Jay Adair - CEO Will Franklin - CFO.

Robert Labick - CJS Securities, Inc. Elizabeth Suzuki - Bank of America Merrill Lynch Samik Chatterjee - JPMorgan Bret Jordan - BB&T Capital Markets Gary Prestopino - Barrington Research John Lawrence - Stephens Inc..

Good day, everyone, and welcome to the Copart Incorporated Fourth Quarter 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, Tiffany. Good morning, everyone, and welcome to the fourth quarter call for fiscal 2014. Before we get started I am going to turn it over to Will, to do a safe harbor and then he'll go ahead and give you an update on financials. I'll give you an update on the company and then we'll open it up for question.

With that, it's my pleasure to introduce Will 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 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-K, 10-Q and other SEC filings. With that, I'll begin with some brief comments about our financial results for the quarter. Total revenue grew by $23.8 million or 9%.

Purchased car revenue declined by $9.3 million, which was driven primarily by reduced direct purchase activity in both the U.K. and North America. In addition, there were fewer cars processed for insurance companies on a principle basis in the U.K. Service revenue increased by $27.7 million or 13%.

Excluding the residual Sandy sales activity in our fourth quarter of last year, the increase would have been 14.4%. The increase resulted from growth in our international operations, which includes Germany, Spain, United Arab Emirates and Brazil of approximately $1.5 million, growth in the U.K.

of $8.7 million, which was tied to market wins and growth in North America of $17.5 million. In North America on a same-store sales basis and excluding the Sandy activity, volume grew by $4.6. In the U.K. our same-store sales unit volume increased 19.3%. All growth came from market wins and growth in the overall market.

In North America, non-insurance car volume grew by 5.4% and represented over 20% of the total volume. Yard operation expenses increased $16.2 million. The growth was driven by increased volume and an increase in the average cost to process each car.

The growth in processing cost were driven by a general increase in subhaul and employee cost including benefits, increased pass-through cost like vehicle titling cost and cost associated with additional services provided to the sellers.

In addition, costs were impacted by increased residual QCSA integration cost and growth in our international activity outside of the U.K., as these operations are in their developmental stages without the benefit of scale. General and administrative cost remain relatively consistent with the same quarter last year.

We expect to see a reduction in our quarterly G&A expenses on an absolute basis by the end of this fiscal year, as we rationalize cost associated with our prior technology strategy. We ended the quarter with over $158 million in cash.

We generated $55 million and $263 million in operational cash flow during the quarter and the fiscal year respectively. During the quarter, we had capital expenditures of $18.2 million, primarily for yard expansion technology and equipment. Finally during the quarter, we had no open market share repurchases.

We've almost $48 million share -- 48 million shares remaining in our current repurchase authorization. That concludes my remarks. I'll now turn the call back over to Jay Adair, our CEO for further comments on the quarter.

Jay?.

Thank you, Will. And just so everyone is aware Will and I are in different locations today. So when we get to the Q&A section, if you can specify who you want to answer the question that would be great. So we started the year with the acquisition of QCSA and Desert View Auto Auctions and Crashed Toys –right in the fourth quarter.

So fiscal 2014, a big part of the year was integrating those three companies into Copart and I am happy to report that at the end of the fiscal year we have done that.

QCSA was fully integrated into the Copart locations, Copart systems, technologies and culture, at this point; DVAA, the Desert View Auto Auctions, we've integrated on to our systems, but it is a standalone business with its own locations and it is run by Joe Mulcahy and he is, and his team, really are the head of the Cherry division for Copart.

So their focus is to really think about how to differentiate us from a cherry perspective handling those types of cars.

On the QCSA side, the team that was part of that company is now part of Copart and we've taken a number of things that they did to differentiate themselves from both Copart and our competitor in the marketplace and implemented those inside of Copart.

So a lot of their best-in-class practices are now have become policy at Copart and have become differentiators for us going forward and we've got that team now in the leadership roles within Copart and helping us to grow the business. So that's all real exciting stuff that occurred in the year.

That growth plus new volume really is the driver on the 9% revenue growth in the fourth quarter and Will gave you some of the numbers, so there is no sense in really repeating that. What I would specify is that you see an increase in G&A cost and G&A literally for Q4 of '13 to Q4 of '14 are relatively flat, but they were high throughout the year.

So there is a focus going into fiscal '15 to work on operating cost, both in the field and to work on yard and fleet -- I am sorry, work on G&A at the home office to reduce those costs.

So there are some yard and fleet expenses as Will just discussed that are not going to be coming down, but there is other expenses that we think we can achieve some additional efficiencies on. So there will be focus there.

We're really not in a position to give estimates on what that's going to be because it's something we're all working internally on seeing if we can find additional efficiencies in the field. At the home office, same sort of story. We clearly know there are some areas where we can cut some cost. So we're working on that.

If you look at the last three years, there is the move out of California, there is the technology approach and a number of these things added one-time cost for the company and we really don't want to get into a position of trying to call out every single quarter. The point is this.

2015 this fiscal year will be the last year where we see any kind of non-recurring one-time expenses both in the field and the G&A.

Additionally, we announced in the last quarter that we had -- that we had changed our strategy on our technology and net income and EPS for fiscal '14 were substantially and adversely affected by $29 million in capitalized software development.

An impairment that we took in the third quarter of 2014 and particularly the impairment reduced EPS by $0.15 and I mentioned this on our last call that the impairment related to our discussion not -- our decision rather not to proceed with replacing our legacy enterprise software system with a new SAP-based system and our Form 10-K will also be disclosing pending litigation we initiated against Sparta Consulting related to this impairment.

So let me give you a little color. We hired Sparta Consulting, which I believe is now called KPIT to implement the new SAP system and KPIT had originally agreed to deliver the complete SAP-based replacement for our enterprise system with a targeted final deployment of March 01, 2013.

By September of 2013, the project was not close to completion and over the life of the project, KPIT failed to meet key contractual milestones and the coding consistently failed user acceptance testing. As a result, we determined that KPIT had not delivered and could not deliver under its contract with Copart and we terminated with KPIT.

We also concluded that most of KPIT's work was of no value to Copart and that the most appropriate and cost effective option was to scrap the project. As a result of this decision, we were required under applicable accounting rules to take a $29 million impairment charge in the third quarter of 2014.

We are also currently in litigation with KPIT over its deficient performance under the contract and related misconduct.

The litigation is now pending in Federal Court in California and Copart intends to fully pursue its remedies regarding KPIT's failure to provide the SAP-based system required under the contract and we will update you concerning developments in the case as appropriate in our future SEC filings.

So this is not something that we plan on discussing much more going forward, but we want to make you aware of this.

It goes in line with what we discussed before that the SAP system, when we took it over and got more involved in looking at trying to have that as the replacement for our existing operating systems that it was just not -- it was not going to work. There were a lot of reasons why we didn't feel that it was the right strategy for Copart.

So that is -- that's where we are at on that. We are currently working on modifying our existing systems such that they will work internationally. The systems are great domestically. They are integrating those systems today with SAP Financials because we are removing or replacing the JD Edwards systems with SAP and all that felt good.

We're happy with every part of that. There is nothing that I can say that isn’t going the way we thought it was going to go, but we went into this thinking that we could replace our systems with an SAP product and the cost and the delay and the failure in a number of areas there just made it the wrong strategy.

So we got new system that we're working on integrating with our existing systems and that will allow us to go international. So there is going to be some delay until we get that done. Okay. Let's talk about marketing update for a bit. So we launched our mobile product in fiscal '13 and fiscal '13, 8% of total auction attendance was through mobile.

That number by the end of fiscal '14 jumped to 23%. So 23% of all auction attendance now is being done on our mobile app and those that use the app daily represent 85% of our customers. So it is obviously a product that's been embraced by our customers and again we go back to the days of live auction and you had to get physically to the location.

Along came the Internet and yet now you got to have a laptop [in] (ph). So with your -- with the mobile app literally, you open your phone from anywhere with a signal and you get access to our auction. So, it really is about as friction free now, as it can get. In 2014, we saw a 248% increase in inventory searches related to mobile.

So, they’re not just attending auctions. They’re doing searches. And then we saw a 122% increase in the number of new registrations, members actually coming on through mobile and accessing the system. So, that’s good news on the mobile front. Crashedtoys.com went live in the fiscal year as well.

And, we’ve got that specialty division that we brought into the Copart family a year ago and we’re heavily focused now on differentiating on all toy type product, everything from motorcycles and boats to exotic vehicle. So that is all live and you can check it out at crashedtoys.com. And finally, I would just -- got a couple comments here.

In July, we saw member registration topping over a 1,000 per month, just for Crashed Toys alone. And, if we compare July '13 versus July '14, we saw a 29% increase in total new member registration across the Copart family, across the Copart Company.

So, real big increase this year in the number of new members coming into the site and getting those converted. We really view our marketing team as a differentiator in this space.

It’s about finding customers that want to buy the product we’re selling and then it’s about, once you’ve got those members, making sure that they can find the product that we’ve got for sale. So, having all the right filters and all the different ways that you can look for product is critical; so, again, big, big differentiator.

And then the final point I would make is that a third of all new members that came to Copart were referred to Copart from people that already know about the company, which is good news. It’s nice that the number is that large. On the flip side of that, it was two thirds of the new members that we signed up in the year didn’t know who we were.

So, again that push to get more and more and more customers out there to become aware of us is front and centre with respect to our focus. All right, Will has talked about the cash numbers and he talked about the debt. And, so, I am not going to repeat all that. So with that, I’d like to open it up for questions.

Tiffany?.

Yes, sir. Thank you. Our first question will come from Bob Labick with CJS Securities. (Operator Instructions).

Good morning, thanks for taking my questions..

Hi Bob..

Hi. So, Jay, I know you just said, you don’t want to get into the weeds in terms of some of the expenses and helping us down there in terms of like $500,000 relocation this or that. But, I was hoping you could take a step back and just give us a sense on the gross margin on the service side even from a macro basis.

Over the course of the year, you had QCSA and you’ve been pulling out cost, but consistently it’s been higher than we’ve modeled.

I am just trying to get a good sense of, where the operating leverage lies on a go-forward basis? And I know, blending it international makes it harder, but if you could take a step back and just talk about operating leverage on a go-forward basis as we see sales growth?.

Yeah, sure, I would just throw out there to you Bob that it’s not going to be back at the same operating margin that it was prior and that’s not just the QCSA or it’s not a QCSA thing. It’s just that the market that we’re in, we’ve just got increased cost, labor costs are up, fuel costs are up.

So there is a number of costs that are up across the board. But then some of it is the integration and putting the two companies together. So, we anticipate it’s going to come down and I appreciate your comments. It’s just -- I don’t think it’s wise.

Will and I discussed it this morning and we just don’t think it’s wise to try and lay out every single expense that we’ve got. So, we anticipate that next year, we’re going to get the operating margin.

By the end of fiscal '15, we’re going to get our operating margin to as good as we can get it and it’s not going to take more than four quarters to do that. And, we’re going to get our G&A where it needs to be, and then, that’ll be it.

I don’t see on the horizon another large acquisition to put with the company domestically and so, it’s going to take us about a year to get those transitions completed and trying to single out the actual expenses is just really tough to do..

Okay, no, fair enough. And then, looking ahead at the U.S. side, obviously, you’ve had some great wins in RFPs in the last couple of years, last year and some national account wins. What are the -- you share is pretty high.

What are the drivers for domestic growth going forward from here?.

Well, it’s still the push, non-insurance. The insurance market, I would call it mature at this point. We’re -- we and our competitor are handling the majority of the volume domestically and the real growth is to push for non-insurance volume. The other driver I would say is, just the overall market increasing.

The market really got slowed down and back in '08, '09. And so there’s -- I would say, fundamentally off the top of my head two drivers.

One is, ASP is going up and we may see ASPs increase in the future because I think they’re -- while they’re at a record high, I think they’re lower because we’ve got an ageing fleet and there weren’t as many new cars.

And, so as they start to sell more new cars again, I think that’s going to -- I know that’s going to increase the quality of vehicle we sell and the ASPs will go up. The other driver is because we haven’t sold so many vehicles new, we’ve got an ageing fleet and we’re seeing unit volumes increase.

So, we will see from the day that we've looked at an increase in the number of units in the next year, two year, three year out; as vehicles get older, they just become that more likely to total.

So those are the drivers on the insurance side and then on the growth for Copart is non-insurance volume, which is about 20% of our company today and we want to obviously make that number larger..

Okay, great. Thanks very much..

You’re welcome..

Thank you. Our next question will come from John Lovallo with Bank of America..

This is Liz Suzuki on for John. A question on acquisitions.

Are there any particular geographic markets that Copart is particularly focused on?.

Domestically or internationally?.

Either..

Yeah. So, you’re right. I would say, internationally what we’re trying to do right now is finish some integration work that’s got to be done with systems and then, we’ll be looking at expanding into markets that we think fit our mould, where we think it will be easiest to implement our model or easiest to make acquisitions in those markets.

And then, domestically, as I said, the market is pretty – it’s pretty mature at this point. So, I don’t think there is a lot of core business acquisitions in the salvage arena domestically. I just don’t see it as we sit here today..

Okay. So, most of the opportunity is international, then. And, just a quick one on -- regarding the tax rate, 30.9% it was pretty low in the quarter.

What was the cause of that and should we expect it to return to closer to 35% going forward?.

No, it shouldn’t return to 35%. It was a unique quarter and as much as we had some discrete tax adjustments that reduced our rate. But no, it would be, I would say just a little north of 34%, I would expect that..

Okay..

And as International becomes a more meaningful side, part of our activity I would expect that to decline..

Great. Thank you very much..

Thank you. Our next question will come from Ryan Brinkman with JPMorgan..

Hi, this is Samik here on behalf of Ryan.

Just wanted to get an update on the inventories first, I didn’t really hear anything in terms of inventories, how much were they up year-over-year on a same-store basis in North America, can you just help us with that?.

Sure. Inventory is up little over 5% on a same-store basis..

Okay. Great.

So, is there any -- just on the trends on processing times and tax contributing to any of the higher inventory you’re seeing? Also, what trends did you see in processing times? Sequentially I think last quarter you mentioned that processing times were coming down, is that still looks to be the trend?.

The insurance companies are addressing that and so some insurance companies are doing a better job than others. In general, the days inventory are starting to subside..

Okay. Great. And my next question is primarily around international expansion and your strategy there.

When we look in terms of the expenses that you’ve been incurring or the investments that you’ve been doing that’s been a headwind on margins, but when we think about the trajectory of your investments, which sort of phase are you in? And do you think these expenses or investments will accelerate for the next year as you continue to build scale in those markets? Or are they going to normalize and what is probably your updated outlook on being profitable in these international markets obviously outside U.K.?.

Yes, so I'll comment. We didn’t - I didn’t hear you specified it. I guess from the perspective of profitability in international markets, that’s always hard to predict. I would say we’re going to have some technology completed in the next year and that’s going to allow us to reduce some cost because it just makes us that much more efficient.

From a G&A perspective, we have said -- we said on this call and I'll say it again, we don’t anticipate G&A going up in the next year. We anticipate it coming down. That’s fully loaded G&A, that’s just not domestic, that’s international, that’s everything. So we’ve got teams in place.

We've expense in place and at this point, we don’t anticipate cost going up at a G&A level. We anticipate revenue going up..

Okay. Great. Thanks for taking my questions. Thank you..

You’re welcome..

Thank you. Our next question will come from Bret Jordan with BB&T Capital Markets..

Hi, good morning..

Good morning, Bret..

Good morning..

A quick question on yard operating expenses.

Is there -- something structurally changed in that pass-through in some of the services that you’re spending on? Are they related to the RFP businesses that you got more labor and/or expense built into some of these insurance contracts?.

Yes, part of it. Part of this we’re just providing more services to the sellers and that’s a part of the RFP process. A part of it is a structural change in our cost, our sub-hauling cost have increased with the increase in volume, we have diminished ability to utilize the low cost providers.

We had to expand the sub-haulers that were used, but by so doing, we had to utilize those that charge a higher rate. And we have a natural increase in our labor cost and our benefits cost. And all those have had a permanent structural change in our yard operating cost on a per vehicle basis..

Okay. And then a qualitative question. I think earlier you began to address your inventory bulge and some of the cycle times that we’ve talked about in the last couple of quarters, but it sounds like inventory is beginning to work down.

Could you give us a feeling where we are relative to a normal base level in the inventory work down? Are we 20% of the way to where you would expect us to be in a base case scenario or 50% or sort of a general ballpark?.

It’s hard to predict, but currently our same-store inventory levels are about 5%. Our same-store sales are about 5%. So, it seems to suggest that’s about the new norm of 5% growth..

Okay. All right, great. Thank you..

You’re welcome..

Thank you, Our next question will come from Gary Prestopino with Barrington Research..

Good morning, guys..

Good morning..

On insurance side, can you -- it's 20% non-insurance, could you maybe find a bucket there between dealer-consumer and are you considering charity in that non-insurance as well?.

Yes. Charity is included in non-insurance..

So, what I'm trying to get at is, if you could bucket how that 20% split goes between those three areas and those markets if you would and give us a thumbnail look at how each of those particularly the deal are more interested and what's the growth profile has looked like here this year?.

So, we've had growth in both dealer cars and charity cars and we’ve had a slight decline in what we call our core cars. Those are cars that came from individuals and companies that just the living, buying and selling cars on our platform. Those are the three major buckets.

In addition of that we have other institutional sellers, banks for the repositions fleets like Southwest Bell and AT&T that utilize us for fleets, rental companies that utilize us as well. But primarily most of our volumes comes from those three buckets; charities, franchise independent dealerships and individual car brokers..

All right.

And is charity still the largest of all of those three followed by maybe fleet and then dealer?.

I would say charity..

Go ahead Jay..

I was just going to say no. Dealer is clearly the largest. It’s bigger than the charity side..

Okay, so they are largest. And you’re saying obviously the focus is on that -- that non-insurance segment for growth.

Are you devoting much more marketing efforts, selling efforts there? Have you increased your feet on the street to get more business there?.

There's been some increase. We’ve made some changes in the last year and so we’ve got some -- we've got -- I guess you called some cost creep that’s come in through some of those efforts, but I look at that as an investment. We think it’s the right thing to do to drive that book of business..

Okay. And then you also mentioned that you've adopted some best-in-class practices from QCSA. Could you maybe elaborate on what….

Well there -- I'm hesitant to, Gary because they’re differentiators in the space and we’ve done some things with clients that -- our clients like those kinds of differentiators as well. And so some of it is -- some simple stuff that’s technology based.

Some web changes things like that, but some of its process driven and it’s definitely something that we use with clients to give them a better experience than what they'll get elsewhere. So, it’s proprietary stuff..

Okay. That’s fair. All right.

And then lastly not looking for any actual numbers, but as we go through the year, should we sequentially see declines in G&A expenses as you do this, finish off what you need to do to get the in line?.

No, I don't think that we're prepared to make that assertion. I think our comment stands that by the end of the year, we’ll see a decline..

Okay..

There is a lot of work that needs to take place pretty now and then..

Okay. Thank you..

You’re welcome..

Thank you, Gary..

Thank you. (Operator Instructions) Our next question will come from John Lawrence with Stephens Inc. .

Good morning, guys..

Good morning, John..

I understand the reluctance to give any guidance as far as those margins are concerned.

But Will, can you look at it another way and just say the pressure is on the business, obviously on the yard cost and as far as that operating metrics and then all said that with G&A and then just put in perspective, I guess couple of years ago, we were at a -- and were closer to a 32% operating margin.

We’ve lost -- there's 500 basis points of erosion.

Is there a certain amount of that 100 and 150 basis points that you could point to that you can't recover or can you give any comment -- I'm not talking about timeframe, but just what would be the limiting abilities to get back -- can you offset SG&A with some of those operating cost?.

So, it’s hard to look at our business on a margin percentage basis or an EBIT percentage basis. Because of the impact that purchase car revenue has on that and as that fluctuates, that has a tremendous impact on that percentage. So, we look at our business on an EBIT per car basis..

Okay..

And when you look out on that basis, we’re fairly happy with where we were this year. We were surely not where we were in 2012, but we’re where we were in 2011. So, we anticipate to increase that next year as we go through the rationalization of certain cost, but it’s hard for me to talk about it on a percentage basis..

Okay. Thanks..

Welcome..

Thank you. And it looks like we have no further questions at this time..

All right. Well, thank you again everyone for attending the fiscal '14 fourth quarter call for Copart, and we look forward to giving you updates on the next quarter and this concludes our call. Thank you. Bye..

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day..