Good day, everyone, and welcome to the Copart Incorporated 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 Incorporated. Please go ahead, sir.
Thank you, Debbie. Good morning, everyone, and welcome to the Q1 conference call for Copart. Before I start, I'll turn it over to Will Franklin, our CFO for Safe Harbor Statement and then we'll go ahead and give you an update on operations and some G and A and other factors before Q and A.
Will? All right. Thank you, Jay and 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 ks and other SEC filings. With that, I'll turn the call back to you Jay for initial comments on
our Q1's results. Thank you, Will. Well, good morning again. As we talked about in the Q4 of the year, Copart completed the acquisition of Quad Cities Salvage Auctions, QCSA, and had our 1st full quarter in the Q1. So I want to jump into some of the increases that you've seen in both G and 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 and A. We finished Q1 with $38,500,000 in G and A expense as opposed to $27,300,000 for the same quarter a year ago. That's an increase of $11,200,000 That $11,200,000 is basically divided into 3 buckets. International is up $1,700,000 and 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.
On the 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 4,700,000 dollars This is associated with our move, 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.
And with it comes a brand new website, with it comes a mobile application, and we are continuing to work on a new operating system that will run the company. That has been delayed. So we are currently really have 2 things that are going on. We've got new systems. Let's use our Web eventually, when we finish that transition, we'll be down to 1 system for the web, 1 system for mobile, 1 system for operating the company and that will eliminate costs.
The other big factor that we have is the move out of California. So in this last quarter, we started transitioning folks from California into Dallas. And by the Q2, 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.
And so there are a lot of expenses associated with severance and moving, etcetera, in the quarter. Will 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 point $7,000,000 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 3rd bucket.
We had G and A of 4.6 $1,000,000 The majority of this will be eliminated as we start the integration. So when we purchased QTSA, we committed to our customers that we would not begin an integration for 6 months. In the Q2, we will be implementing the integration of the company. And so the vast majority of that $4,600,000 will be eliminated as we integrate the company. There are also one time costs that are in there that Will will talk about as well.
And 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. But we're very confident at this point that there will be no further integration of QCSA in fiscal 2015. So from August 2014 on, we'll be done with the integration of QCSA and there will be no more costs 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 $41,000,000 in revenues. Revenues for the quarter finished at 279,900,000 up to $41,000,000 $17,200,000 of that was revenue associated with QCSA. There was literally no margin brought down to the bottom line on that $17,200,000 So the fact that we are 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. So those vehicles will be going to facilities that are maybe 5 miles away from the car instead of 100 miles away. So you're going to see, as we talked about on the G and 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. So 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 and A. I did want to mention that we acquired one auction facility in Montreal, Canada recently.
We now have 5 locations in Canada. And with that, I'll turn it over to Will 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 $41,000,000 Purchased car revenue grew by $9,800,000 The Spain and QCSA acquisitions both of which closed in our Q4 of last year contributed $6,400,000 to that growth. Purchased car revenue in the U. K. And the U.
S. Grew by $2,100,000 $1,300,000 respectively. The increases resulted primarily from the growth in our direct purchase program. In this program, we purchased cars primarily from the general public and resell them for our own account. Service revenue increased by $31,200,000 The increase resulted from growth international operations, which included acquisitions last year in Germany, Spain, the United Arab Emirates and Brazil.
These totaled approximately $4,100,000 growth in the U. K. Of approximately $500,000 our QCSA acquisition of 12 $200,000 and growth in Copart U. S. Of $14,400,000 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 art operations expenses were up $27,900,000 The growth came as a result of our international expansion, the QCSA acquisition and its associated integration cost, which totaled approximately $9,100,000 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 costs. These costs will continue into our second, third quarters of this fiscal year. General and administrative costs grew by $11,200,000 over the same quarter last year.
The increase was due primarily to, as Jay mentioned, the additional costs tied to our international expansion, which totaled $1,900,000 and will continue. A $4,600,000 increase associated with the QCSA acquisition, of which $1,100,000 was lease and employment termination costs. These restructuring costs will continue into our second and third quarters. We expect the QCSA general and administrative costs to be approximately $1,500,000 per quarter when fully rationalized and additional spend and technology of approximately 4 $700,000 of which $1,500,000 was tied to relocation of our technology group from California to Texas. These costs will also continue into our second, third quarters.
Also included in the 4 $7,000,000 increase are an estimated $1,500,000 in transitional or duplicative costs associated with SAP rollout and the outsourcing of our technology infrastructure and level 1 support. These costs will continue into next fiscal year. In total, we incurred approximately $2,900,000 of severance lease and relocation costs that are reflected in our G and A. We ended the quarter with over $77,000,000 in cash. We expended $21,600,000 for capital assets, capitalized software development costs and the buyout of 1 lease.
During the quarter, we had no open market share repurchases. We have almost $48,000,000 shares remaining in our current repurchase authorization. That concludes my comments. We'll turn the call back over to you Debbie for the Q and A session.
Thank you. Ladies and gentlemen, our question and answer session is conducted electronically. We'll take our first question today from Robert Labick with CJS Securities.
Good morning. Congratulations on a strong sales quarter.
Good morning, Bob and Bob.
Hi. I wanted to start with sales. Both this quarter and last you discussed that total inventories are up about 20%. And 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?
And how is 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?
Yes. 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. That 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.
So, if we want to think about real inventory growth, it's probably closer to the 10% number.
Okay. Great. Well, I mean that's still obviously a fantastic number. And 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 just I think it's important to understand the 20% number. We got all the costs associated with that inventory build. So 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. So that will be the improvement. And 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 5 years ago. New car sales have been down for the last 5 years. They're now starting to trend up. But all those factors, as we talked about back in 2009, if you recall and some of those conversations back in 2009 after the 2008 crash of the market, when we talked about 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. So the overall market we believe is just expanding.
Okay, great. And then on the QCSA side, revenues were strong in the quarter certainly versus I guess what we're looking for there. And 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 arts you might keep of theirs if they're in the right places?
Sure. Well, we're not going to be breaking out QCSA in every quarter just so you know. The integration will start this quarter then into Q3 and we'll just be talking about revenue. This is a you can see it's $17,200,000 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. The one I talked about on the call was towing. Another one would just be all the duplicate facility expenses. I mean, they're running over 20 facilities that are right next door to our facilities or I shouldn't say next door, but in the same markets as ours. So 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. So there is that component. We've learned from both sides. They had some technology functions that we've now integrated into our company and we'll be launching at the integration on our website for our sellers.
So 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. And then 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 toes.
We've got a much larger buyer base by a much bigger factor. So we expect higher returns on those vehicles as they get integrated. So 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. So like I said, the technology piece.
So really happy about it. I mean, I think I really 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, 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. The first question is just a point of clarification in terms of the revenue sorry the inventory build. Are you guys seeing more pressure from are you guys seeing more pressure from insurance companies to pick up vehicles more quickly to save them cost of the in paying pound yard?
Well, that's always been the case. So we teased because 20 years ago, it was the standard was 4 day pickup. And today, they want 24 hour pickup. Now they push for same day pickup. So yes, we're always seeing push towards that and we've been able to improve year after year on cycle time.
And I suspect there's a point where you can't improve anymore, right? You can't do it in 0. So at some point, we'll stop seeing that improvement. But with technology, it's allowed us to improve even further. So 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.
So that's we're always going to see a need for that because yes the impound yard is a big expense.
Okay. That's very helpful. And then 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?
Yes. We don't talk about pricing on calls, John. So
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 low, I mean, partly due to the REIT situation I would imagine and then maybe QCSA.
But going forward, I mean, do you see yourself going back into the market to repurchase a fair number of shares?
Yes. Well, we don't talk about share repurchase on calls either. You're 0 for 2 there, buddy. No, we don't talk about share repurchase. We 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. But 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. So 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 has been declining as you continue to make contractual payments on your debt and your earnings expand?
Well, yes, 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. And 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, Thanks. And could you maybe just give us an update on your international operations outside of the United Kingdom? So, how have some of your recent acquisitions been tracking relative to original expectation for example in Brazil or United Arab Emirates?
Yes. 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. So 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. And so 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. So we're happy about what's going on internationally. It's good stuff.
I see. And so 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? Or 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. And in other markets, there are still acquisitions to be made and we would be open to that.
Okay. And then last question just more housekeeping. At what time do you expect the QSA margins to be up to the Copart levels? And what are the steps that remain to get there? Thanks.
Yes. Q4, we're going to be integrating 2nd and third. The margin should be up to par 4th quarter. And as I said on the call, there'll be some carryover from expenses in the 3rd quarter that could go into the Q4. But if you take that non recurring factor out, we'll be there in the 4th.
It comes Q1 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 and T Capital Markets.
Good morning.
A couple of 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?
Yes. Sure. I won't give you the actual numbers. The toys is better than salvage because they tend to be higher sale price, higher margin units, charity or less than insurance. So 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.
Then you'd move down into damaged vehicles. Then 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. And then a question on the market share comments. I mean, I guess, trying to figure out what real inventory growth is versus share growth versus the underlying 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. The quite a few of the large suppliers, large insurance companies have made a decision to go with 2 vendors or 3 vendors and eliminate doing business with 17 vendors as an example.
So this is the outcome of the RFP process we saw a year or 18 months ago?
Say that again?
So this is the result of the RFPs that we were seeing 12 or 18 months ago.
Sure. And we're always looking at RFPs. I mean that's pretty regular. But there was a pretty major shift in the last year that pushed a lot of business towards 2 or 3 suppliers or auctions and eliminated where they eliminate doing business with some of the smaller players that are out there. The other side is just as we said the markets the industry is expanding.
It's getting bigger.
Right. And 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. Most of both.
Okay. And one last question. Your next Board meeting is that the mid December? I guess, as really the proxy, it looks you may be extending your dollar a year contract. Is the next meeting the 16th for the Board?
No. 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 are you doing? Good morning, Gary.
Well, did you give a total volume number for the year for the quarter year over year that you were up? Or do you ever give that number?
No, I didn't. I gave the U. S. And I gave U. K.
Separately. Okay. Because
and then just a lot of questions have been answered, but just can 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 cliff. So maybe you could talk a little bit about that?
No. I mean, you're spot on. I mean, that's exactly what's happened and they've continued to be able to improve that part of the business. And I anticipate that will 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 6th year that we've had a dealer division and a direct division. So 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?
Yes. We don't break out volume, Gary, but we do break out the percentage of the business. So as you said, it's about 20 percent.
Okay. And how many dealers are you dealing directly with now? Can you tell us that?
Oh, 1,000. I don't know the exact numbers, 1,000 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. Just a 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?
We are. We're yes, 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. So rest assured in 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. And then 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, but I did talk about them on the last quarter. But it's double digit growth year over year in people attending auctions and auction attendance. It's double digit growth in new registrations. So 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. And the new site, which is currently beta and we'll 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. But so in the months ahead as we launch that, you don't have to register to be attend an auction. You can jump in, watch an auction.
And so you learn much more about our business when you see the vehicles sell. We sold a Ferrari, an F50 Ferrari last, what, 2 weeks ago or something like that, that sold for $455,000 We put a video of it up on YouTube. It got over 100,000 views. And you can just type in Copart F50 Ferrari. You can find it.
It's really easy to find. And you can watch the auction. We posted the auction up on YouTube as well. So 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 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. So today you can watch an auction from your phone. Over 10% of our auctions are attended via mobile. And 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.
So those are just improvements that we think are going to be a big deal going forward, Craig.
Thank you. And then 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. But on your more recent international investments, you've got, I'd say, subscale 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. But 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 and I think your point is 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 4 markets coming on. And then we'll expand from there into multiple markets. So it's just we just feel like it's in the long term a much better strategy to getting across the globe.
Great. Thank you,
Chaim. Yes, sir.
We'll go next to Bill Armstrong with C. L. King and Associates.
Good morning, guys. Most of mine has been answered. But could you remind me do you disclose same store sales anymore?
No, we didn't. But same store sales are up 7%.
Up 7% okay.
North America, yes.
That's just North America not U. K?
That's Copart U.
S. Got it. Okay. Thanks.
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 Q2 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.