, and upgrading our operating and computer systems. That project OverDrive will come to completion in July of 2014. With it comes a brand new website, with it comes a mobile application, we are continuing to work on a new operating system that'll run the company. That has been delayed.
We currently really have two things that are going on. We've got new systems. Let's use our website as an example. We're running the old website and we have the new website both up and running, and we're carrying duplicate systems in many cases. Eventually, when we finish that transition, we'll be down to one system for the web, one system for mobile, one system for operating the company, and that’ll eliminate costs. The other big factor that we have is the move out of California. In this last quarter, we started transitioning folks from California into Dallas. By the second quarter, which ends January 31, 2014, we'll have that completed. There will be no further technology employees in California. They will all be based in Dallas, Texas. There are a lot of expenses associated with severance and moving, et cetera, in the quarter.
Will give you color on how many of those are non-recurring, what amount of those, and quantifying the non-recurring nature of those expenses. I just want you to know out of that $4.7 million, the vast majority of that is from a standpoint of either the move or from a transition will not exist in the future. That's expense that we expect to have eliminated when we finish this transition process. On the QCSA front, that's the third bucket. We had G&A of $4.6 million. The majority of this will be eliminated as we start the integration. When we purchased QCSA, we committed to our customers that we would not begin an integration for six months. In the second quarter, we will be implementing the integration of the company. The vast majority of that $4.6 million will be eliminated as we integrate the company.
There are also one-time costs that are in there that Will talk about as well. That integration, to give you further color, we talked about it on the last quarter, but that integration will begin in Q2. It will continue into Q3, and should be finished by the end of Q3, but there will be some costs that run into Q4. We're very confident at this point that there will be no further integration of QCSA in fiscal 2015. From August 2014 on, we'll be done with the integration of QCSA, and there will be no more cost associated with moving personnel out of California when we look to the new fiscal year as well. All right, let's look operationally. Inventories continue to be up. Inventory was up 20% again in the quarter, even with the increase of $41 million in revenues.
Revenues for the quarter finished at $279.9 million. Of the $41 million, $17.2 million of that was revenue associated with QCSA. There was literally no margin brought down to the bottom line on that $17.2 million. The fact that we have not integrated any of those facilities yet means we're literally towing a car 100 miles past one of our own locations, so that we can keep everything that is QCSA on its own, everything that's Copart on its own. Once we integrate the companies, that will cease to be the case. Those vehicles will be going to facilities that are maybe five miles away from the car instead of 100 miles away. You're going to see, as we talked about on the G&A front, a bunch of savings.
You'll see the same savings on the operational front as we eliminate towing expense and other costs that we have associated with facilities. Best color I can give you on that is we would accept similar margins. These are going to be incremental vehicles flowing through to our facilities. It should be similar margins once it is integrated to Copart as we've seen with Copart on existing business. Okay, the rest I'll leave for Q&A. I did want to mention that we acquired one auction facility in Montreal, Canada recently. We now have five locations in Canada. With that, I'll turn it over to William Franklin for financial review, and then we'll open it up for question and answer.
Thank you, Jay. As you can see, total revenue grew by $41 million. Purchased car revenue grew by $9.8 million. The Spain and QCSA acquisitions, both of which closed in our fourth quarter of last year, contributed $6.4 million to that growth. Purchased car revenue in the U.K. and the U.S. grew by 2.1 and $1.3 million respectively. The increases resulted primarily from the growth in our direct purchase program. In this program, we purchase cars primarily from the general public and resell them for our own account. Service revenue increased by $31.2 million. The increase resulted from growth in our international operations, which included acquisitions last year in Germany, Spain, the United Arab Emirates, and Brazil. These totaled approximately $4.1 million. Growth in the U.K. of approximately $500,000. Our QCSA acquisition of $12.2 million. Growth in Copart U.S. of $14.4 million.
The growth in Copart U.S. came primarily from increased volume, resulting from growth in both market share and overall market size, as we have seen an increase in salvage frequency. In the U.S., volume grew by almost 7%, as we saw increases from both our insurance and our non-insurance suppliers. Non-insurance car volume represented approximately 20% of our total Copart U.S. volume. In the U.K., total volume grew by approximately 10% and resulted primarily from market share gains. The yard operations expenses were up $27.9 million. The growth came as a result of our international expansion, the QCSA acquisition and its associated integration cost, which totaled approximately $9.1 million. The growth in Copart U.S. volume and the growth in Copart U.S. inventory. Copart U.S. inventory was up 20% on a year-over-year basis.
Included in the yard operation expenses for the quarter are approximately $800,000 in severance and lease termination and relocation cost. These costs will continue into our second, third quarters of this fiscal year. General and administrative costs grew by $11.2 million over the same quarter last year. The increase was due primarily to, as Jay mentioned, the additional cost tied to our international expansion, which totaled $1.9 million and will continue. A $4.6 million increase associated with the QCSA acquisition, of which $1.1 million was lease and employment termination cost. These restructuring costs will continue into our second and third quarters. We expect the QCSA general administrative cost to be approximately $1.5 million per quarter when fully rationalized. Additional spend of technology of approximately $4.7 million, of which $1.5 million was tied to relocation of our technology group from California to Texas.
These costs will also continue into our second and third quarters. Also included in the $4.7 million increase are an estimated $1.5 million in transitional or duplicative costs associated with the SAP rollout and the outsourcing of our technology infrastructure and level 1 support. These costs will continue into next fiscal year.
$2.9 million of severance lease and relocation costs that are reflected in our G&A. We ended the quarter with over $77 million in cash. We expended $21.6 million for capital assets, capitalized software development costs, and the buyout of one lease. During the quarter, we had no open market share repurchases. We have almost $48 million shares remaining in our current repurchase authorization. That concludes my comments. We'll turn the call back over to you, Debbie, for the Q&A session.
Thank you. Ladies and gentlemen, our question and answer session is conducted electronically. If you have a question, please press the star key followed by the digit one on your touch-tone phone. If you are on a speakerphone, be sure to disengage your mute function so that your signal will reach our equipment. Again, star one. We'll take our first question today from Bob Labick with CJS Securities.
Good morning. Congratulations on a strong sales quarter.
Good morning, Bob.
Hi, Bob.
Hi. I wanted to start with sales. Both this quarter and last, you discussed that total inventories are up about 20%. Last quarter, we talked a little bit about the apples-to-apples inventory growth as part of it, and then also some cars staying on the yards a little bit longer due to processing time from the insurance company side. Can you give us a sense of the organic or apples-to-apples inventory growth in the quarter? How's the processing time? Is it normalizing yet? Where does that stand? Do you expect that excess inventory to flow through at any point? How should we think about that?
Well, as we said on the last quarter, we felt about half of it was associated with improvements in inventory, and half of it was associated with the cycle times on those vehicles. I don't think there's an inherent trend that cycle times are just getting longer and longer. There's some reasons why some of those vehicles hadn't moved based on the supply where they came from, and I expect those vehicles will start moving in the quarter that we're in and subsequent quarters, Q3 and Q4. If we want to think about real inventory growth is probably closer to the 10% number.
Okay, great. Well, that's still obviously a fantastic number. The primary drivers, I think you said, were both share gains and then the industry itself growing. Is there anything else behind that?
Well, I think it's important to understand the 20% number. We got all the costs associated with that inventory build. When that number does become more indicative of our growth, more towards the 10%, we're going to have all the revenue associated without the expense when we sell those vehicles off. That'll be the improvement. Then, to your second point, Bob, it really is just that it's an environment where the market is, we're seeing some market share gain, and we're seeing some improvement in the overall market. Vehicles are older today than they were five years ago. New car sales have been down for the last five years. They're now starting to trend up.
All those factors, as we talked about back in 2009, if you recall, in some of those conversations back in 2009 after the 2008 crash of the market, when we talked about in 2009, if vehicle sales stayed at these low ratios, which they did, that we'd see vehicles aging, which they have, and then we would see vehicles becoming more probable total losses, which is what we're seeing today. The overall market, we believe, is just expanding.
Okay, great. On the QCSA side, the revenues were strong in the quarter, certainly versus, I guess, what we were looking for there. I know you're going to begin the transitioning going forward. Can you talk a little bit about some of the best practices that will be transferred between Copart and QCSA? Things you've learned from them and things you can impart on some of the yards you might keep of theirs if they're in the right places.
Sure. We're not going to be breaking out QCSA in every quarter, just so you know. The integration will start this quarter into Q3, we'll just be talking about revenue. You can see it's $17.2 million. You've got a real run rate of the revenue so that you've got that visibility. We won't be breaking that out in subsequent quarters. We'll be talking about the company as a whole as we integrate. One I talked about on the call was towing. Another one would just be all the duplicate facility expenses. They were running over 20 facilities that are right next door to our facilities. I shouldn't say next door, but in the same markets as ours. We may be driving right past one of our facilities to go to their facilities. That's the towing side.
The other side is that you've got all the benefit of not having that facility expense. There is that component. We've learned from both sides. They had some technology functions that we've now integrated into our company and will be launching at the integration on our website for our sellers. There's been improvements there. There's been some improvements in just the way that they interact with the sellers has been new from some of the ways that we've done it. We've implemented some of those, we've got a number of things that we do from a best class or best practices standpoint. We've got better cycle times and more efficient on the tows. We've got a much larger buyer base by a much bigger factor. We expect higher returns on those vehicles as they get integrated.
There's just a number of areas where we've seen benefit on both sides, and we've been able to integrate those benefits on Copart. When they've got something that they do better, we've taken advantage of that. Like I said, the technology piece. Really happy about it. I know we're going to be very pleased as we get into Q3. Q2 is still going to have a lot of costs in it, but you'll start to see some of these benefits coming in, Q3 and Q4 are going to look really good compared, once we've got all this integration completed.
Great. Thanks very much.
You're welcome.
We'll take our next question from John Lovallo with Bank of America Merrill Lynch.
Hey, guys. Thanks for taking the call.
Good morning.
Hi. The first question is just a point of clarification in terms of the inventory build. Are you guys seeing more pressure from insurance companies to pick up vehicles more quickly to save them costs at the impound yard?
That's always been the case. We tease because 20 years ago, the standard was four-day pickup, and today, they want 24-hour pickup. Now they push for same-day pickup. Yeah, we're always seeing push towards that, and we've been able to improve year after year on cycle time. I suspect there's a point where you can't improve anymore, right? You can't do it in zero.
Yep.
At some point, we'll stop seeing that improvement. With technology, it's allowed us to improve even further. We've got some tools that we use on our technology front that allow us to pick up vehicles in hours as opposed to next day even. We're always going to see a need for that because, yeah, the impound yard is a big expense.
Okay, that's very helpful. On the pricing front, if we do see a pullback in used vehicle prices, is there an opportunity to potentially raise auction fee prices to kind of keep the fee revenue flat, if you will?
Yeah. We don't talk about pricing on calls, John.
Okay. Fair enough. If I could just end with one other. In the past, you guys have clearly repurchased a lot of your shares. There's been a little bit of a lull, partly due to the REIT situation, I would imagine, and then maybe QCSA. Going forward, do you see yourself going back into the market to repurchase a fair number of shares?
Yeah. Well, we don't talk about share repurchase on calls either. You're zero for two there, buddy. No, we don't talk about share repurchase. Historically, you can see where we bought. We do have an authorization to buy plenty of stock, and we have had a history of doing it. I've said on calls before, we tend not to lay our playbook out on when we think we should be buying stock back.
Okay. Thanks very much, guys.
You're welcome.
We'll go next to Ryan Brinkman with JPMorgan.
Hi. Thanks for taking my question.
Good morning, Ryan.
Good morning. I understand you don't talk about share repurchases. Perhaps I could try to approach it from a different angle. How do you currently feel about your financial leverage, which you know has been declining as you continue to make contractual payments on your debt and your earnings expand?
Well, yeah, we've got less debt than we had a couple of years ago. Again, we just don't get into those types of discussions on a conference call because it's not a CEO decision, that's a board decision. When we get into how much debt we think we should have, we talk about that at the board level, and then we make a release and let everyone know what we're thinking and what we're doing.
Okay, great. Thanks. Could you maybe just give us an update on your international operations outside of the U.K.? How have some of your recent acquisitions been tracking relative to original expectation, for example, in Brazil or the United Arab Emirates?
Yeah, we're really happy with them. There's a lot of opportunity in those markets, and we want to move quickly, but you don't want to move too quickly or get too aggressive. It's one of those things where we're integrating our process, our procedure, and our systems, and it feels very similar to the U.K. When we came to the U.K., pickup times were triple what they are today. Returns were 30%, if not more than what, less than what they are today. We see those markets as very similar to the U.K., and the potential and the opportunity being very similar to what we were able to do in the U.K. We're happy about what's going on internationally. It's good stuff.
I see. Is your intention to sort of use these international acquisitions to form kind of a beachhead in some of these markets, after which you would then expand organically? Do you see yourself continuing to make multiple acquisitions in the same international market, or aren't there really people to acquire in some of these?
In some of the markets, there's no one to acquire, that's fair enough. In other markets, there are still acquisitions to be made, and we would be open to that.
Okay, last question, just more housekeeping. At what time do you expect the QCSA margins to be up to the Copart levels, and what are the steps that remain to get there? Thanks.
Yeah, fourth quarter. We're going to be integrating second and third. The margin should be up to par fourth quarter. As I said on the call, there'll be some carryover from expenses in the third quarter that could go into the fourth quarter. If you take that non-recurring factor out, we'll be there in the fourth.
Okay.
Come first quarter of the year, there shouldn't be any carryover expenses.
Very helpful. Thank you.
You're welcome.
We'll go next to Bret Jordan with BB&T Capital Markets.
Good morning. A couple quick questions. I guess when we look at QCSA and sort of out in the future when we've adjusted for the duplicate of overhead and the buckets, could you give us some color on how the gross margin profile of the charity or toys business compares to the core insurance category? Is that dilutive to the overall mix?
Sure. I won't give you the actual numbers, but toys is better than salvage because they tend to be higher sale price, higher margin units. Charity are less than insurance. If you think about the profitability of segments, if you will, or supply in our business, at the top of the food chain would be rental cars, dealer cars, non-damaged stuff. You'd move down into damaged vehicles. You'd move down into charity vehicles, which typically are not damaged, but they just have really low valuations in terms of profitability per unit.
Okay. A question on the market share comments, and I guess trying to figure out what real inventory growth is versus share growth versus the underlying, the slowdown in the processing. Where do you see the share coming from, and I guess, what do you see being the driver of market share shifts right now in the market?
Well, there's been a consolidation in the market in the last year. Quite a few of the large suppliers, large insurance companies, have made a decision to go with two vendors or three vendors and eliminate doing business with 17 vendors, as an example. There's a number-
This is the outcome of the RFP process we saw a year, 18 months ago.
Say that again?
This is the result of the RFPs that we were seeing 12 or 18 months ago.
Sure. We're always looking at RFPs. I mean, that's pretty regular. There was a pretty major shift in the last year that pushed a lot of business towards two or three suppliers or auctions, where they eliminated doing business with some of the smaller players that are out there.
Okay.
The other side is, just as we said, the industry is expanding. It's getting bigger.
Right. I have one question, I guess, on the QCSA. Is the charity volume going through vehicle revenues, or is that going through service revenues?
Both.
It goes to both.
Okay. One last question. Your next board meeting, is that the mid-December? I guess, I was reading the proxy, and it looks like you may be extending your dollar-a-year contract. Is the next meeting the 16th for the board?
No.
The shareholder meeting.
The shareholder meeting is, yes, the 16th.
Okay. What's the next board meeting?
Next board meeting is next week.
Okay. Thank you.
You're welcome.
We'll go next to Gary Prestopino with Barrington Research.
Good morning, guys. How you doing?
Good morning.
Good.
Well, Will, did you give a total volume number for the quarter year-over-year that you were up? Or, could you ever give that number?
No, I didn't. I gave the U.S., and I gave the U.K. separately.
Okay.
Because of-
All right. If you don't give it, that's fine.
last year.
A lot of questions have been answered, but just could you maybe make some comments on how you're doing in the dealer and the public markets? Obviously, you're adding to QCSA. You've got a lot more salvage vehicles in the mix, but yet you're still doing about 20% that was non-salvage. That's obviously growing at a pretty good clip. Maybe you could talk a little bit about that.
No, well, you're spot on. That's exactly what's happened, and they've continued to be able to improve that part of the business. I anticipate that'll be the case. The non-insurance business is a very large segment for us. We handle a very small piece of that. We've got a really good sales team that are working that now. That business has existed now, this is its sixth year that we've had a dealer division and a direct division. I expect that they'll continue to do well for years ahead. I don't see that coming to maturity for a while.
Could you maybe share what the volume growth is there year-over-year? Is that too intrusive?
Yeah, we don't break out volume, Gary, but we do break out the percentage of the business. As you said, it's about 20%.
Okay. How many dealers are you dealing directly with now? Can you tell us that?
Oh, thousands. I don't know the exact number. It's thousands of dealers.
Okay. Thanks.
You're welcome.
We'll go next to Craig Kennison with Robert W. Baird.
Good morning. Thanks for taking my questions as well.
Good morning.
Just to follow on to Gary's question on the non-insurance side, Jay, I would think that your platform would be particularly strong in the buy here, pay here market. Do you have a specific initiative to get after opportunities there?
Oh, we are. I tend not to like to talk about all those segments because, again, we've got a lot of competition out there, but we work all those angles. Rest assured on that. I won't get into each market out there like buy here, pay here that we go after, but we're involved in all those markets as potential supply for vehicles.
Thanks. I know you're investing in a new website. To what extent do you think that is a game changer on the consumer side, where you've maybe had a lot of hits on your website, but maybe it's not as intuitive as you'd like it to be?
It's a big deal. I don't have the numbers in front of me, I did talk about them on the last quarter. It's double-digit growth year-over-year in people attending auctions, in auction attendance. It's double-digit growth in new registrations. It's a big deal. The old site, which is currently the existing site, you have to sign up, you have to register to join an auction. The new site, which is currently beta and will be replacing the old site in the coming months once we've worked out everything, and we want to make sure it goes out completely bug-free and stronger than the existing site. In the months ahead, as we launch that, you don't have to register to attend an auction. You can jump in, watch an auction.
You learn much more about our business when you see the vehicles sell. We sold a Ferrari, an F50 Ferrari, last, what, two weeks ago, something like that sold for $455,000. We put a video of it up on YouTube. It got over 100,000 views. You can just type in Copart F50 Ferrari, you can find it. It's really easy to find. You can watch the auction. We posted the auction up on YouTube as well. That kind of stuff where the visibility of what we do and then being able to come into our site and actually watch auctions and not have to register. That registration process for people can be a pretty big barrier, and we've eliminated that. That's just one example on the new site. If you go back a year ago, we didn't have auction access on our mobile site.
Today you can watch an auction from your phone. Over 10% of our auctions are attended via mobile. Those are some big numbers when you think about what we're selling every day, how many people are attending. Over 10% of the attendance is coming in through the mobile platform as opposed to the web. Those are just improvements that we think are going to be a big deal going forward, Craig.
Thank you. Final question, just on the international strategy. It's my understanding your business really tends to flourish once you've achieved enough scale, like in the U.S. and the U.K. On your more recent international investments, you've got, let's say, sub-scale investments in Germany, Brazil, Spain, Dubai, Canada. Why spread it out like that instead of consolidating and really getting that scale that tends to drive that better economics?
Well, we've got the teams to do it. We've been investing in bringing people on over the last 4 years so that we'd have the personnel to expand into multiple markets. We've got the cost associated with it, there's no question about it. We look at that as short-term pain, long-term gain. We'll have some of that expense that we're carrying while we are in markets without enough scale. I think your point's well taken. We will then start to build scale in those markets, and instead of having one market come on and then go to another, we'll have four markets coming on, and then we'll expand from there into multiple markets. We just feel like it's, in the long term, a much better strategy to getting across the globe.
Great. Thank you, Jay.
Yes, sir.
Ladies and gentlemen, just a reminder, it is star one if you would like to ask a question. We'll go next to William Armstrong with C.L. King & Associates.
Good morning, guys. Most of mine have been answered. Could you remind me, do you disclose same-store sales anymore?
No, we didn't. Same-store sales are up 7%.
Up 7%? Okay.
In North America. Yes.
That's just North America, not the U.K.
That's Copart U.S.
Got it. Okay, thanks.
You're welcome.
Gentlemen, with that, there are no other questions in queue.
All right. Thank you, Debbie. Again, thank you everyone for attending the call. We look forward to talking to you next quarter when we report on the second quarter for Copart. Happy Thanksgiving, and we'll talk to you then.
Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day.