Jay Adair - CEO Jeff Liaw - CFO William Franklin - EVP.

Bob Labick - CJS Securities Ben Bienvenu - Stephens Inc Bret Jordan - Jefferies Ryan Brinkman - JP Morgan Matthew Paige - Gabelli Gary Prestopino - Barrington Research Chris Bottiglieri - Wolfe Research.

Good day everyone and welcome to the Copart, Incorporated Second Quarter Fiscal 2018 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, Chantelle. Good morning, everyone, and welcome to the second quarter earnings call for Copart. On the call today is Jeff Liaw, our CFO; and Will Franklin, our Executive Vice President. It's now my pleasure to turn it over to our CFO, Jeff Liaw..

Thank you, Jay. I'll start the call as always with a brief Safe Harbor.

During today's call, we'll discuss certain non-GAAP measures, including non-GAAP net income per diluted share which includes adjustments to reverse the effect of income taxes and the deemed repatriation of foreign earning net of deferred tax changes, disposals of non-operating assets, foreign currency related gains and losses, certain income tax benefits and payroll factors related to accounting for stock option exercises.

We've provided the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our website under the Investor Relations link and in our press release issued earlier today.

We believe the presentation of these non-GAAP measures together with our corresponding GAAP measures, is relevant in assessing Copart's business trends and financial performance. We analyze our results on both GAAP and non-GAAP bases described above.

In addition, this call contains forward-looking statements within the meaning of federal securities laws, which are subject to substantial risks and uncertainties that could cause actual results to differ materially from those projected or implied by our statements and comments.

For a more complete discussion of these risks that could affect our business, please review the management's discussion and analysis portions in our related periodic reports filed with the SEC. We do not undertake to update any forward-looking statements that may be made from time to time on our behalf.

Then moving to the second quarter, this was a record second quarter for Copart in unit sales revenue gross profit and operating income. We grew global revenue by 31.3% including a slightly beneficial year-over-year currency effect of $5.5 million primarily due to relative strength in the British pound.

Excluding Hurricane Harvey our revenue grew at 18.5%. Copart grew global unit sales at 15.5% with U.S. unit growth of 18 and international unit growth of 1. U.S. unit growth by driven by catastrophic events as well as market growth and Will will provide more color on those fronts. Excluding catastrophic events, U.S.

unit sales growth was 9.4% for the quarter year over year. Turning to inventory, our global inventory grew at 8% year over year at the end of the second quarter, excluding catastrophic inventory from both periods inventory growth would have been 8.1%, so virtually no difference.

This is because if you exclude Hurricane Matthew and the Baton Rouge events from our inventory last year in turn Hurricane Harvey and Irma from this year we end up with inventory growth of 8.1%. Approximately 1% of this inventory growth is attributable to acquisitions and in terms of the U.S. and international split U.S.

inventory grew at 7.8%, international growth is 9.5. For the quarter, Copart grew service revenue of $91.1 million or 29.6% year-over-year and purchase car revenue growth of 17.7 million or 44.7%.

Gross profits grew from a 146.8 million to a 191.6 million with a slight decrease in gross margin rates from 42.0% to 41.7%, a mix of offsetting factors, but most significantly Harvey. Excluding merely the effects of the quarter’s catastrophic events, our margins would instead have been 44.3% on a gross margin basis.

Continuing these, we talked about last quarter we continue to observe improvements in United States average selling prices, year-over-year in this case for the quarter of 27.5% in the U.S. and 16.1% ex-Harvey.

As we discussed on the last call, we are noting that newer cars are being totaled, less severely damaged cars are being rendered total loss as well and that in turn we are observing significantly increased biding activity, both from our registered bidders as well as more bidders per unit.

Again, Will will describe more of the underlying drivers and underlying levers that we are pulling to generate that benefit. We also continue to observe a reasonably strong used car price environment. Manheim has finally broken its consecutive month streak of record highs, but used car prices remain substantially higher by their index than last year.

And finally, we have noted a reasonable strong scrap environment as well, up 16% year-over-year. All balanced then, we generated a benefit of $8.3 million for the quarter of Hurricane Harvey, which represents a cumulative then $9 million loss through first six months of fiscal '18.

We will also note that that $9 million loss from catastrophic events excludes significant capital expenditures made both in, anticipation of catastrophic events as well as in response to them. All told, Hurricane Harvey remains the most substantial resource mobilization for catastrophic event in Copart’s history.

Our G&A expenditures for the quarter were up from 32.4 million a year ago to 34.7 million this year excluding D&A. The difference is due almost exclusively to the acquisition of NPA a year ago. Our GAAP operating income growth, we grew operating income from $108.9 million to $150.9 million or 39% year-over-year.

Our operating margin last year of 31.2% compares to this quarter of 32.9%. Again, our rates were burdened approximately 150 basis points from Hurricane Harvey. Net interest expense was approximately flat year-over-year with a lower debt balance offset slightly by a higher risk-free rate.

I will now pause for a moment on income taxes which are unusually complex of course for the quarter by virtue of passage of the Tax Cuts & Jobs Act of 2017. I will categorize the effects in two broad buckets, the first being change in federal income tax bridge. We will benefit from the reduction in the federal tax rate from 35% to an eventual 21%.

However, for Copart’s fiscal '18 because we straddle the pre-reform and post-reform periods, our federal tax rate for this fiscal year will be 26.9%. In fiscal '19 and beyond our U.S. federal tax rate instead will be 21%. This quarter of course includes the benefits of that change from 35% to 26.9%.

It also includes the benefits of releasing of some of the accrual from Q1 of 2018, which had assumed at the 35% prior federal tax rate. If you wanted to estimate our effective rate for this year, the better math would be to take first six months of this year and to exclude the transition tax change, which I will now describe in greater detail.

So companies like ours with foreign un-repatriated earnings, we calculate our transition tax due, which in our case is subject to sit to further refinement as well as additional guidance from IRS. Nevertheless in this quarter, we accrued approximately net $10 million charge for this transition tax, which is net of deferred tax changes as well.

Our GAAP net income then increased from $66 million a year ago for the second quarter to $103.3 million this quarter. The results of operating profit growth as well as the various tax changes I just described a moment ago. On a non-GAAP basis, our net income grew from $67.4 million a year ago to $111.4 million this year, growth of 65%.

You can see in the detailed reconciliation, the exclusion of the booked tax benefits of our early adoption ASU 2016-09 as well as various other factors described a moment ago. Our effective share count is increased slightly from $234.2 million to $238.7 million largely attributable to an increase in stock as well as stock option exercises.

On a non-GAAP basis, our EPS has grown from $0.29 to $0.47. Last couple of comments on the balance sheet and cash flow and I'll turn it over to Will, our operating cash flow for the quarter of $93 million as compared to $81.3 million a year ago, a reflection of increase cash earnings as well as working capital movements.

Finally, on capital expenditures, we invested $69.4 million this past quarter. Of which, approximately 80% again was for land in development a continuation of our capacity expansion efforts in general. With that, I'll turn it over to EVP, Will Franklin..

Thank you, Jeff. And let me add few more comments and some more color on the quarter. Copart delivered another strong quarter. This quarter we grew our worldwide revenue and EBIT by $109.6 million and $42.1 million respectively.

Excluding the impact of Hurricane Harvey, our revenue and EBIT growth would have be $64.8 million and $33.8 million respectively. The growth rate in revenue and EBIT excluding Harvey would have been 18.5% and 31% respectively. In North America, our revenue grew by $100.5 million or 34.6%.

Excluding the impact of Harvey, this growth would have been $55.7 million or 19.2%. In North America, total volume was up year-over-year by 18.6%; excluding Harvey volume, it was up 8.2% and was driven by organic growth and market wins in the insurance market, the continued growth in the non-insurance market and our recent NPA acquisition.

Volume from non-insurance sellers, which include franchise and independent dealers, franchise -- excuse me, finance companies, who have assigned us the repossessions in office vehicles, charities, municipalities, equipment dealers and brokers grew by over 31%.

Excluding volume from NPA which was acquired in the fourth quarter of last year, our non-insurance volume increased over 18%. Also with the non-insurance market, we are seeing a shift in mix as growth in volume from dealers was up nearly 27% and volume from charities and municipalities were down 4% and 26% respectively.

As we strategically dedicate our limited land capacity to more profitable markets, dealer cars were typically run and drive cars that yield an average ASP and average gross margin significantly greater than those for insurance cars, while at the same time have a shorter cycle time.

In total non-insurance cars represented 20.5 of all North American cars sold. In North America and excluding Harvey volume which yielded a higher value to salvage car, our service revenue per car on a quarter over quarter basis was up approximately 9.9%. The increase in revenue per car was due primarily to higher ASPs.

The increase in ASPs were driven by a number of factors, the value of used cars as measured by the Mannheim index was up over 6%, the value of crushed car bodies as measured by the index has maintained by American Recycler were up about 16%.

The beneficial mix of cars sold has previously discussed and the additional volume from NPA which yields a higher ASP. Finally, we continue to see increases in revenue from sellers as we adjust our pricing to certain sellers to more accurately reflect the value of the land utilized in our operations.

We also believe our marketing efforts, international buyers is having a beneficial impact on ASPs. Despite the challenges caused by the stronger dollar, total bids from our international buyers were up over 42% over the same quarter last year.

Measured by the business address of the buyer, total sales to international buyers was approximately 21%; however, based on the location of the IP address of the buyer sales to international buyers was approximately 32%. This does not capture the activity of buyers who have domestic physical addresses, bid locally then export the car.

We believe it is not unreasonable to estimate as much as 35% of all our sales are for export. Another area of significant progress within Copart is that of data analytics and business intelligence.

We have a team of data scientists utilizing new technologies, machine learning, and millions of data points we have systematically captured over the years to enhance and develop our products. We have a product called ProQuote, it's a tool used by our insurance partners to predict the proceeds that we generated at auction for any specific car.

As you can imagine this is a very complex calculation including inputs like year, make, model, trend, auction passages of the car, nature and severity of the damage, proximity to a port of export, seed and scrap metal evaluation trends and many-many others. Next week we will release our fourth new version of this product in the last 12 months.

By using gradient boosting we have improved the accuracy of that prediction by 34% thereby allowing insurance companies to make better repair versus salvage decisions. Due to the electronic nature of our auction platform we can capture all the search and bidding activity including product preferences and bidding tendencies.

Utilizing that data we made when appropriate the extent our electronic auctions in anticipation of further activity. During the quarter this new capability generated millions in additional gross proceeds for our insurance partners.

Finally we're using data and data technology to enhance our yard configuration and work flow to increase the capacity and efficiency of our operations. Turning to the UK, we generated another strong quarter.

We saw marginal decline in units sold resulting in part from our decision to eliminate the low margin cars from our direct purchase program and to eliminate in total our municipality program. Nevertheless, expressed in GDP, revenue was flat and EBIT grew by almost 10% as we increased the yield per car.

Germany continued to deliver impressive auction results with low volumes. We hold biweekly auctions for three insurance suppliers and two major rental car companies.

Auction buyers' participation continues to exceed our expectations as the number of participants and the number of unique bidders per auction are higher than those same metrics in North America. Returns achieved through our Copart auctions in Germany significantly exceed those achieved through the existing re-marketing conventions.

Key to growth in volume in Germany is the expansion of our network to facilities. In addition to the sole operational facility which is located near Hanover, we have purchased around the process of developing two new facilities, one near Berlin and the other near Leipzig.

We expect to begin the phasing-in operations at these locations this calendar year. We continue our efforts to open at least three other new facilities in the country. We're also seeing meaningful progress in Brazil where revenue and EBIT were both up over 20%.

As our Brazilian operations mature and continue to gain market share, we believe it to be a more meaningful contributor in the future to our financial performance. Nevertheless, on overall basis and for the quarter, our operations outside of North America and the UK while profitable remained immaterial in both revenue and EBIT.

We are seeing rising diesel fuel, labor and health insurance costs.

Nevertheless, on a consolidated basis and excluding a normal cost associated with Hurricane Harvey and the $2.6 million special bonus paid to our operation employees, which was tied to the recent change in corporate tax, our average cost of process of each car grew only marginally over the same quarter last year.

We remain focused on controlling our G&A expense and we are pleased with our efforts to gain leverage by limiting its growth. Total G&A expense for the quarter was $34.7 million which included $1.8 million of additional G&A expense associated with the NPA operations.

Excluding the additional NPA cost, G&A remained very consistent with the prior three quarters despite the increases in both unit volume and the number of yards. As a percentage of revenue, our G&A expense has remained below 9% of revenue as we strive to operate in a lean and efficient manner. Our inventory in North America was up 8.6%.

Excluding all CAT units from this quarter and the same quarter last year, North America inventory was up 8.7%. Inventory outside of North America was up 3.9%. At this point, we have a clear picture of the impact of Hurricane Harvey on our financial results. Overall, we expect to lose approximately $8.2 million on the event.

As always, we conducted a comprehensive post event review and our performance to identify areas of improvement and to prepare for the next cat. We have identified several areas in which we can improve operational efficiency through better use of technology and data, most notably the recovery of the flood cars.

We have also identified areas where through the expansion of our cat equipment fleet in mobile facilities, we can improve the experience, comfort and efficiency of our insurance companies' employees and their policyholders as we are currently procuring and outfitting equipment in those mobile facilities.

While cost associated with our response to Harvey were high, they were necessary provide the level of service expected by our insurance companies. Within days of the event, both before and after, we secured over 750 acres of temporary storage capacity at a cost of over $15 million.

We've diverted all of our appropriate machinery and equipment of our construction company to the region even before the storm hit land to prepare and manage these facilities. We called on over 660 people who are seasoned members of our CAT team to temporarily relocate to the Huston area.

To supplement the 58 loaders we initially dedicated to CAT, we procured on an expedited basis, 22 more loaders are at cost of $4 million.

Our marketing team developed international marketing campaigns specifically for flood cars that resulted in 55% of all Harvey units during the first time flood buyers and an estimated 37% of the product going offshore, including a disproportionately high volume going to Latin America and the Middle East.

Our IT team was on site day one establishing connectivity for communications and for our operations. Regarding land, while we know there will be another CAT at Huston, we also know the likelihood of gaining access of land used in this CAT is remote. In fact, we know that 450 acres of land we use will become a residential development.

Accordingly, we have developed more permanent solution for Huston. We have expanded our existing facility. We have purchased and are currently developing a new operating facility of across more 240 acres, and we have a non-operational CAT only facility of 150 acres. This more permanent CAT land solution has been executed in Huston.

It's just a continuation of our broader strategy that will help to cover the entire Gulf and Atlantic hurricane exposure areas. In addition to Huston, last year, we announced the acquisition of 162 acre non-operational CAT facility in Okeechobee, Florida to address CAT needs in Miami, Tampa and Orlando.

And in fact this facility was utilized to address CAT volume from Hurricane Irma. In the current quarter, we purchased a 211 acre non-operational facility Theodore, Alabama, which will serve CAT needs from New Orleans, and can handle Florida. Now let me address our non-CAT lands needs.

Over the last 15 quarters, our year-over-year quarterly volume growth rate has averaged 10.8%. We have previously discussed extensively the driver of that growth. Increased accident frequency and increased total loss frequency, while the growth rate in accident frequency is moderating, we see no such trend in total loss frequency.

In the most recent report from CCC, total loss frequency is up 6.5%. Further, we believe there is a reasonable expectation that total loss frequency may accelerate due to the anticipated decline in used car pricing. Historical data suggest the used car price declines as off-lease volume increases as a percentage of new car sales.

Accordingly, we are extensively-- excuse me, extremely active in our yard expansion program, while we did not announce the opening of any yards this quarter. Activity continues at an elevated pace.

During the quarter, we closed 14 land transactions including new yards or yard expansion in Salt Lake City, Ogden Utah, Memphis, San Antonio, Atlanta, Tampa, Boston Minneapolis and Milwaukee, all of which either are or will soon be in development.

Last year April, we acquired our own construction company to more efficiently and cost effectively developed our new yards. Currently, we have nine new years or yard expansions and development. Within three months, we expect 11 more yards or yard expansions to begin.

That concludes my comments, I'll turn now turn the call back over to the moderator for questions..

Thank you very much. Ladies and gentlemen, at this time we would like open the floor for questions. [Operator Instructions] Our first question will come from Bob Labick, CJS Securities..

I wanted to start with Germany, making progress there, you mentioned last quarter that you had -- you were starting to build out two other yards.

Can you just give us an update on that progress, how it’s going? And is it, when you get those yards more insurance companies will come? Because I think you were three last time as well, what's -- give us maybe some milestones in Germany as to how that should play out this year please?.

Sure, we have two that are on schedule, one that we should begin construction on with the next two weeks, the other in Berlin which will probably be in the next two months. And we have I think very viable targets in two other cities.

We really don't expect to see an expansion of our volume until we get this network in place due to the cost to hold these cars, but we're more confident than ever of the success of our product offering in this region and we're progressing full speed ahead..

Okay great. And are there any emerging competitive threats? Or is the only threat to your expansion there really just status quo? And how does the rest of Europe look going forward..

No, there's really no one to offer what we do. The market in Europe is primarily with the insurance companies pay to the policy holders, the diminished value of their vehicle and then it’s up to the policy holder to recover the balance of the value through selling that vehicle.

So what we offer is completely different model, but one I think will be welcomed by the market there in Europe..

Okay great. And then last point just jumping, the non-insurance growth in the U.S. remains very strong and excluding NPA as well.

Can you just talk about, you've mentioned a little bit about focusing more on dealer versus charity, any other drivers there? And what you've been doing differently to have such strong growth?.

I think we're finding areas in which we can maximize the sale proceeds of these non-franchise dealer cars. We have developed internal teams that help with counter bidding and because the elevated returns that we're achieving, we're aggregating more volume from franchise, that's primarily independent dealers..

Thank you. Our next question will come from Ben Bienvenu, Stephens Inc..

I want to ask on the vehicle sales line item, up nearly 45% year over year and that's kind of a trend change from what we've seen over the last several quarters.

I am wondering how much of those driven by the hurricane? What are some of the factors that driving that growth rate so substantially higher?.

Sure, Ben. This is Jeff. And I will jump here and just a brief reminder before I get even into the substance. I think the purchased car math I think it's sometimes misleading because we’ve recognized them as revenue for the full selling price of the car.

They always look more meaningful at place in the P&L than they actually are to the operations of the business where they are 14% of revenues, but well less than 5% even though of actual units sold. So purchased cars include a variety of sourced cars including the Copart direct business, which you’ve heard us talk about on prior calls as well.

There are countries in which we operate that have a higher mix of purchased cars as well, including the UK for example as you already know, among many other drivers.

So I treat the variability in this quarter as largely noise and more than anything else and with less of effect -- less of an effect on the bottom line that might first appear from the headline number..

And then I want to pan out a little bit and think about the capacity expansion that you’ve added to the business, obviously total loss rates have driven pretty steadily over the course of the last several years. Active rates going higher, but we’ve had an absence what I characterize as normal winter.

How do you feel about your ability to handle the sell throughput in light of more normal winter that we’ve seen at least in calendar 1Q to-date? Where does your capacity stand to absorb what I think would be more normalized volume in that environment?.

Well, we’re addressing that on several different fronts. First and most obvious ones is we are expanding our land capacity. Secondly, we are developing new ways to handle the cars which allows us to draw more cars on the same facility, and that we’re exploring in place that we can to reduce the cycle time to get the cars sold faster.

In the past we’ve announced a tremendous investment of land, I think we were between roughly 700 acres last year we’ll be in that range this year. And we don’t see the need for land abating in the next few years..

Ben, I think you just heard both sides from Will, which are both true, which is one.

We are confident in our ability to provide excellent service with Copart standards to our customers including in weather scenarios that you described, but also that you've now seen multiple years of highly elevated capital expenditures, which is a reflection of our expectation that we need still more.

As you know already, land and capacity, we always talk about it on the earnings call as a big sweeping concept. It’s very much market-by-market individual city even regions of a given city basis. So, we study that very carefully and we invest accordingly on truly micro economy basis..

And then last question from me, it's sort of housekeeping around tax rate. Jeff, thanks for the color provided in the release today. I want to make sure that I am thinking about this correctly. Given your targeted rate for the full year for the fiscal year 26.9%, I am inferring around the 25% tax rate for the back half.

Is that the way that we should be thinking about go forward tax rate?.

No, so first clarification is that 26.9% is strictly U.S. federal, so already the Copart pays the U.S. federal tax we pay state income tax as well and then we pay foreign income taxes in the jurisdictions in which we do business, principally to-date the UK.

So all of that historically has blended to a 34% to 36% rate for the past few years, so for Q2, 2018, and for all of fiscal '18 frankly we will pay U.S. federal tax rate and accrue at 26.9%, so Q2 reflects that, it also reflects a "correction" because Q1 was accrued at 35% initially. So for the balance of the year for U.S.

federal tax rates only, we should expect to see an accrual of 26.9%. By the time it blend its way into our actual P&L number will be at a little bit. But that's the fiscal '18 implication is the input is the 26.9% U.S. federal rate. In 2019, fiscal '19 and beyond our U.S. federal tax rate will be 21..

Thank you very much. Our next question will come from Bret Jordan, Jefferies..

Could you talk a little bit about the increase in the international buyer bids? And obviously you're saying maybe 35% of your volume is being exported.

Is there anything going on I guess beyond a weaker dollar that is driving that? And I guess from an import export, is there anything politically going on? Are we hearing about import duties on metals, is there anything that could shift that trend going forward?.

No, I think that the difference is the way we're measuring it. We can be more accurate and how we determine where the bid is actually coming on, instead of relying on their address that they provide us when they sign up. They're relying on their IP address where the bids, what the bid is received.

And based on that, we're providing a more accurate number. But despite that, even however you measure it, our international activity is growing, and much of that based on our marketing efforts targeting our international buyers. We have buyers for the first time last quarter from a single CF Ireland.

And every quarter seems like we have one or two new countries that are bidding. And so we expect that our international influence on our ASP is to continue to grow..

Bret, I'll add a little bit of color there too. You've heard the commentary we made about ASPs rising and the underlying progress there being newer cars on average as well as waste damaged cars on average. When the population of cars shifts in that direction, I think it naturally expands the available universe of buyers including foreign buyers.

But the less damage to newer cars the more focus that might be interested including foreign buyers who can put those cars back on the road in their respective countries. So I think that's part of the story too.

But for sure, as we've articulated the big headwind shift key might have in your head from the below 20% to 35% so that's the measurement difference that you described. And Bret more precisely addressed your question about trade heightened trade barriers if that eventually comes to past.

I think the short answer is that all kinds of first and second order complications that I don't think anyone compare to client on fox at this point. Certainly, if you saw, if you saw increased barriers to products getting in the U.S.

from outside the U.S., you could imagine that the value of the salvage car that's here domestically with a number of impacts parts and the re-buildable platform could do worth more. You could also see a scenario where you describe in which the international buyers who have helped to increase ASPs in U.S. that could be net harmful.

So hard to say where that shakes out, I don't think any of these has a clear not to give it vision of where that might end up in terms of the trade implications themselves. .

A quick follow-up on you commented on adjusting pricing to certain sellers to reflect the land values.

Could you give us a little bit more detail as to which certain sellers and how much of an adjustment?.

No, really we can't -- while we're on the specifics, you can imagine that the sellers are bringing us more valuable cars would have preferential pricing in that consideration, and you can probably also understand the charity cars and cars are received from municipalities are very low on value.

And despite that they're low on value, they consume the same amount of land and typically has cycle times that maybe even longer than insurance car. So, they're far less attractive to us on verall basis..

Thank you. Our next question will come from Ryan Brinkman, JP Morgan..

Just a follow-up on the earlier conversation about Germany.

Can you elaborate on the, the early reaction from customers given how different your service is from the model that was prevalent before your arrival? And what that might mean for the ultimate growth potential in Germany which you commented on before? And then could you provide too, sort of an update on some of the other places you've recently expanded into you know in recent areas like India for example.

Now what are you learning there about whether that's a market you want to continue to invest in and what the ultimate growth potential could be in that country?.

So, I'll start with Germany. So, the feedback has been very positive. The policyholders obviously love the fact that they can collect a check and then walk away and buy a new car without having to touch the check and simply the diminished value of their car and then to sell the damaged car to aggregate enough cash to go buy a new replacement.

Yes and it's more beneficial for the buyers too. In the car market, a buyer in Germany may bid on a car and then he has to wait 21 days to find out if the car will ultimately be awarded to him. In our convention, a buyer knows within days whether he has the car and he can better plan his business and his inventory management.

Our challenge before us is just to build out the infrastructure to take advantage of this beneficial product offering that we provide and it's not a simple task.

Obtaining land in Germany is every bit a lot more difficult than obtaining land in areas like Miami and Los Angeles in the United States, and it’s taken us some time but we're well on our way.

We've got, like you said we got one in operations, we have two that are beginning construction, only have two other sites that we feel very comfortable we should close on the next months, that’s in Germany. And every country is different, and so you asked about India.

The prospects in India are not as bright as they are in what we've seen in Germany, and we’ll make the correct decisions in addressing the potential and best allocation of our national resources going forward..

And then just lastly for me, how should we think about management's priorities for the use of the incremental cash flows provided by the lower tax rate? I see the one-time bonuses to the employees, but relative to your prior plan.

Do you think you'll use the excess cash flows to accelerate organic growth and would that be domestic or international or potentially to repurchase more shares than you otherwise would have or some other purpose?.

Let me just add before I turn it over to Jeff. Let me add, it was more than just a one-time bonus. We actually had seen increases for a number of job classifications in our operational side of our business. .

So in response to your question, I think we invest to grow our business organically to provide outstanding service to our customer and you can see it reflected over a very long period of time Copart’s generally very conservative financial practices because we want to be relatively unconstrained when it come to serving our customers well and to servicing their needs.

We also expect to continue to invest internationally. We talked further about Germany today. Western Europe has been big strategic non-U.S. priority for us that likely will consume a substantial amount of capital as well. As we’ve always said, the ultimate residual is returns. Of course we historically have pursued share buybacks.

I don’t think the tax reform per se changes the timing of how we approach that. It’s as you can tell historically very lumpy by nature but that’s ultimately the lever that we will use, so no immediate triggers but ultimately that is the result of incremental cash generating..

Thank you very much. Our next question will come from Matthew Paige, Gabelli..

I just wanted to quickly follow up on Hurricane Harvey. I think in the past you’ve noted that you expected about 85,000 vehicles.

Is that still a target number? And could you just give an update on how many parties sold through?.

So hurricane and we think of for us what Hurricane Harvey and Irma being contemporaneous and Harvey being much larger of course. We have sold approximately 85,000 units to-date and through the first two quarters of fiscal ‘18 and we have approximately 7,500 units or so remaining..

And then lastly from me maybe thinking bigger picture, you made acquisitions -- are there adjacent in-markets especially in auction space that you think your technology would work in?.

It’s a fair question, nothing specifically. So we know what the job one is which is to service our customers exceedingly well and job two is to expand internationally in the markets we talked about. We will always explore specific adjacencies. We want to be thoughtful about it.

As you heard us describe on prior calls, the NPA acquisition made sense for us both because we liked it as an investment and financial rebalance because we thought it was a strategic benefit to our core business. That will likely always be the baseline test, any meaningful expected to be on that will have to meet a very high hurdle..

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

Just want to touch on the dealer cars. Good strength there on the growth on units, but first of all, with your program with the dealers.

Can a dealer put their car on your system through a mobile means and sell it that way rather have to take it to a site or do they stop to take it to one of your facilities to sell it?.

No, they have to bring it in..

Okay.

Is there any plan to do something like that where the dealer would not have to bring it in and he could just do it through a mobile phone, upload everything?.

Not at this point..

Okay.

And in terms of the transactional base, are the buyers mostly independent dealers, the sellers or mostly franchise dealers? Is that how these vehicles are flowing from buyer to seller?.

Yes, the sellers are mostly independent, yes, mostly independent. We have two franchises, they're mostly independent. And it's going everywhere. So it would be hard for me to single out one particular pocket of buyers that is significantly more important than others. A lot of these cars are going offshore..

Okay. And then lastly Jeff, I just want to make sure I'm clear on this, because I'm not. In terms of what we start looking as the tax rates for the back half of the year and next year. When you talk about the U.S.

tax rate, but is there any way you could probably just give us what your all in blended tax rate is going to be the back half for the year and for fiscal '19?.

No, unfortunately, Gary, I think, the U.S. federal tax rate historically has been a very good starting point for estimating our overall rate. But coincidently our overall rate similar because we have net offsetting benefits of relatively lower rates in the UK. But again offset and lifted by U.S. state tax rates in turn.

The point I was trying to make was in Q2 of '18, you have the noise of not that the lower rates year-over-year. You also have noise of the $7.6 we are effectively releasing from the Q1, right. Q3 and Q4 will just have a fairly clean 26.9% U.S. federal tax rate.

We haven't historically provided any guidance beyond that, but that's then starting point for Q3 and Q4..

Thank you. [Operator Instructions] Out next question will come from Chris Bottiglieri, Wolfe Research..

I want to focus first I guess the dealers.

What exactly is to writing that? Is it more like your efforts trying to get more of these dealers to sell out of value trade in to your sales other than scrap yards? Or trying to understand where the higher supply of these cars actually coming from?.

Yes, mostly it's -- we're meeting their expectations in terms of returns where we're getting higher returns and therefore that's driving higher volumes. And we've had a number of programs in place that are helping us in that respect. But we seen a returns increased significantly over the last 4 to 6 quarters on the dealer cars..

Are there any other like supplementary market factors that are driving like repossessions or anything like that that mostly in your efforts?.

Mostly, it's our own efforts. We've developed some programs and some expertises, and some internal processes that are allowing us to yield a higher return..

Okay. And then related, vaguely, you might be calling out a market share win in the prepared comments.

Is there any big account? Or was it kind a just broad based or just general comments you're making? And it was just new to the quarter just kind a more commentary on that?.

I'm not sure any essential shift this quarter..

No essentials, okay. All right, And then just finally, when you think of these CATs, pretty small loss. Sounds like i.e. something comparable maybe small gain in those. But when you think about the CAT frequency unfortunately similarly picking up be kind a more recurring event and then.

Is it largely an entry of the duopoly of high barriers to entry? And you both made these massive permanent land investments.

How you start thinking about these CATs going forward? Do you think there's any ability to price these more effectively to be compensated for pretty strenuous efforts? And is there a point where you can make in Miami as a part of recurring ordinary event?.

In the past we have not, we have not adjusted OME special pricing for CATs, and right now I can’t say there's any discussion that's been entertained about doing so..

And there's going also I just wanted to jump in on the premise if your question too, we've felt pretty meaningful financial effect across the first six months of the year, a $9 million net operating profit loss, and we don't expect to make that up in any means or degree.

I'll also add for the prepared commentary that, that in fact doesn't even count to very meaningful capital expenditures we've made in anticipation of these catastrophic events and in response to them.

So these are major financial burdens for us, no question on balance, as Will articulate that simply what it takes to provide Copart service to our customers. As to your question about pricing, I think we view it as part of the cost of doing business to provide exceptional service to our customers.

So, we historically have not, as Will noted, -- have not adjusted pricing accordingly for those moments in time..

Thank you very much. Ladies and gentlemen, at this time, we have no further questions in the queue..

All right, thank you Chantelle and thank you everyone. As you can see from the results of the quartet, we're quite happy with how things look with the CATs primarily behind us, I just want to point out our people have done a fabulous job.

We've been out in the field speaking to those folks and I know they're proud to work for Copart, and we’re proud of them. So we appreciate all the hard work and the effort and look forward to reporting on Q3 on the next call. Thanks so much..

Thank you very much. Ladies and gentlemen at this time this conference is now concluded. You may disconnect your phone lines and have a great rest of the week. Thank you..