Earnings Call: Q4 2013

Sep 25, 2013

Good day everyone, welcome to the Copart, Inc. Q4 Fiscal 2013 earnings call. As a reminder, today's call is being recorded. For opening remarks and introduction, I would like to turn the call over to Mr. Jay Adair, Chief Executive Officer of Copart, Inc. Please go ahead, sir. Thank you, Elizabeth. Well, good morning everyone. Welcome to our fourth quarter call. As many of you know, we have a process where I'll turn it over to Will to go through a brief disclosure and then update for comments financially, and then turn it back to me. I'll go through my comments, and then we'll open it up for Q&A. With that, it's my pleasure to introduce William Franklin. Thank 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 result 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. Now, I'll begin with a few brief comments on our fourth quarter financial results. Total revenue grew by $37.1 million. Purchased car revenue grew by $11 million and was driven primarily by growth in purchased car activity in the U.K. and from purchased car activity that came to us with the QCSA transaction. In the U.K., we introduced a program similar to the Copart Direct program, which we have in the U.S. In that program, we buy cars primarily from the general public and resell them for our own account. Service revenue increased by $26.1 million. The increase resulted from growth in our international operations of approximately $4.1 million, our QCSA acquisition of approximately $8 million, and from growth in volume in Copart US. The growth in volume in Copart US came from both market share gains and overall market expansion, as we have seen an increase in salvage frequency. In Copart US, the growth in volume was offset by a decline in revenue per car, driven by the decline in used car pricing and a change in our supplier mix. Charity cars were a larger percentage of our sales volume, and charity cars generally have a lower than average selling price. In Copart US, volume grew by almost 8% and was driven by growth in cars from insurance suppliers. Non-insurance volume represented 19.4% of our total Copart US volume. Yard operations costs were up $21.4 million. The growth came as a result of our international expansion, the QCSA acquisition and its associated integration cost and inefficiencies, the growth of Copart US volume, and the growth in Copart US inventory. Copart US inventory was up 20% on a year-over-year basis. General administrative costs grew by $9.4 million over the same quarter last year. The increase was due primarily to additional costs tied once again to our international expansion, which totaled $1.9 million, additional costs associated with QCSA expansion and acquisitions of $4 million, and additional spend on technology of approximately $2.9 million. We ended the quarter with over $63 million in cash. During the quarter, we made four acquisitions. We expended $52.8 million, and we assumed $21.6 million in long-term debt in connection with those acquisitions. The debt was paid off simultaneous to the close of the transactions. In addition, we expended $16 million for capital assets and capitalized development cost. During the quarter, we had no open market share repurchases. We have almost 48 million dollars shares remaining in our current repurchase authorization. That concludes my brief comments. I'll now turn the call back over to Jay Adair for further comments on our quarter's results. Jay? Thank you, Will. Good morning, everyone, again. I've got basically 5 topics that I'll be going over this morning. I'll briefly talk about the inventory build, the acquisitions made in the quarter. Specifically, I'll talk to QCSA and the integration of that acquisition, timing and expectations that we have for the future, financial performance, our announcement on the REIT, and our new website that we launched in the quarter. As Will stated, inventory was up 20%, and with the new accounting rules, we have the expense, we have the cost of that inventory build. In years past, we would defer those costs, and we can't do that today. Some of the results of the quarter are associated with that large inventory build in the quarter. We expect that those vehicles will be sold off in Q2, primarily, and maybe a little left over in Q3. I wanna caution the fact that we continue to build inventory. We've seen quite a bit of new business that's come in in the last 6 months, both domestically and internationally, in fact. The international business didn't affect the inventory build in the fourth quarter, it will affect the inventory build in the first quarter that we're in now. As Will stated, ASPs are off slightly, and we see that now trending up a little bit. It's now trending up slightly. We don't think that that will continue as we go into the winter. Historically, we will see ASPs tend to increase as there's more accidents and more total losses will take place with a typically better quality product and a higher ASP going in. In terms of average selling price, Q4 will probably be the low end of what we'll see compared to Q1 and Q2. As you all know, there's a natural hedge that exists in our business, and that as ASPs fall, units go up, and the inverse of that when the ASP direction changes. Wanted to point that out on inventory build for the quarter and then move into the acquisition of QCSA. We completed the acquisition in May. We made it real, made it real clear to our customers that we would not make any changes for six months, which will take you basically into the end of this calendar year. We are right now looking at all the areas that can improve the company, and I'll talk about that some more a little later here in the call. Because of that decision, we've got all the costs, both operationally and G&A, associated with QCSA. For example, on the ops side, we're towing vehicles 100 miles past one of our own facilities that maybe is 20 miles away. Those types of expenses, personnel costs, facility costs, additional facilities that we have opened that we don't need, because they're duplicate locations. On the G&A side, we've got a whole myriad of duplicate costs associated from accounting, sales, marketing, HR, IT, legal, everything that you would imagine that exists in a company that has to run independent. When this company merges with QCSA and we do complete the integration process, there'll be a number of savings that exist both on the ops and G&A side. Finally, I would mention there's a ton of increased costs associated with the acquisition for Copart as well. We are holding very frequent meetings right now with the whole company, working on the integration plan, setting everything up. We didn't wanna make any snap decisions. As we are gearing up for that integration, there's a lot of cost that's associated, both on the G&A and on operational as we build those plans and prepare for that integration. It has had an effect on financial performance, which is pretty obvious. You can see that in the quarter, with all these costs that are associated. We expect the integration to begin in the second quarter. We are currently in the first quarter. First quarter ends October. We expect the integration to begin in the second quarter, and we expect to have that integration completed by the third quarter. This delay of integrating the company obviously has added a lot of cost, but on the positive side, it's allowed us to really evaluate best practices for the entire company. What are things that QCSA does better than Copart? What does Copart do better than QCSA? We want to map those improvements across the entire organization. We've also brought a fantastic management team to the table. This is a management team that's competed with us and our competitor for the last decade. There are some people that have some really, really strong skill sets when it comes to operations, when it comes to relationship management, when it comes to just really reviewing the process of making salvage total loss decisions. We've got some people that we'll be bringing into the team or that are with us now, but we'll be integrating them into the company, into some roles that will be significant, material roles that will impact us positively going forward. Finally, I just mentioned that we are gonna keep some of the locations. We don't know exactly what that number is today, but we will probably end up with a half a dozen new locations that will just make our network that much more robust and improve our ability to reduce towing. I just very quickly, I would state, I'll use Davenport, Iowa, as an example. If we are towing that market today from a yard that's considerably far away and we can add that location, it reduces our towing costs as well as the example of shutting down one of their locations and towing them into our facilities reduces their towing costs. It really affects both of us. We can do that in both cases. Looking forward, we think that our margin improvement and our financial results will improve in Q2, that will start in Q2. I wanna caution the fact that Q2 may have some leftover write-off expenses. I anticipate Q1, the quarter we're in now, having some write-offs, some non-recurring expenses associated with the integration of QCSA, and that as we complete that, we'll be announcing that at the end of Q1. There may be a little bit of a tail left over in Q2, but Q2, we'll start to see the improvements of reduced costs and improved revenues from the integration of this company. That will extend into Q3, and we expect the operating results to be completed in Q3, but there may be a tail. Again, I'll just caution the fact there may be a tail into Q4. Integrating companies is something we've done many, many times. We've made 4 acquisitions in the quarter, and the other acquisitions we made domestically are already integrated into the company. We will integrate this. It's just there were so many locations and so much volume that we wanna take our time, and again, as I said, take a look at best practices and make sure that we make the right decision. I feel very confident that the integration will take place in Q3, but it may be a little bit of tail results that you'll see in Q4, but that will complete us for fiscal 2014. Fiscal 2014, we expect to have all this integration finished. On the REIT, you saw the announcement in the press release. We spent a year reviewing this. There were a number of factors that the board considered. We retained a number of outside experts. Obviously, a key factor was the board's assessment as to how the IRS would view Copart's business. We spent quite a bit of time thinking about our business, how we felt it fit within the REIT regulations, and how the IRS might look at it. As you know already, the IRS has been scrutinizing proposed REIT conversions more closely, and that's come out in the news in the last 6 months. Ultimately, the board decided that we should focus on our business and not pursue becoming a REIT at this time. Finally, I'd like to comment on our new website. We launched the new copart.com in the fourth quarter. It's a completely new look and feel. There are over 100 major changes that the new site offers that our old site does not. I would just like to focus for a minute on 3 changes that I think are a really big deal. First one is our new third-generation bidding technology. We launched VB2 in 2003. This year marks the launch of VB3, our third-generation technology. I wanna encourage you to go to the new website, check that out. Already what we're seeing is auction attendance is up. We have designed it in such a way that it's available to non-members, so you don't have to be registered. On our current website, you have to be registered to watch the auction. You have to sign up as a member. On the new website, you do not. We allow for unlimited auctions, and it's all browser-based. It's not Flash. It's not a Java applet. You don't have to layer them up on your screen. Allows you to roll your browser up and down and look at 20, 30, 40 auctions running at one time. What will be coming subsequent to this third-generation technology is probably the most exciting part. The old technology was very static. We had the same amount of time countdown per buyer regardless of the buyer. The new technology will allow us to adjust that, become more dynamic, and adjust the time that we count down per buyer based on their bidding habits. It'll allow us to put sounds and information and to really cue in on the visual. Check it out. I think, you know, seeing is believing. If you look at the new technology, you know what I'm talking about. The next thing I would talk about is photo browsing. Photo browsing is something that we all do. The experience on our old site is not what I would call standard in the industry today. You're all very familiar with how you browse photos, whether you go to Facebook as an example. You, you walk into Facebook, the way that you look at the images, that you cycle through the images, we have gone down the path of making it just like what you would expect in the industry. This is very important because our buyers spend enormous amounts of time looking at inventory. Now a member or a buyer can come to the site and browse those images much quicker, see that information, and the layout of the site allows us to expand the types of images that we'll be showing in the future. That is very exciting as well. Finally, I would just say that once you are a member and you sign up, we give you now a completely customizable dashboard. It's all widget-based. You can set up, I wanna look at sale list first, or I wanna look at my watch list first, or I wanna see what lots are won or what lots I have to counter. All that is set up in the order that the member wants, not the order that Copart wants. It's not what we've decided. It's what they've decided. They can put the things that are most relevant to the top of the screen and adjust everything from news information and weather information to watch lists and lots coming up for sale. The new website will be replacing the old site in the near future. I highly encourage you to check it out. That will, again, as we talk about the integration of Quad Cities in Q1, Q2, Q3, Q4, you'll be seeing us move to that new website as well as further improvements to the website and our mobile bidding platform. Really good stuff there. All right. With that, I'd like to open it up for questions. Elizabeth, if you would. Thank you. We'll go first to Bob Labick with CJS Securities. Please go ahead. Good morning. Good morning, Bob. Good morning, Bob. Hi. Thanks for the details here. I wanted to just dig in a little bit more, starting with yard and fleet. You know, the increase in the quarter, you mentioned obviously the increased inventory. Is that 20%, including QCSA, or what's the organic number on that? No, that's not including QCSA. That's just- That's for Copart. Wow, okay. That's fantastic, obviously. Are there, you know, any unusual, you know, Hurricane Sandy expenses in there or anything else? No, most of those have already flowed through. Okay This is just primarily the inefficiencies, that are associated with the integration of QCSA and QCSA itself. Right. Okay. Can you give us a sense, or is it too soon to know, you know, roughly a year from now, how much can be pulled out once you fully integrate both companies? I caution giving that kind of, you know, view on it. I would say this, our expectations are that the margins will be similar to the margins of Copart, so that we'll convert that revenue to a historical Copart margin, not what you're currently seeing. Okay, great. Just to kind of stick on the margin side, just wanna, you know, verify one thing, which I think you've been saying, but has there been any material change in the, you know, revenue model, the pricing outside of commodities of course, or the, you know, cost to process cars? Is the, you know, near term gross margin decline, you know, the identifiable factors we've seen, the international and the integration and things like that? No, there's really been no change in the overall model. I mean, we've seen a little bit of cost creep up in the cost to process cars. Tow costs have not come down after Sandy. We've had a little bit of increase in the costs associated with title processing. The state of Georgia is now charging us $75 per car to convert a title from a clean title to a branded title. We're seeing a little bit of- That, I would just mention that is pass-through, though. That's pass-through. It's part of revenue, but it's pass-through at cost, basically. Right. We're seeing a little bit of creep up in the cost to process a car. Other than that, there really has not been a fundamental change in the model. You know, our ASPs tend to fluctuate with used car pricing, commodity pricing. You know, we tend to look at the Manheim Index, and there's a few indexes that we focus on for our commodity information. That, as Jay said, that trend was trending down through July and it seems to have come up a little bit in August, and that's what we're seeing in our auction results. Okay, great. One last one, and I'll hop out. In terms of capital expenditures, sometimes you'll talk about the opportunities in the next, you know, 12, 18 months out there. Are you seeing more international opportunities on the near-term horizon? What are the opportunities in the U.S. for CapEx? Yeah, there are opportunities out there. I won't talk specifically to them. We will make some acquisitions in the year ahead, but our focus this year will be clearly on completing the integration of QCSA, completing the migration from California. That will be completely done this year, this fiscal year. We've got some technologists that will be moving out in the next 2 quarters. Really, fiscal 2014, if you will be very much focused on fully integrating and completing the move. I think we talked about Project Overdrive, couple of years ago, and completing Project Overdrive, which is the move to Texas and a number of moves in addition to that, and then completing QCSA and implementing new technology, the website, the mobile platform, and an internal system that we're implementing as well. We wanna get all those done, and then we'll get, I would say, more aggressive on the acquisition front. Great. Thanks very much. Welcome. You're welcome. We'll take the next question from William Armstrong with C.L. King & Associates. good morning, Jay and Will. Hello, Bill. In G&A, Will, you know, pretty much outlined some of the major buckets of the increase year-over-year. Maybe could you tell us, you know, how much of that $9.4 million was non-recurring? How much, you know, might be ongoing? Yeah, I mentioned the cost associated with QCSA and the deals, and that was about $4 million. You know, we'd expect to rationalize most of that cost. The timing on that, like Jay said, will be during the course of this year, and I wouldn't be specific about when that will come down. I would expect most of that to disappear. O-okay. I would also, Bill, I'd just comment on technology. We are in the middle. We've talked about it before. We try not to keep bringing up the same points over and over, but we are in the process of making some major technology changes. We do have duplicate costs today with technology that won't exist in years ahead. Understood. With QCSA, I think you acquired 39 locations in total. Did I hear you say you're at, you know, at the end of the day, you'll end up keeping about half a dozen of them, you know, somewhere in that neighborhood? 6 on the salvage front, and then there's another 6, 7, 8 facilities on our DVA side. You have to add both those together. It would be somewhere around 12, 14, 15, somewhere in that range. We have not completed the integration plan yet. As I said, we're not gonna be implementing that plan until Q2. We haven't completed it, we haven't made a decision, but I would say somewhere between 12 and 15 stores is where we'll end up. Okay, got it. You know, at the end of last quarter, I think you still had about 10% of those Sandy, Hurricane Sandy vehicles still remaining. How much did those contribute to revenue and gross profit in the fourth quarter? Very little in terms of margin. Let me get that number for you. That's about less than $10 million in revenue. Less than 10? Yeah. Okay. Okay, great. Thanks, guys. Less than $1 million. Less than $1 million. I'm dizzy off, yeah. Less than $1 million- Oh -in revenue and very little gross. Oh. It's a lot less than 10. Okay. Exactly. Okay. You're making Will calculate on the fly here. Yeah. He's over here punching the calculator on the call. Sorry, I didn't mean to cause any stress. Thank you very much. You're welcome. We'll go next to John Healy with Northcoast Research. Please go ahead. Thank you, guys. Wanted to ask a little bit about your expectation for how inventories will continue to build. Based on the share you've won with customers and the conversations you're having with the insurance companies, assuming accident rates kind of remain stable from here, how long will we continue, do you think, to see this type of inventory build? Is there a point of this year where you think, you know, your sales of vehicles start to supersede kind of your inventory build, and at that point, we'll really see kind of a step up in the gross margins? Maybe when do you think that might occur? Well, it's a tough question because if you'd have asked us at the beginning of the fiscal year last year, the beginning of 2013, if we thought inventories would be building in the fourth quarter of fiscal 2013, I'm convinced we wouldn't have said yes. I'm convinced we wouldn't have thought we'd see this kind of inventory build year-over-year. It's unknown. It's just you're sitting with a dynamic today where vehicles are getting older. As we talked about on calls before, as vehicles get older, the likelihood of those becoming total loss goes up. Of course, that has a negative effect on ASPs, that's why I said in the call, we've seen ASPs now we think hit the low trough in the fourth quarter. They seem to be coming up in the first quarter, and we anticipate that'll happen in Q2s two and three. It's really tough to give you an exact number. I don't know if you've got something you'd want to add to that. Well, I think there's two elements to our inventory build. You know, one is just we're processing more volume. That's, I think, what Jay's talking about being unpredictable. If we continue this growth, then inventories will continue obviously to build. The other is the insurance companies have really not caught up after Hurricane Sandy in their cycle time. Part of the reason that inventory is built, and I'd say it's less than 10% of that, or excuse me, less than half of the 20%, is due to the insurance companies delaying their cycle time, and they're starting to catch up now. We're gonna see, I think, the inventories start to come down over the next few quarters. On a year-over basis, I wouldn't see them coming below the 10% growth. That makes sense. I'd be interested in your thoughts in terms of salvage frequency. You know, you make a great point there, Jay, with the average age of the vehicle, and you know, that coupled with the used car market moderating a bit. Where do you guys believe that, you know, or at least when you speak with insurance companies, where do you think salvage frequency could potentially go over the next, you know, two years? Well, I wouldn't know how to predict that. If you It's really the movement between a number of different variables. You know, repair cost, used car pricing, and auction results. You know, depending how those three elements move, that has an impact on your salvage frequency. When I started, it was about 10%, today it's over 15%. As Will just stated, it, you know, part of that is we're seeing a different return on salvage today than we did 20 years ago when it was just live auction. Now with the advent of the internet and that. Of course, with the advent of repair costs, you know, with the advent of safety, airbags, and all those types of safety elements, they raise the repair cost. My instincts are the trend is up, not down. That might help you. I don't know if it's gonna end up at 20%, or not, but my instincts are the number will continue to rise over time, not go down, just because all the elements from returns to cost of repairs seem to be going in an upward direction. No, no, fair enough. I appreciate that. Just final question. you know, I know with the item on the table this year, I don't know if it's coincidental, but, you know, you guys had historically been a very, very consistent repurchaser of your own stock, and I was just kind of curious how you guys look at share buyback and, you know, maybe with, you know, the business looking really well and maybe these strategic things financed out a little bit more. How do you view that as an item on the priority list? We've always been consistent about not laying out when we're gonna buy stock or not buy stock back. I think it's pretty obvious why we didn't buy stock back with the acquisitions and the cash we used in the quarter. You can see how much cash we finished the quarter with $60 something million in cash. We're not sitting with a, you know, we weren't sitting in a position without taking on more debt to bring out a lot of cash. If you look in the last year and a half or two years, we've taken the debt from roughly $500 million to below $400 million. We're slowly paying off the debt and, you know, I would say being very pragmatic about when we wanna buy stock back and using cash for buying companies when the opportunity exists. Okay. Thank you. You're welcome. You're welcome. Our next question comes from Bret Jordan with BB&T Capital Markets. Good morning. A couple of quick questions, and I guess one relates to inventory growth. Is there anything, I guess, just sequentially last quarter inventory is up 16%, and now we're up about 20%. Is there any inflation in the inventory cost that isn't, that you can't pass along? Is inventory somehow becoming less profitable? I guess you talk about title value or tow prices going up. Is there any change in the cost of inventory acquisition that we're seeing sequentially? Well, the inventory numbers that we've quoted are simply units in inventory. Right. I'm just wondering whether the units are coming to you at a higher price. No, I mean, You mean the cost to process them? No. Right. Jay alluded to the change in accounting treatment. The way the accounting works is we actually recognize a loss every time we put a unit in inventory. Right. Yeah, is the loss greater than it was previously, I guess? Is there some different profit profile on the inventory? No, I would say no. I'd say it's up slightly. Yes, it is up slightly. Okay. Is that something you can pass along, I guess? I mean, you build that into your outbound or? I would say that it's very slight. The increase that we're seeing is, I wouldn't, I wouldn't be too alarmed by that, let's put it that way. Yeah, no, it's not passed along. It's simply, you know, once you're finished, it's part of the total transaction. Okay. It's just a matter of timing when you recognize all the revenue and all the expenses. Okay. I guess on the tech investment, I mean, we've been dealing with some ERP and some spend there. If you could sort of refresh us on our quarterly spend and sort of how long we expect to be spending incrementally more on the technology. Also, is that going up because we're now spending on adopting the same processes within Quad City? Well, I'll let Will talk to the numbers. With respect to adopting the same process, we are there are some things that we're adopting in Quad Cities, but I don't think they add expense. There are some coding changes that we'll be making, then they exist in our process forever, you know, going forward. Then there's some operational process that has nothing to do with technology that we'll be adopting. I don't see anything there that's an issue. Yeah, the technology First of all, two things, then Will can talk to the numbers. The technology change has been a big undertaking. You're talking about, you know, brand-new operating system, brand-new mobile platform, brand-new web site. We do a 100% of our business online. We're a 100%, you know, web and mobile transacted company. Talking about major changes. With that said, they've taken longer than we expected them to take. Candidly, they've cost more than we thought they would cost. We're dealing with that, and we're gonna get that dealt with. We're gonna get that where it's completed. We'll be ratcheting down expenses. I doubt it'll happen in fiscal 2014, but in fiscal 2015, we expect to be seeing improvements in G&A and lowering costs because we've got a number of duplicate costs that exist on the technology front. Yeah. We basically have two projects in that we're pursuing at this point. One is the transitioning from insourcing our infrastructure and our support to outsourcing that. We've got two data centers, one in Reno and one in Las Vegas, packed full of computers and servers. We're in the process of outsourcing that as well as the support that goes along with the operation of the NOC. The other is the transition from our operating platform, which internally we call CAS, to SAP. We track on a quarterly basis the extra costs we have that we wouldn't have but for that transition. Like Jay said, it's a continuing project, and so we've stopped calling them out. For last quarter, it was $1.9 million. We're going to have that transition cost throughout fiscal 2014, and they should abate sometimes during 2015. Okay. Then I guess one last question, sort of trying to get a core number ex the Quad Cities deal or could you give us at least a feel for maybe what the Quad Cities revenue run rate was? I mean, it sounds like we're gonna be culling a certain number of the physical sites, but do you expect to keep the sales that were associated with those? Then I guess as you comment in the press release on expectations for operating margin contribution in the second half of 2014, is that you expect them to be accretive to your aggregate operating margin in the second half, or you just expect them to generate a positive operating margin in the second half? I'm not sure what the difference is. They'll generate operating profit margin in the second half. When you measure, we called out their revenue. Right in the press release, $7.2 million. Right. I'm trying to get a feeling for an annual run rate on that revenue. Is it because that clearly was not a full quarter, and you're changing the physical structure of the business a little bit. Just trying to get a feeling for how big Quad Cities looks to you now. Yeah. Well, we bought them the end of May, so that was basically two months. Right. In terms of the ultimate contribution from Quad Cities, it's impossible to tell you. I can tell you, what we do know is if we had taken their volume and layered it over Copart's model, simply added it to it would have added at least $5 million of EBIT. Okay during the quarter. We're not gonna get all that. I'm just saying if that was incremental volume to Copart, it'd be well over $5 million. Right The ultimate yield on this acquisition is gonna be somewhere between that and obviously where we were in the quarter for them, which was negative $3.5 million. Hopefully, we're close, much closer to Copart. Okay. Great. I appreciate that. Thank you. Our next question comes from Ryan Brinkman with J.P. Morgan. Hi, this is Samik here on behalf of Ryan Brinkman. I just wanted to run through the your decision of not pursuing a REIT conversion at this point. What can you just shed some light on what the likely motivation was for that? Was it to preserve capital towards growth investments, or was the benefit not adequate to pursue such a conversion right now? No, I really don't have a lot of comments on the REIT. We have an investor that did an analysis and came out with a report that said that they felt that the company could be a REIT from their analysis that they did on the outside, not looking at the inside of Copart. We hired advisors to come in and review our process and report that to the board. The board felt that it didn't make sense to pursue becoming a REIT. That's really all I've got to say about it. Okay. Okay. When I think about the acquisition costs, that you, just costs related to the acquisition that you've incurred in this quarter, and looks like you're saying it starts to sort of go down starting from Q2. Does it actually go up in Q1? Does it sort of remain at a similar amount in Q1? I think Q1 is gonna be similar. I think we were really not gonna see the benefit of what we have in place and what is getting on now until, like Jay said, towards the end of Q2. Right. In terms of the cost towards the inventory build that you referred to, and you're expecting sort of where your inventories are up 20% year-on-year right now, they sort of go down to up, being up 10% in the, maybe in the first quarter or second quarter. Does that give you a benefit on that cost of inventory build, and can you sort of quantify that, how much that will be on a sequential basis? No, I can't quantify because I don't know how the inventory will move. I can just give you in general terms. When inventory goes down, our margins go up. That's simply because we recognize a little bit of the revenue associated with the total transaction up front, but the majority of the cost. When I say up front, I'm talking about when we put the car into inventory. Two months later, when the car is ultimately sold, we generate most of the revenue with very little of the cost. That's just the way the accounting rules apply to our business. Okay. Okay, I get that. Just a final question on your working capital for this quarter. Typically, you have an outflow in the fourth quarter, but it seemed to be a bigger drag on this quarter compared to last year. Is that something we need to take note of there? No, I just think there's just fluctuations in the balance sheet that account for that. It's not too different. I think our operating cash flow in Q4 of last, there's about $16 million difference in operating cash flow year-over. That's just ascribed to changes. For example, we had a, you know, large growth in accounts receivable due to the QCSA acquisition. It's simply a move in the balance sheet. Okay, great. Thanks. That's it from me. Thanks. You're welcome. As a final reminder, that is star one if you would like to ask a question. We'll go next to Amy Norflus with Neuberger Berman. Yes. Hi. Two questions. One, can you talk about your market share gain? How much are you getting? Where is it coming from? Is it organic? Is it coming from Quad City? Secondly, can you help us a little bit more and quantify some of the costs that you're having of running the duplicate facilities? You quantified it a little bit, I think that was just towards SAP and not towards, you know. Well- -overhead personnel, IT, all that stuff. Yeah, sure. The market share gains don't count Quad Cities. When we talk about Quad Cities, that's an acquisition. When we talk about market share gains, that's about gaining business organically across the country, which is separate from the fact that we believe the overall market is increasing in size right now. We believe that had we not gained market share, we would have seen additional units coming in because the market is also increasing. The way we quantify that is by giving you the inventory number. We don't get into units. We've told you that inventory is built up, and William Franklin pointed out that excluded already on the call. He's pointed out that excluded Quad Cities. That's a Copart-only piece. From a cost standpoint, Amy, we're hesitant to go out and tell you what we think we're going to generate. I gave earlier in the call that we believe we can achieve the same type of margin with the new business. We may achieve better than that because there's so many incremental units coming through. I would rather underpromise and overdeliver as a company than have us say that we think we're gonna achieve that. We'll be happy if we can complete the integration, and upon doing that, generate the same type of margin per unit as we do with Copart. That's the position we're giving today. Okay. Thank you. You're welcome. That's all the questions we have in queue. I'll now turn the call back over to our presenters for any additional or closing remarks. All right. Thank you all for coming. I'll just to reiterate, 'cause we did get 2 questions on the call, I think were duplicate, so I want to make sure there's no confusion. We will not be completing the integration in the quarter that we're in now. That will not be until Q2. It will not be completed until Q3. You're going to see margin improvement in Q2 and Q3, and we don't anticipate that you'll see improvement in the quarter that we're in today. We look forward to reporting the first quarter to you pretty soon here. As this is the fiscal year, we get to come back pretty quickly on the first quarter. Will and I look forward to doing that, reporting the quarters throughout the year as we do make improvements in the integration of our companies. Again, thank you for coming on the call. That concludes our call. Once again, that does conclude today's conference, and we thank you for your participation.