Jay Adair - Chief Executive Officer Will Franklin - Chief Financial Officer Bruce Bishop - Senior Vice President, Finance.

Bob Labick - CJS Securities John Lovallo - Bank of America John Healy - Northcoast Research Ryan Brinkman - JPMorgan Craig Kennison - Baird Bret Jordan - BB&T Capital Markets Bill Armstrong - C. L. King & Associates John Lawrence - Stephens.

Good day, everyone and welcome to the Copart Incorporated Second Quarter Fiscal 2015 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..

Alright. Thank you, Noel. Good morning, everyone. Before we start, I am going to pass it over to Will Franklin, CFO, who will give us an update on numbers. I will give you a quick update on the company and then we will keep those remarks brief and then we will open it up for questions. With that, it’s my pleasure to turn it over to 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 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 or 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. So, with that I will begin by making a few brief remarks concerning the financial performance of our company in our second quarter.

Total revenue declined by $10.2 million or 3.6% due to the change in the mix between cars sold as an agent and cars sold on a principle basis, which we refer to as purchased cars. Purchase car revenue declined by $13 million. As a percentage of total revenue, it declined 4 percentage points to 13.7%.

Purchase car unit volume represented 6% of the total volume in the current quarter versus 6.8% the same quarter last year. The decline in purchase car revenue was driven primarily by reduced volume as direct purchase activity in both the UK and North America and cars purchased on behalf of insurance companies on a principle basis in the UK declined.

Service revenue increased by $2.8 million driven primarily by volume as revenue per car remained relatively constant. On a year-over-year basis, in North America, unit sales grew by 2% and the inventory grew by 10%.

On a consolidated basis, unit sales grew by 1% and inventory grew by 8% as the UK saw a reduction in both unit sales and unit in inventory. Our operation expenses decreased by $1.1 million. Adjusted for one-time QCSA integration cost of $2.2 million incurred in the same quarter last year, costs were up $1.1 million or 1%.

The increase was due to growth in volume as the cost to process each car remained relatively constant. General and administrative costs declined by approximately $4.9 million.

Same quarter last year contained $2.3 million in severance, lease termination and relocation cost associated with the QCSA integration and the move of our technology team from California to Texas. We have completed the QCSA integration and the IT department relocation.

In addition, we have completed the transition in IT strategy in which we have moved away from the third-party ERP system and from a third-party solution for infrastructure and support. During the quarter, we expended $16.1 million for yard expansion, technology and equipment. This number also included one lease buyout.

Finally, during the quarter, we refinanced our debt. We replaced our term loan A with a credit structure utilizing private placement debt in the amount of $400 million, due in four tranches ranging from 10 to 15 years, a term loan A of $300 million due in 2019, and a revolver of $300 million also due in 2019.

At the end of the quarter, $681 million was outstanding, none of which was from the revolver. Currently, the blended interest rate is approximately 3.35%. Refinancing added approximately $2.5 million to our interest expense this quarter compared to the same quarter last year. That concludes my remarks.

I will now turn the call back over the Jay Adair, our CEO for further color on the quarter..

Thank you, Will. In an effort not to repeat some of the information that Will just discussed with you, I am going to go ahead give you some additional information and maybe put some color around of some of the things that we are doing. We discussed the fact that revenues were flat.

We had one less business day in this quarter as compared to same quarter a year ago. The rest of it I would say is timing due to a very strong Q1 this year as was witnessed and so some of those it just depends on when vehicles come in, when they are going to sell.

And we saw some heavy sales in Q1, little slower in this quarter and I suspect we will see a good sell-off in Q3. Inventories as you heard are up 10% in North America and more importantly right now is the G&A has been a big focus for us on not only getting the cost down. I think that the quarter reflects modest effort so far.

But more materially as the improvements that we are making in the home office both on a spend per person and how we are actually executing on the dollars that we spend in G&A, as well as the fact that total dollars are down. So, we are getting more as they say more bang for the buck on the dollars that we are spending.

And we are actually reducing those numbers as well. So we are happy about that. Sale price was down in the quarter. We believe this is primarily due to scrap, scrap pricing has come off substantially, not only year-over-year but Q1 to Q2. And cycle times have remained relatively flat at this time.

So we try to anticipate the questions, but I am sure there is something that we have missed. So at this time I would like to turn it over to Noel and we will go ahead and open it for questions..

Thank you. [Operator Instructions] Our first question comes from Bob Labick with CJS Securities..

Good morning. Thanks for taking my question..

Hi Bob..

Hi, just to start with a simple one, in terms of FX obviously there has been a huge currency swing over the last quarter or so could you tell us what if any, FX impact was on the top line sales on the quarter.

And then just a little further what you expect if it impacts your export sales or how you expect the stronger dollar to impact you going forward?.

Well, we are seeing a negative impact in both aspects. So it had a marginal impact on revenue. In the quarter it was about $3 million and primarily due to the change in the FX between the dollar and the pound. At the EBIT level it represented slightly les than $1 million of negative impact.

It also had a detrimental impact on our export business slightly. So I think our – we have gone from about 25% to about 23.5% of our total volume being exported..

Got it. Thank you.

And then in terms of obviously you had record volumes and proceeds are I think near highs certainly for your customers, you are just starting to get back to that gross margin recovery from the fact that you have increased your service level, is that – is this trend of two quarters of gross margin recovery sustainable and can you describe some of the services that you did increase to impact margins right now?.

Well, as I have said many times. We don’t focus on gross margin percentage because that’s subject to the percentage of our sales that purchased car versus agency car. So we focus on EBIT per car. And when you look at that level we are – we have been growing for the last 3 quarters year-over-year.

And the target is to reach where we were in 2012, but we are not there yet. But like I said we have had nice growth in that metric in the last 3 quarters on a year-over-year basis..

Got it.

I suppose you won’t say exactly what the target is in dollars or how close you are?.

I am sorry we don’t disclose that Bob..

Right. No, I assumed not, but I figured it – ask since you put it that way. And then last one obviously you said good control on the G&A side down to the 31%, 32% level. I think we have spoken about 31% to 33% being the sustainable run-rate once you got rid of the redundant expenses from QCSA and the IT transition.

We were expecting that a little later in the year.

Is the current level the right base and sustainable going forward?.

Well, we think it is based on current activity. So, as we have talked about, there is a focus to expand internationally.

And we think that, that will probably come into play in 2016 far more than it has 2015, but any change in our fundamental activity level will have a change on G&A, but at this activity level, this sales and volume level, this is probably an appropriate G&A level, G&A spend..

Okay, great. I will let others ask. Thanks very much..

Thanks Bob..

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

Hey, guys. Thanks for taking the call..

Good morning..

First question, Jay, I just want to make sure that I understood your comments correctly on the timing of the service revenue department here. So, service revenue was up a little over 1% in the quarter and I think inventory at the end of last quarter was up about 9%.

So, you are talking about timing, but I guess – was the flow through of those vehicles slower than expected? What am I missing I guess is the question?.

Yes. We had a real big Q2. So, we are able to not only build inventory, but we had some large sales. You can compare that to – I meant, Q1 if I said Q2. You can compare that to Q1 of fiscal ‘14 and see that the growth in those two quarters as opposed to growth in Q2 a year ago versus Q2 this year.

So, some of it is just timing, I mean, it’s the type of vehicles you get the mix meaning some of our accounts move vehicles twice as fast as others on the insurance side. On the non-insurance side, we have got a mix of vehicles that are far more profitable, because they are dealer cars.

And then as opposed to mix of vehicles that are more charity focused. So, it depends on mix. It depends on timing. And I just want to give you a little color that why the quarter when you look at it may look in terms of revenues a little soft.

And as Will said, he pointed out that the purchase car activity, I was really just focused on the fact that the revenue aside from purchase cars and the fact that we had one less business day in the quarter this year than we did a year ago. So, those are the main factors I was trying to point out..

Yes, let me add one more element to that. So, our inventory grew at the end of the quarter. I mean, we had a significant increase in assignments towards the end of the quarter, which didn’t allow us to cycle that through the sales process that will flow through in our third quarter..

Okay, that’s helpful. And then just I guess on the vehicle sales line, the principle business here, is this a business that you guys see winding down completely over time? And I am just trying to think from a modeling standpoint here, I mean…..

About the purchase cars? No, we will continue to do that. We have become focused on trying to make sure that when we process volume, we make a certain margin for handling cars and we are not making enough of a profit. We are exiting that type of business.

So, no, we will continue to handle vehicles like that and you will continue to see that and I suspect it will grow actually in the future. What we have done right now is made some corrective changes that will bring it down and then we will come back, but at a higher margin.

We are just at the end of the day we are not willing to grab market share in a particular segment like vehicles that we are purchasing them and then do it at a low margin..

Okay, great. And the final question you guys historically have been and I think you still are today very big believers in the business and I think you have demonstrated that through buying back a good amount of shares over time.

I think, we over the past few years we have been hit with a number of things like the re-conversion noise, the acquisition integration, some of the ERP system stuff that went on.

With a lot of that behind us now when you guys took on a turn of leverage, I mean, is it – how are you thinking about share repurchases going forward just broadly? Is this something that we should be thinking about could accelerate?.

Well, we might want to add Sandy to that mix of all the items that you threw out as well, but we have said historically that it’s something that we view as an opportunity for us to deploy cash as well as acquisitions, buying companies, expanding locations, buying out leases.

So, it’s one of the many and we have never given any guidance as to what dollar amount we will buyback or when we are going to buyback, but it is still something that we consider an option and something we discuss at the Board level..

Okay, appreciate it guys..

Thank you..

Thank you. Our next question comes from John Healy with Northcoast Research..

Thank you.

Jay I want to follow-up on that question there, can you help us think about the decision to add internal leverage in the month of December, I understand the opportunities for acquisition or land assets or even buying back stock, but what was the trigger to say, okay we need to now bring this on to the balance sheet and pay money to have this flexibility and how do you think about timing of executing against that flexibility?.

Sure. So I will give you an example back in 2008. Fiscal ‘08, we went out into the market and bought back stock, split adjusted off the top of my head. That’s my qualifier there. I think it was in the 20s. And subsequent to the financial crisis our stock was in the 12s.

We were sitting with a very low cash position and we reached out to the banks and as you can appreciate nobody was willing to loan money at that time. So having cash on our balance sheet is part of our thought process in terms of a fiscally prudent approach to the market.

So we think interest rates are very low right now as a company, as a Board we are able to borrow debt that goes out 10 years to 15 years before it has to be paid off and it’s cheap as Will gave you the rates earlier.

So we viewed that as a smart move to go ahead and increase the amount of debt on our balance sheet to refinance the debt that was coming due this year. We had a couple of hundred million I believe that was coming due this year and that debt now has been pushed out roughly 5 years. So part of the restructure was it was the right thing to do.

Part of increasing the debt, we felt was just a prudent approach to hedging if you will the future. So we are not sure what the market will do, and we are not sure if we will be able to – you don’t know what your stock price is going to do. We are very bullish on the company.

And if for some reason we had a financial issue again in the future as the country, we want to make sure we have got cash on hand and we are not in a position we are trying to reach out and borrow money at that time.

So as a company and as a Board we felt it was important to go ahead and refinance the debt and also increase the amount of debt on our balance sheet..

It makes sense.

And along the same lines I want to ask I know you guys kind of made it known that Will is going to be transitioning to more an operating role, and I was curious where you guys are at with the CFO search process?.

We have SVP of Finance in the company. He is sitting in the room right now. His name is Bruce Bishop and we will have, Bruce who is a great guy..

Thank you..

And we have – Will has gone into a heavy operating role. And that’s great. He is doing a fantastic job and Bruce has been taking over the financials. And so I will leave it at that and in the future if there is a change in CFO title, we will make that announcement..

Okay. Thank you..

Thank you..

Thank you. Our next question comes from Ryan Brinkman with JPMorgan..

Hey. Thanks for taking my call. I guess I will tackle the stock buyback, capital allocation, capital structure questions in maybe a different way.

This is the first time that you ever had long-term debt on the balance sheet 10 years to 15 years you mentioned you have levered once before in the recent past, really only to buyback stock, but that was with a medium duration term loan and revolver which the contractual terms have you been immediately begin paying down.

So is there anything philosophically that you are thinking differently when it comes to capital structure with having that the long-term debt on the balance sheet?.

Well, this is the first time that we have seen interest rates for long-term debt at this level. I mean we picked up the $400 million of debt over 10 years before we had to pay it back and at a rate just over 4%. And that really is the first time that we saw an opportunity like that, A.

B, we historically many of you in the analyst community I believe know this our founder Willis Johnson has historically built the company before we went public on debt and historically has been debt averse in the past when interest rates obviously were much higher than they are today.

And so when interest rates got lower back in ‘10, ‘11 and the opportunity to put some debt on, we all agreed including our Chairman that it was something we should do. Now that we have seen interest rates get low for long-term debt, we believe that that was again something that made sense long-term.

And then the last piece I would throw is because of the relationship that we have between our international entities and our U.S. entity there is some tax advantage that we get by having debt. And if we didn’t have the debt, we would actually lose – we will lose the tax advantage basically.

So, there is a benefit to having some debt, especially at these levels and especially these rates for the foreseeable future and that was really the reason for locking up some long-term debt..

Okay, thanks. That’s helpful. And then maybe just on the quarter.

It looks like general and administrative expense fell nicely sequentially down I think like $7 million, is this the savings that was previously communicated regarding the non-implementation of that earlier planned ERP system, is this quarter’s run rate now more or less clean or is there still some noise running through the data centers, headquarters…?.

Well, the change in the IT strategy is certainly part of that. We did incur significant amount of cost that reflected in the prior – actually 3 quarters ever since we took the impairment Q3 of last year to make that change.

The other elements, which I spoke to were the costs associated with moving our IT department out from California and just the cost of integrating QCSA, which was the significant operation. And at this point, we think those costs are primarily behind us.

There will always be one-time cost, and frankly if they are not significant, we won’t point them out. But in general, at this activity level, we think this is appropriate run rate for our G&A spend..

Okay, great. And then sticking with the quarter, one of your competitors recently mentioned lower scrap price weighing on pricing at salvage car auctions, are you seeing that and can you kind of just directly, proportionately size up how important scrap metal is versus the lower U.S.

dollar are for pricing versus used car prices, which seemed to be holding up the best of all the factors?.

Well, in the North America the scrap metal pricing had a significant impact on our lower end cars. Our overall base is there was a marginal decline. On a consolidated basis, because we had a growth in revenue per car and other areas of our operations internationally, they is relatively flat.

In terms of important scrap metal pricing is a significant factor. So, I mean, we look at two primary drivers when we correlate our pricing and that’s used car pricing and commodity pricing. And in terms of significance, I would weigh used car pricing is slightly more significant..

Okay. That’s good to hear. And then just last question for me if I can on the weather, I am in Miami today, but we have had a lot of snow in the New York, lot of snow in Boston. This seems like this is sort of weather that is good for you, it’s not significant storm that leads to like extra expense in your parking, can you kind of confirm that.

And then of course you have very difficult compares with favorable weather for a year ago, so how is weather going to play on your results over the next couple of quarters maybe on a year-over-year basis? Thanks..

Sure. I would just stay there, so it’s hard to isolate on a call how weather comparison in the Northeast compared to the Midwest compared to West Coast, etcetera. We look at when we peak. And we peaked in inventories at the end of January and we have been selling off those inventories now in February.

So, we continued to see strong volumes coming in, but we have seen the peak coming. Sometimes that peak is the first week of February, sometimes the second week of February. Right now, it peaked at the end of January and once you peak and you come off, which we have it won’t go back to those levels.

We are now selling off substantial amounts of units in February. And so again, I think it’s going to be a good quarter based on the inventory build, based on the volume we are seeing come in. It’s definitely not a bad winter, but we have a peaked already..

And I will add one more comment on that, as I have talked about the decline in volume in UK and we can trace that back to significant influence of weather. So, at this time last year, there were occurring floods in a number of areas in the UK, which made the comp for volume more difficult for us this quarter. .

Okay, helpful. Thank you..

Thank you. Our next question comes from Craig Kennison with Baird..

Hi, Craig..

Good morning. Good morning. Thanks a lot for taking my question as well. On market share, your largest competitor reported a 11% revenue growth in the similar period versus your 1% service revenue growth and I recognized very much that its apples and oranges when you are looking at those two metrics.

But to what extent if any does it suggest you are not gaining shares quickly as your largest competitor?.

I think both of us have been relatively mature in the last year. There was quite a few RFPs that went out over last two years and the mix has been very steady over the last year. And again, they are not completely comparable quarters.

Theirs ends December, ours ends January, and January is the biggest month in terms of cost and building inventories in that process. So, I think the easy answer to give you is just that the mix hasn’t really changed between either of us in last year..

Okay..

Craig, I want to point one other thing, which is we are in a number of different markets. They tend to focus on just the insurance market, but we are in the charity market, we are in the repo market, and we are on what’s called the market folks just buy and sell cars on our platform as part of their business.

And so you have to look at each of those individually to conclude about where our market share resides. So, for example, in charities, we maybe up or not and that enters into our total volume mix..

Did you see relative weakness in those non-insurance categories?.

In certain categories, we did..

Okay.

Shifting gears to gas prices, just Will, give us a sense how lower gas prices will impact your revenue and cost structure?.

Well, it typically has impact on our self-haul cost. And that’s one element to those costs. I can tell you that there are so many other factors that enter into our average cost to pickup the car and probably the main one is the volume. When you have more volume, you have a reduced opportunity to select the low cost provider. We talked about that.

But there is other elements and we are picking up a far higher percentage of cars on the same day than we did previously. Our pickup time is well below 1 day and is declining. When you are trying to provide better service to your insurance customers by picking up the cars faster, you have less opportunity to aggregate hauls.

So, you have more single hauls in the total mix. So, despite the fact that we have declining diesel fuel pricing, we are challenged to reduce our self-haul cost on a per car basis..

Good, that helps. And then maybe finally, Jay, on the dealer-to-dealer market and that whole car side, we have seen a number of business models pop up in this dealer-to-dealer space, where technology essentially disintermediates the physical auction to some extent.

I am just curious you tend to like these disruptive models and have done well with technology.

How do you see that market as a potential addressable market for Copart?.

Well, for the industry, I think it’s been slow to adopt. I expected 12 years ago that we would see much further progress in the adoption on that, especially on the whole car side. With respect to our dealer processing of vehicles, we added – and this maybe partially true for the whole cars as well.

We provide a service by getting the vehicle off their lot. And I don’t see that technology disrupting our business, because the dealers got limited space in the lot. They want those vehicles that they are not going to sell off the lot and they basically got two quick options. They can wholesale it or they can take it to auction.

In both scenarios, it gets off the lot immediately. And if you are talking about using a technology to do a B2B process and get rid of the vehicle, it’s sitting on the lot while they go through that.

So, I suspect that those vehicles will continue to be vehicles we will get and will continue to grow in that segment, because it’s not just returns, it’s not just the ease of selling the vehicles, the fact that it’s being physically moved.

We don’t sell vehicles typically at the lot, where the vast majority of our vehicles are being moved to our sites and so it’s out of their – off their facility and that’s a big improvement for them..

Got it. Thank you..

Thank you..

Thanks, Craig..

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

Hey, good morning..

Good morning, Brad..

Good morning, Brad..

Just a follow-up question on sort of the capital allocation and I think there was a comment about M&A and international expansion potential and obviously you have got liquidity, how are your thoughts about international growth, M&A given the fact that you wrote off the ERP system last year, are you thinking smaller size or relatively lower risk transactions because of the lack of an IT system or do they not really changes them all?.

The ERP was really - I would put that separately and our reasons for doing the ERP and our reasons for exiting ERP are really separate from international markets. I mean we can grow internationally without the ERP and we are doing that. We are building systems to do that.

Our desire to have an international footprint is the same as it was 10 years ago when we first expanded into Canada. It’s been a strong desire and that eventually brought us to the UK and Brazil and Dubai and everywhere else that we do business. So we will continue to develop tools necessary to expand in those markets.

And when the opportunities arise for us to make an acquisition in those markets we are going to do that..

Okay, thanks.

That was not a critical backbone for M&A integration, that was just another piece of the puzzle?.

Correct..

Got it. Thank you..

Thank you again. Our next question comes from Bill Armstrong [C. L. King & Associates]. [Operator Instructions].

Good morning, guys.

You already answered my question on market share, but I did have a question on the other income line you had a spike there to $4.1 million I just want to dig into a little bit, what’s in there?.

Well, it includes a number of different elements. It includes some rent, so we rent out properties and we don’t include that in our operating income. It includes gain on the sale of fixed assets, but also includes an FX impact. So our hedging strategy is pretty simple. When we accumulate cash offshore, we convert it to USD.

While the accounting rules which I can’t explain but we hold this cash in USD to eliminate economic risk to the business. Nevertheless accounting rules make us recognize gain and loss on that cash relative to the home currency of the country that owns cash. In this situation we had USD owned by our UK entity and that generated a gain on FX in the UK.

And now it’s a primary driver in the spike..

How much was that out of that $4.1 million that ForEx gain?.

Hold one second. It was about $3 million..

Okay.

So going forward are we looking at maybe run rate of roughly $1 million a quarter on that other income line?.

Well, it’s hard to predict. It all hinges on the movement of the relative values of the different currencies..

Right, understood, okay. Thanks..

Thank you..

Thank you. Our last and final question comes from John Lawrence with Stephens..

Good morning guys..

Good morning John..

Hey John..

Would you comment just a little bit – Will I don’t know if you will give us this number, but what’s the delta from when you talk about 12 at the peak of EBITDA or EBIT per car, how far are we away from that peak at this point?.

No, I am sorry, I can’t give you that. I have talked about directionally and directionally like I said we have seen a consistent growth in the EBIT per care and we can’t look at it on a sequential quarterly basis because of the seasonality of business.

So we got to reach back 2 years and like what we did in the same quarter, ‘13 and ‘14 and we have had a nice growth..

Yes.

I mean is it unfair to compare that to that operating margin 32 to 32.5 back in June of ’12?.

You really can’t look at it on a percentage basis. Size of the impact of purchased car activity. You have to look at on EBIT per car basis..

Got it.

And secondly to follow on Bret’s question, Jay can you comment just the environment what you are seeing over there expand that internationally the environment what are you seeing over there as far as progress in the industry that may or may not want to expand and at what point?.

Well, I guess I would just comment by saying that we have people on the ground. We have got operating businesses. The first step would be expanding operating businesses that are already there.

And then we have got people on the ground in new markets that where we don’t do any volume yet and we have got relationships with opportune acquisition targets and when the time arrives and when we feel it’s the right time to do that, we will step into those markets as new markets.

Right now, we are really focused on improving the markets we are already in before we expand into new..

And there is nothing that’s changing that’s causing you to think about pulling back or anything like that?.

No, I mean we are always – each market you look at they are going to have their own tax laws, they are going to have their own process. Sometimes, we have got to build systems around the new tax law before we can get into that market.

Sometimes, we have got a completely different process than we are familiar with in the U.S., UK, Brazil as an example, Dubai. And so we have to go into a market and convert that existing process that they have got to a new model and show them that the model is better.

So, it just depends market by market and some markets you can move quicker than others, but we are committed to that strategy of expanding our global footprint..

Great. Thanks for your help..

Thank you..

Thank you, John..

Thank you. There are no further questions. At this time, I would now like to turn the call back over to Jay Adair..

Thank you, Noel and thank you everyone for coming on to the second quarter call. We look forward to reporting Q3 in 90 days. Bye-bye..

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