Copart Earnings Call Nuggets: Quad Cities and Nationwide Contract

Copart (NASDAQ:CPRT) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Quad Cities

Robert Labick – CJS Securities: Just wondering if you could maybe give us a little more history of the acquisition, how long you were talking to them, was it an auction or a negotiated deal, why did they sell now? You talked a little bit about why to Copart, but why now? And obviously, with (indiscernible) of the terms of the deal or how big they are and then that kind of stuff if you would tell us that?

Vincent W. Mitz – President: Sure. This is Vinnie. The deal came together very, very quickly. After some recent national RFPs market share throughout the country had been suddenly redistributed and the owners of Quad Cities, including John, we’re looking what is best for their strategic future. And they were looking to team up to continue and accelerate their growth; and actually we’re looking for a partner who will be able to help and assist in the growth of their Company separate from a normal acquisition integration and that opportunity came together very quickly once we agreed philosophically how to handle the transaction. It was just a matter of working out the financials. So, it only took probably three to four months for the whole thing to come together.

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William E. Franklin – SVP and CFO: Bob, this is Will. Let me add just a little color to that too. Quad City is a serious player in our space. We compete with them all the time and we (lose certainly). The insurance companies use them because they like what they do. So we think this is a win for us to be able to understand what they do well in their corporate debt and into our offerings as well.

Robert Labick – CJS Securities: Could you maybe give some specifics on what they do well better than Copart and how you can bring that to the rest of your yards?

A. Jayson Adair – CEO: Well, that’s exactly what we’re doing right now. We’re in a period where we’re going to be analyzing all their process and then we’re going to be looking at what we want to incorporate. So we don’t plan on changing anything for the foreseeable future right now until we get all that figured out.

William E. Franklin – SVP and CFO: Bob, this is similar to what happened in the U.K. We went to the U.K. and we took what they did really well and what we do really well and combined to arrive at the best offering that we could to provide and that’s exactly what we intend to do with QCSA.

Robert Labick – CJS Securities: And then the terms for the deal, any information you will share with us on that?

Vincent W. Mitz – President: No, not this time. Honestly, there will be some disclosure in the 10-Q and other public filings, but at this time, we’ll not talk about the specific terms of this deal.

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Robert Labick – CJS Securities: Then just quickly on to the quarter, the very strong inventory build, the 21%, can you maybe give us some color in terms of how much of that’s related to – you had to sell out Sandy cars, you were building inventory; how much was the easy comp from no winter? And how much was really growth that you’re seeing where we should expect that growth on a go-forward basis?

Vincent W. Mitz – President: Well, it’s interesting. It’s a good question. So, some of it is Sandy, obviously. We’ve got about 10% of Sandy cars remaining in inventory. The majority of that comes from market wins, so we’ve been successful in the last 12, 18 months and expanding our presence in the market. But we’re also seeing growth in the market on an overall basis. So, 2009, ’10, and ’11 we’ve basically had headwinds in every element of our market management. So, when we look at our market and what drives it, we look at basically four different elements. We look at the number of cars on the road. We look at how often are those cars involved in accidents. How those cars involved in accidents? How often are they salvaged as opposed to repaired. And then finally, we started looking after 2009 at unemployment, because unemployment drove uninsured motorists. So, while the uninsured motorists may be involved in accident, we didn’t necessarily get cars because they didn’t know about Copart or salvage pools. So, for three years, everyone one of those drivers have been negative. And now they’re starting to turn. And so we’re seeing the best of that – you’re seeing that reflected in our inventory…

Robert Labick – CJS Securities: And then one last one and I’ll jump out. In terms of the increased yard and fleet, I think you mentioned this, but I just wanted to check. You said roughly, I think, $12 million, $13 million in sales from Sandy and roughly that much incremental Sandy expense. Is that accurate? And then also, can you quantify maybe the incremental yard expense from that 21% inventory build as you said because you’re getting all the towing expenses upfront in this quarter. So we can kind of get a normalized yard expense on a go-forward basis.

Vincent W. Mitz – President: Yeah. It makes it very difficult to get a normalized yard expense on a go-forward basis. Historically, we used to put all of our costs on the balance sheet and then release them in the same period in which we recognize all revenue and that’s no longer the case. So, it’s very difficult to predict our yard and fleet expense until you are able to predict our growth and changes in inventory. So, getting back to your specific question, from Sandy, we said last time that we didn’t expense anymore losses from Sandy and I think that – we think that that’s what we saw this quarter. So, of the roughly $13 million of Sandy sales almost none of that came through as a benefit. It was all absorbed by direct and indirect costs. And we’ll have some of that costs continue into our fourth quarter. So, we still have people displaced, we still have properties that we’re leasing and some of that’s going to flow through. In terms of revenue, I think the impact of a change in inventory, I think we’ll just leave it with the comments we’ve already made in that we recognize a majority of our expenses when we pick up the car and the majority of our revenue when we sell it and they can be one or two quarters apart.

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Nationwide Contract

Scott Stember – Sidoti & Company: Could you maybe talk about with the Nationwide contract? I know that as of last quarter we were – the second quarter on a full run rate basis. Are we on a full run rate basis, apples-to-apples going forward from here with that contract?

Vincent W. Mitz – President: Yes. This is Vinnie. We are absolutely fully integrated with Nationwide and that is a apples-to-apples run rate now.

Scott Stember – Sidoti & Company: And just shooting over to the acquisitions you guys announced last night with Quad City. Can you maybe talk about how they process their business, is it more of a purchase versus an agency type of model and how much of it is a fixed or percentage kind of deal versus (not or) fixed? Maybe just talk about some of the details there…

Vincent W. Mitz – President: Sure, sure. They have different divisions as does Copart. They have a charity division which strictly processes charity cars with sales to the public. That’s the brand Desert View Auto Auctions. They do some purchase cars similar to Copart Direct, and the vast majority of their insurance work is on the agency business exactly the same as Copart, and, of course, the specialty division are all individually negotiated contracts but also all on agency.

Scott Stember – Sidoti & Company: And last question, can you maybe just give an update on how things are going down in Brazil and some of the other areas that you entered over the last couple of quarters?

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Vincent W. Mitz – President: Yeah, all the investments we’ve made internationally are considered strategic investments for the future. We are in the process of consolidating the operations into the Copart model, implementing our operational procedures and looking forward to growth. Right now, there obviously is a cost drag on them as we go through that process. But the investment in the future is hopeful. I mean, we are extremely excited about it. We see a great growth opportunity in the international markets, and benefit is yet to come, obviously.

A Closer Look: Copart Earnings Cheat Sheet>>