And gentlemen, good day, and welcome to the Copart Incorporated Second Quarter Fiscal twenty eleven Earnings Call. As a reminder, today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Mr. Jay Adair, CEO of Copart Incorporated. Please go ahead, sir.
Thank you, Peter. Good morning, everyone. Before we start, I'll turn it over to Will Franklin for a brief statement, then we'll open it up for comments and then questions. Will?
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. These statements are neither promises nor guarantees and are subject to certain risks, trends and uncertainties that could cause final results to differ materially from those projected or implied by our 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 factors affecting future results contained in our 10 ks, 10 Q and other SEC filings. With that, we'll turn the call back over to Jay Adair, our CEO for to begin the comments on our Q2 results.
Thank you, Will. Again, good morning and welcome to the Q2 earnings release and conference call for Copart Inc. Start with international bidding for the quarter. Units came in at 24%, sold internationally. Gross proceeds were at 28.4%.
So obviously the international units are a little better vehicle than the typical car that we sell. So sequentially, let's look at that as compared I'm sorry, year over year, let's look at that comparatively. And the number was and actually it is sequential, 22.5% in terms of units and 26.6 percent in terms of gross proceeds. So the trend from Q1 to Q2 is up. The mix in terms of what percentage of our vehicles being sold to insurance companies as opposed to what units are coming from, are being sold from insurance companies and as opposed to what units are coming from non insurance, has maintained at about eightytwenty and that's with a large increase in insurance units coming through for the quarter.
So we've seen a nice improvement in our non insurance sales in the quarter. Looking at G and A, Q2 came in at $23,600,000 in G and A as compared to $27,000,000 in Q1. We predicted or we talked about in the beginning of the year that G and A would be coming down as we work towards reducing costs. Those costs are associated with marketing and personnel primarily. I'll talk a little bit more about that later in my discussion and Will will give you a little more flavor for that as well.
So yes, sequentially, looking at Q1 versus Q2, we are down and we're continuing to push on that trend for G and A. Capital spending in the Q2 came in at $27,600,000 $5,600,000 of that was lease buyouts. So the year to date number for 6 months, dollars 42,400,000 in capital spending. Also in the quarter, we announced a stock buyback. We purchased 12,200,000 shares, approximately $463,000,000 worth of stock.
We have a 13,000,000 share authorization still in place. We also bought stock in the prior quarter, so total stock purchased in 2011 is 14.4 1,000,000 shares. Our average purchase price is at $37.33 Currently, total shares outstanding fully diluted are outstanding fully diluted are at about 71,000,000 shares. Debt for the quarter, we announced also that we were taking on some debt. We brought in Bank of America and secured $400,000,000 in debt.
The rate is floating at 150 bps over LIBOR, so currently under 2%. Also in the quarter, we announced the sale of our corporate office and we in doing that did a 2 year leaseback, so we'll be leasing the building for the next 2 years. And then in addition, we announced that we would be relocating the home office from California to Texas in the Dallas area. So that will be happening in 2012. So we've announced it now in 2011, but it's still over a year away.
So there's a number of changes that will be taking place to our G and A as we get structured and ready to do that change. It's a big move. We're excited about some of the things that are happening inside the company from a cultural standpoint, the move and both the move and technology. And we'll report on that in subsequent quarters as we make some of those plans become reality. We finished the quarter with cash on the balance sheet of $204,000,000 And with that, it's my pleasure to turn over to Will for a little more commentary on financials.
Thank you, Jay.
Yesterday, we reported our financial results for the Q2 of our 2011 fiscal year. Consolidated revenue was $207,400,000 compared to $176,600,000 for the same quarter last year. These results include the impact of the change in revenue recognition rules adopted at the beginning of the fiscal year, which mandate the recognition of certain revenues, primarily towing the car into the yard, converting a title to a salvage or branded title and the performance of vehicle enhancements as the services are performed. Previously, these revenues and their associated costs were carried on the balance sheet until the car was sold. As a result of this change, we recognized $3,600,000 in revenue and $3,400,000 in expenses that otherwise would have been recognized in subsequent periods.
In addition, during the quarter, we settled a dispute with HMRC in the U. K. Concerning the appropriate amount of VAT associated with cars sold under a certain program. The result was a refund of VAT previously paid of approximately $1,800,000 which is reflected in vehicle sales. Excluding the impact of these items, revenue would have been $202,000,000 This represents an increase over same quarter last year of 14.4%.
The growth in revenue came primarily from increased volume. Overall volume increased in most segments. In North America, insurance volume grew excluding the impact of Allstate. Overall, insurance volume remained at approximately 80% of total volume. On a same store sales basis, excluding the impact of the change in accounting rules and the VAT settlement, revenue increased 8.4% and was driven by volume.
However, during the quarter in the UK, 37% of the cars sold were sold on the principal model compared to 51% for the same quarter last year. The transition to the agency model had the effect of reducing revenue by over $9,600,000 Excluding this impact, overall same store sales would have increased 13.9%. Our gross margin grew from 78 $700,000 to $85,900,000 or 9.2%. Excluding the impact excluding excuse me, included in yard and fleet costs for the quarter was the impairment of a real estate asset, which totaled approximately $1,300,000 $3,400,000 in costs associated with the service revenues whose recognition was accelerated due to the change in accounting rules and a $1,500,000 adjustment to our self insurance reserves. The increase in our self insurance reserves was a precautionary move to protect us from future exposure for a claims trend we are seeing with respect to medical claims that's in excess of what we had seen in our actuarial studies.
Excluding the VAT settlement, the change in revenue recognition rules, the impairment and the adjustment to the insurance reserves, the gross margin would have been $86,800,000 and gross margin would have been 42.9%, a 170 basis point reduction on a year over basis. This reduction represents additional costs associated with the development and the support of new business segments. General and administrative costs, excluding depreciation, were $23,700,000 compared to $23,400,000 for the same quarter last year. On a sequential basis, G and A expenses were down from $27,000,000 due primarily to reductions in marketing expenditures and reductions in headcount. Our operating income increased from $53,200,000 to $60,200,000 or 13.1 percent.
Our overall tax rate for the quarter was 37.6%. Diluted EPS was $0.46 per share compared to $0.42 per share for the same quarter last year. Ended the quarter with $204,000,000 in cash. Accounts receivable, deferred revenue and inventory increased as the number of cars on hand grew. Taxes payable declined as we made 2 estimated tax payments during the quarter.
In the quarter, we generated approximately $15,800,000 in operating cash flow. Net income plus non cash expenses like depreciation and share based compensation generated $55,900,000 and was offset by movement in the balance sheet as cash was consumed for the building of inventory and the payment of taxes. Capital expenditures for the quarter were $27,600,000 and included the buyout of 2 facilities leases totaling $5,600,000 We generated $16,500,000 in the sale and leaseback of our corporate office building in preparation for the relocation of our headquarters in Texas. Finally, during the quarter, we expanded approximately $463,000,000 to repurchase 12 point 2,000,000 shares of our common stock. At the end of the quarter, we had 70,200,000 shares outstanding undiluted and we had approximately 13,000,000 shares remaining on our share buyback authorization.
That concludes my comments. Peter, now I'll turn the call back over to you to moderate the Q and A portion of this conference call.
Thank you. Let's first go to Robert W. Baird, Craig Kennison.
Good morning and thanks for taking my question. First one has to do with the hello. The first one has to do with yard margin. You had very impressive revenue growth and yet that did not flow through to yard margin, like we thought it might given the scalability of your business. Can you help us understand that dynamic?
Sure. Part of it is what Will already explained, the one time events that took place there. The other piece of it is really the investment, that we're making right now in non insurance businesses. So the all the business segments that we're going after on the non insurance side, we're putting a lot of effort into that, a lot of personnel. And then the other side would be technology.
So we've got some technology costs that are in there as well right now.
So thinking ahead and going forward, how much of the weight on gross yard margin should we expect to see in the next few quarters? I would expect given those investments you're making, we should continue to expect some pressure on that line item?
Yes. I think you'll see the trend that we just talked about continue that we'll be increasing investment to develop these business segments. The technology that Jay mentioned is primarily computer equipment. We extended about $10,000,000 or we entered to at least about $10,000,000 worth of computer equipment and that will continue as well. You'll see based on these new revenue recognition rules though a seasonality to our margin.
So you'll see lower margins in our second quarter and higher margins in our Q3 as our Q2 will now we'll start to recognize the low margin revenue.
That's helpful. And then Jay, would you please elaborate on the move to Texas, maybe what we should anticipate from a G and A perspective as well?
Sure. Well, I can tell you what our goals are. We're in the move in making the move. We're going to be closer to our customers, obviously. There's only a few major customers that are based out on the West Coast.
The vast majority of the insurance industry is the Midwest East Coast. So there'll be a process where we're getting closer to more of our locations, closer to our customers. It's going to reduce the amount of travel time, but also the amount of travel cost. In the process, we're also reviewing everything that we do at the corporate office. How do we do it?
Is there a better way to do that, both from a technology and a process standpoint. So this is not a 1 year deal, this is going to take 3 to 4 years to complete in terms of the full transition, from a process and technology standpoint. But, from a move perspective, we'll be moved in 2012. We'll have the move place and then in doing that, we're going to basically take care of as much low hanging pick as much low hanging fruit as we can, just the obvious stuff to do. But as I said, the full transition, you should be looking at 3 to 4 years.
And the trend, the goal is to reduce G and A costs through all of these changes.
In the short run, will there be an increase in G and A, but then over the long term a decrease? Is that how we should think
about the flow? We expect G and A to be down, this year as opposed to last year. That was the comment that we made in Q1. And we still believe that to be the case. So we expect G and A to come down in Q3 and Q4.
And then internally, we've talked about what costs are going to be associated and what we've decided to do, Craig, is give you in the investment community guidance at the end of the year because it's we'd like to finish the year and see where we're at and then come back with what we think G and A will look like for fiscal 2012.
Thanks, Amit.
Let me add a couple of comments. You'll see a little choppiness in our G and A. But one of the reasons we've talked about this previously is the timing of when races occur and we're still involved in racing. And the other is, there will be quarters in which we'll recognize severance cost or state pay cost and those will not be continuing, but be unique to that certain quarter.
Okay, that's helpful. And Jay, one final question just on the non insurance business. Some of your competitors have finance arms where they can provide wholesale floor plan financing to dealers. Is that a business you need or can you partner to provide that service to grow in the category?
Yes. We already are partnered with DSC. So we have a finance instrument that we provide our dealers. So I don't view that as any change coming in the future. There's no reason for us to get into the business.
We've got a great partner that basically finances all the dealers that are out there. So it's really as we sit today, we don't view it as any kind of a competitive disadvantage or advantage today. I think it's just been equalized.
And not a business you want to be in?
No. We've got no plans right now to be in the finance business.
Great. Thank you.
You're welcome.
Let's move on to Bob Labick with CJS Securities.
Hi, good morning. Thank you.
Good morning,
Bob. Obviously, you had strong results driven by volumes there. Allstate was a part of it. Could you give us a sense of your non Allstate insurance volumes and what you think the industry trends are right now?
Well, Will stated in his remarks that we're up. We've seen growth in both non Allstate Insurance, growth in non insurance and of course growth in Allstate. But we have not in the past gone through a process of breaking out each segment. So we're not going to do that today.
Right. Okay. Thank you. I missed his remark on that. And then back to the non insurance initiatives.
I know generally you don't like to share too much on it, but could you give us a sense of the incremental investment maybe now versus a year ago or even where you stand in that process? Will there be significantly more than the current run rate of investments towards? I'm assuming it's Copart Director, Copart Dealer Services or other initiatives like that.
Yes, it is. It's both of those. It's really a function of growth and the non insurance saw a lot of growth, both in the quarter, but look back over the last year, over the last 4 quarters, it's just been one of these products or one of these divisions of the company that's just grown sequentially quarter after quarter. And our goal is to stay ahead of that, to keep that growth going. So you want to put more people out there to build the business than you need.
And the reason for that is you've got you're building a pipeline. And then what happens is they mature over time and then you start to get some improvement in margin. But as long as we can keep growing this, we're going to keep fueling that. And you're going to see that because as they get more mature, there's going to even be further and further growth. We had fantastic growth in the insurance side and to be able to maintain and just tell you my expectations where we wouldn't come in at eightytwenty.
And to be able to maintain that ratio just tells you how much we were able to grow the non insurance piece of the company.
Yes, absolutely. And that was a surprise to me as well on the positive. Last one, I'll get back in queue. Obviously, you've repurchased a significant amount of shares in the last 3, 4 months, including obviously the Dutch. Can you give us a sense of where you stand and your thoughts on the balance sheet now and use of cash flow going forward and priorities?
Sure. We've got less than $200,000,000 in debt, in net debt, when you offset it for the cash that's on the balance sheet and we generate over $200,000,000 in EBITDA, so less than 1 to 1 in terms of debt to EBITDA. So we think it's very conservative. We're paying less than 2% interest rate, very conservative. But we were able to retire a significant amount of stock and I think that speaks for itself.
I could tell you, I can get into what we think the valuations are, but that really speaks for itself, the fact that we did that. So we'll be going forward and we'll be looking at our opportunities to buy companies. There will be some companies we'll be buying in the quarter that we're in now and we'll be talking about that in the next quarter. And that'll be using up some cash. And so we're just going to weigh the opportunity to acquire against the opportunity to acquire our own shares and that'll be part of the process, part of the decision we make.
Okay, great. Thanks very much.
Thank you.
Let's go to Scott Stember, Sidoti and Company.
Good morning.
Good morning, Scott.
Could you talk about within the non insurance segment, any pockets of strength or weakness that you're seeing?
Specifically, I'm not sure if I understand the question.
Well, within the non insurance, car dealers versus, let's say, finance companies?
Well, yes, clearly, the dealer side has been the strongest.
Okay. And as far as the costs go, could you just talk I mean, we know that the some of the racing spending is coming down, but could you just talk about which areas or which racing segments will be sticking as we go forward?
Yes, sure. The racing that we're going with this year will be NHRA, drag racing. It's a I've talked about it on prior calls, Scott, but it's a very grassroots gearhead sport. It's all about the race and tearing down the engine and racing again and tearing down the engine. So it's a sport where there's a lot of our existing clients already there and a lot of future members and eventually buyers to bring into the company.
So we're going to continue with that, but when you think about marketing it's a lot of things for us today. We are focused on search engine optimization, search engine marketing and print and a number of areas where we're out there building awareness for the brand. It's not just racing is my point.
Got you. And last question, Will, you were saying that most of the growth in North America came from volume, but could you talk about how pricing was in the quarter?
Yes, it's very similar to what it was the previous quarter and frankly it's very similar to what it was the same quarter last year.
And that's being driven by high used car pricing in scrap metal?
Metal? Well, I mean there's a number of influences. So it has to do with mix of product, it has to do with growth in Allstate, it has to do with Continental pricing and used car pricing. And it's hard to identify if it's possible to identify the specific impact of any of those specific items.
All right. Great. That's all I have. Thank you.
Thank you.
Let's move on to Tony Cristello, BB and T Capital Markets.
Thanks. Good morning, gentlemen.
Good morning, Tony.
Will, a point of clarification. You talked about the margin in the accounting change, and I just want to make sure I understand correctly. It sounds like you incurred more of the lower margin hit in the second quarter, but then will receive the benefit of the actual sales sell through in the Q3 or subsequently into the Q4. Is that how I need to be looking at it?
Yes. It really complicates the way you look at our business at least from I'm sure your point of view because historically what we did is we put all the revenue and all the cost on the balance sheet until the car was sold and we recognized it all at one time. Now we've had to separate different elements of our revenues and the ones that are associated with the pickup of the car and the initial services in the car are recognized generally around the time of assignment, which is about 2 months prior to the time it's sold. So we have the seasonality of our business indicates that we have more assignments in our Q2, which means we recognize more of this initial revenue in our Q2 and it's very low margin. So now we've always had seasonality to our revenue.
It's always been the highest in our Q3. Now we're going to have seasonality to our margin percentage. And we try to provide some color as to what the margins would have been on a pro form a basis, so you'll have a basis for your comparison.
So when I think about then the revenue and thus the margin then into the seasonally stronger quarters, will revenue be a little bit less, but then the margin seasonally will actually be better not only than you normally would expect, but also better from a sequential standpoint than you would normally expect as well?
That's exactly correct.
Okay.
So you're going to have reduced revenue, but higher quality revenue in our Q3.
Okay. All right. And the other question another question I had that you mentioned was sort of the reserves with respect to medical claims. And I'm trying to understand what is it that's sort of happening and how should we think about that as an impact on a go forward basis? Is it a one time adjustment or do you still run the risk that those costs will continue to inch higher?
Well, it's a catch up adjustment. What happens is every year we have natural oil study conducted that indicates how we should accrue for our exposure or expenses. And in this quarter we determined that the trends were actually higher than those studies would indicate and so we needed to book an extra reserve which covered the prior 12 months basically. So if you were to portion that $1,500,000 expense on a quarterly basis, I would apportion 1 fourth to this quarter and 75% as one time.
Okay. Is there something going on? I mean, did it get more dangerous all of a sudden to work on your yard? Or is there just something that just out of just timing that you I mean, it's kind of
No, this isn't workers' comp. This is actually health insurance. Okay. So it's just, when you have and we have a sizable population, but not one to which is not subject to certain small number of high volume claims.
Okay. Okay. And maybe one last question. Jay, you talked about the technology and I know you guys have always been investors into the future. Is there any more color that you can shed on the exact sort of spend and the $10,000,000 in the technology that you're putting in today and what that's going to do for you over the next 6 to 12 months?
No, I really can't. But I mean, it's all geared towards additional unit, except for the well, kind of except in the technology piece. I say kind of because all the other spend is directly attributable to we're going to spend that because we know we'll bring in more cars. The technology is going to improve the company and over time technology has always helped us get additional volume. But that's an investment today that's going to be paying off years out as opposed to the rest of the investment is really focused on we're spending money today and that's going to drive additional volume in the future.
I can't really give you an amount. I can just tell you it correlates.
Well, I mean, if I go to your website, am I going to see this investment spend? Is there something new, some new initiatives, some new
Primarily people and additional leads, getting more volume out there in the field.
Okay. And it's more geared toward non insurance rather than on the insurance side?
Yes.
Okay.
Okay. Thank you.
You're welcome.
And a question now from Ryan Brinkman with Goldman Sachs.
Hi, good morning.
Good morning.
The decision to lever to repurchase shares in the quarter, how significant of a break should we view this in terms of how you think about the capital structure? And what level of debt to EBITDA do you think might be most ideal going forward?
Well, it's a big deal because we haven't done it in the past decade. We haven't really that I can think of had any debt on our balance sheet. Last time I can think of debt really off the top of my head was about 95. So it's a significant change in how we view our capital structure and what our capital structure should look like. And I believe that, that's associated with our belief in the future.
And obviously that equates to we want to own more of the future. And so we've made those decisions to do that. And as far as what comfort level do we have for debt to EBITDA and what ratio, I really can't say that on a call. That's something that we discuss at the Board level. And that changes.
That's really based on factors that exist today and I can tell you we were less comfortable back in 2019 or in 2,008 when the auto market was going through a lot of struggles and a lot of trouble and today we're more comfortable. So it will change quarter to quarter and we'll look at that quarter to quarter as we go as a company.
Okay, thanks. And then just kind of given the news in the last couple of weeks, could you remind us of how you are impacted by higher fuel costs? For example, as towing costs rise, how is that cost shared between the towers, between the buyers and sellers of the vehicles and you guys?
It's really just impact it's just absorbed by us. Regardless of our revenue structure, it doesn't really matter what the revenue structure is, whether it's a percentage or fee or purchase, regardless of that, we absorb the obviously absorb the tow cost. So if fuel prices go up, then tow costs go up and we absorb that cost.
Okay, good. And then just last question. You talked about the one timers affecting gross margin rate and the accounting and the real estate. And you talked about, to the investments that you're making in to drive non insurance business. What about Allstate?
If you were to try to isolate that kind of trading price or volume potentially, was Allstate kind of dilutive to gross margin rate during the quarter?
We really just don't get specifically into pricing, Brian, and what we charge and that kind of thing. It's pretty competitive market out there. So as we said in previous calls, we're really happy with the growth with that account. It's a big deal. There's number 2 rider in the country.
And we're excited about that. And we're excited about the fact that insurance grew regardless of the Allstate growth. So we're in a growth mode right now both on all the insurance segments and then we're in a growth mode on non insurance. So we're very focused right now. We could cut the spending and we could not spend money and we could obviously improve margins, but we're big believers in making investments right now, in growing our future.
And you're still confident that the Allstate deal will ultimately be highly accretive to gross profit dollars?
We think it was a fantastic deal.
Okay. Thank you very much.
You're welcome. Thanks, Ryan.
From RBC Capital Markets, let's go to Scot Ciccarelli.
Hi, this is Patrick Palfrey sitting in for Scot Ciccarelli today. Thanks for taking my questions. Just a housekeeping issue first. The $1,800,000 you received from the favorable tax settlement in the UK, were there any costs associated with that revenue?
They don't have been previously recognized. There's none specifically with the settlement.
Okay. Thanks. That's helpful. And then I guess looking at your same store sales growth, it was up 8.4% during the quarter and you said it was driven by volume. I was wondering if you can give any additional insight into sort of revenue per transaction.
Was it up or down or flat?
Well, I answered that. It's very similar to what it was same quarter last year.
Okay. Okay. Thank you. And then I guess just one additional question if I may. I was just wondering if you could talk about any impacts, if there were any from weather in the business during the quarter?
I know that we had seen some pretty severe weather.
It's really hard to know. I mean volumes are up and inventories are up and we can go out and look at existing accounts that we haven't changed any volume with and we can try to get a benchmark there, but did they gain market share? Did they lose market share? It's very hard to try to determine or predict what's going on there. I think it's safe to say there's been some decent weather across the country and we're all aware of that.
And so we think part of the quarter is affected by the weather that we've seen.
Okay. Thank you for taking my questions.
Thank you.
And let's move on to Gary Prestopino with Barrington Research.
Hey, good morning, Jay.
Good morning.
Is Allstate now totally integrated? I mean, are all of the cars now coming to you? And was that reflected in the Q2 numbers? Or are you still is there still a lag with getting that entire contract wrapped up into your system here?
Gary, I think we entered the quarter below our expected run rate and we ended the quarter at our full run rate.
So you ended the quarter at
your full run rate. Okay.
And then Jay, when you're talking about some of these investments that you're making in non insurance, You talked about people and technology, but I was under the impression that on the people side and are first of all, are you adding salespeople or is it support people or what?
Both.
Okay. I was under the impression that you were using more independent agents and just paying them commission. Has that changed and that you're adding salespeople now because of the success you're having in the market?
No, but independent agents are considered sales. They're out there driving sales.
But why would that be an investment in an individual? I'm not I'm a little fuzzy on that. That's not actually the company, is it?
Well, there's an operational cost to paying them to go out. But they're great people, Gary. Why would they you're confused on why they would be people.
No, no. I just would not think that you would have to make if they're not if they're independent reps, say, you're just paying them a commission, I guess that's the way I'm looking at it.
Well, there is a cost to getting people on board in that role. No different than the insurance industry. When an insurance company brings on a new agent to sell insurance, they'll often have to carry them for a period of time to get them to get the book of business rolling.
Okay. But suffice to say, you're growing it, you're happy with where you are and where you're going with this.
Very happy.
Okay. And then lastly, going forward, should we use about 71,000,000 shares a fully diluted basis? That I thought I heard Will say that that was the share count at the end of the quarter?
Well, no, the share count on an undiluted basis was 70 point $2,000,000 The dilution contingent on the value of the stock obviously as the stock comes more valuable you have more dilution.
Okay. Thanks.
Welcome.
Thanks, Gary.
With that, we have no further questions at this time. I'd like to turn things over to the company for any closing remarks.
All right. Thanks, Peter. Again, thank you everyone for attending the call.