Jay Adair - Chief Executive Officer Jeff Liaw - Chief Financial Officer Will Franklin - Executive Vice President.

Bob Labick - CJS Securities Stephanie Benjamin - SunTrust Robinson Humphrey Craig Kennison - Baird Ben Bienvenu - Stephens Inc Bret Jordan - Jefferies Gary Prestopino - Barrington Research Chris Bottiglieri - Wolfe Research.

Good day, everyone. And welcome to the Copart Incorporated Fourth Quarter Fiscal 2018 Earnings Call. Just as a reminder, today’s conference is being recorded. For opening remarks and introductions, I would now like to turn the call over to Mr. Jay Adair, Chief Executive Officer of Copart Incorporated. Sir, please go ahead..

Thank you, Katy. Good morning, everyone and welcome to the Q4 and year-end call for Copart. I'm going to turn it over to Jeff Liaw, who will give you an update on finance and then Will Franklin, who will give you an update on the operations in the business, and then we will open it up for questions.

With that, it's my pleasure to turn it over to Jeff Liaw, CFO..

Thank you, Jay. I'll start with the 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 on the deemed repatriation of foreign earnings net of deferred tax changes, disposals of non-operating assets, impairment of long-lived assets, acquisition related fees and integration charges, reserves for legacy sales tax liabilities, foreign currency related gains and losses, certain income tax benefits and payroll taxes related to accounting for stock option exercises.

We've provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our Web site under the Investor Relations link and in our press release issued this morning.

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 the GAAP and non-GAAP basis 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 the 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.

Now, turning our attention to the fourth quarter of fiscal 2018. We achieved a record fourth quarter and unit sales revenue, gross profits and operating income.

We're quite pleased by what we believe is strong underlying operational and financial performance, but it was of course a complex quarter given certain non-recurring, non-cash charges, which I'll elaborate on further during this call, as well as a slight mix shift to purchase cars and year-over-year changes in our tax rate.

Starting with the topline, our revenue grew globally at 18.7% year-over-year with a modest contribution from beneficial year-over-year currency effects of approximately $1.5 million. We experienced global service revenue growth of 16.3%, which is largely the best reflection of underlying growth in the business.

Purchase car growth of 37.7% driven by NPA Copart Direct Germany among others. Actual Copart owned inventory at the end of the quarter was $16.7 million, which as you know, is still small in the context of the overall business.

As you know, if you have followed Copart for some time, viewing purchased car revenue on a nominal basis overstates its relative contribution to the business if we reflected only the net margin in our financials or if we were to gross up our service revenue generally for the average selling prices of cars, purchased car revenues would appear much smaller in comparison.

We experienced global unit sales growth of 10.2% with U.S. unit growth of 9.8% and international growth of 12.2%. Will, will provide additional color on the growth drivers, but we did experience growth in both insurance and non-insurance volume.

Our global inventory grew by 3.8%, slightly more than that excluding catastrophic inventory from both last year and this year. Our gross profit grew from $167.5 million to $188.4 million in the quarter, or 12.5% growth.

That said, the fourth quarter of 2018 was burdened by a one-time non-recurring depreciation charge of $10.5 million due to assets newly placed into service as well as changes in the useful lives of fixed assets.

The fourth quarter of ‘18 was also burdened by $1.9 million of write-downs of assets and certain separation costs in connection with our acquisition of the business in Finland. The gross margin rates decreased from last year, 44.2% to 41.9% or a decline of 230 basis points.

That said, the non-recurring depreciation charge represents 230 basis points of that contraction by itself. Furthermore, the slight mix-shift to purchased cars represents another 70 basis points of thereabouts. The Finland write-down is an additional 40 basis points.

The punch line being that in the quarter in which our gross margin rate declined year-over-year by 230 basis points, those factors alone represented 340 basis points or more than the total decline. We grew ASPs in the quarter year-over-year by 11.9% in the U.S. despite lapping a strong ASP growth quarter a year ago in fourth quarter of 2017 of 7% net.

Will, will elaborate again, but this is continuing the phenomenon we talked about previously of newer cars being totaled less severely damaged cars being totaled, increased bidding activity, strong used car price environment, and a solid scrap price environment as well.

Turning our attention to general and administrative expenditures, I’ll start with the line item excluding stock compensation and depreciation. G&A ex those factors increased from $29.8 million a year ago to $42.8 million this year.

Of that $13 million increase, $5.6 million is a non-recurring payroll expense in connection with certain executive stock comp exercises, which we have normalized in the non-GAAP EPS presentation you see in the press release, an additional $1.4 million of non-cash reserves in connection with certain sales tax liabilities.

Those together are $7 million of $13 million increase in true one-time issues. Furthermore, approximately $2.9 million of our G&A growth is due to the acquisitions of NPA and the business in Finland. The balance then represents actual growth in general and administrative expenses for the quarter.

As we have said routinely on our calls and interactions with our investors and others, our general and administrative expenditures will grow over time with inflation and with increases in complexity of our business, but we continue to believe we can achieve operating leverage given the top line growth rate that we have experienced.

Finally, two other points on G&A and other portions of the income statement; G&A depreciation increased by $1.6 million year-over-year, of which materially all is in connection with the acquisitions as described previously at NPA and AVK. Our GAAP operating income grew from $110.8 million to $134.8 million, or 21.7%.

If you include the one-time matters that I described previously, the depreciation and amortization charge of $10.5 million, the $1.9 million write-down in connection with the Finnish acquisition, the sales tax liability, the payroll liability as well as an additional $1.1 million impairment of an intangible asset in connection with historical acquisition.

Those factors together represented $20 million of decreased operating income in comparison to what it otherwise would have been. Our operating margin for the quarter was likewise depressed by 450 basis points attributable to those factors. Our net interest expense was down year-over-year from $5.5 million to $4 million, given the lower debt balance.

I'll turn our attention to income taxes, in the fourth quarter as you know, there are additional complexities as tax reform comes into clearer focus with both a change to our recurring tax rate as well as one-time effects on deemed repatriation and deferred taxes and the like.

Our Q4 effective rate of 17.3% benefited from certain non-recurring tax offsets, including the exercise of stock options, which again you see reflected in the adjusted EPS schedule. Our full year normalized rate for fiscal '18 would have been approximately 28%, excluding those one-time factors. That said, as you know, our U.S.

federal cash tax rate for fiscal '19 will be 5.9% lower than what we experienced in fiscal '18 due to the full year benefit of tax reform. Because our fiscal year straddles the calendar year, we received a portion of the benefit in fiscal '18 with the full benefits in fiscal '19.

Our GAAP net income for the fourth quarter increased from $70.3 million to $109.7 million, or 56% year-over-year increase. On a non-GAAP basis, our net income increased from $82.4 to $102.6 million, or growth of 24.5%.

In the non-GAAP net income reconciliation schedule, you will see there the $2.9 million in deferred tax adjustments, the impairment of the long-lived assets, the targets we incurred in connection with the acquisition of our Finland business, as well as the legacy state tax liability.

Not included in that reconciliation is the depreciation and amortization charge I've described a moment ago.

The effective share count, the last comment before we get to EPS, has increased from $237.6 million a year ago to $244.4 million or 3% increase, with the majority of this increase attributable to our increase in share price due to the treasury method of accounting for stock options. Our non-GAAP EPS spend has increased from $0.35 to $0.42.

Regarding our balance sheet and cash flow. Operating cash flow for the quarter was $157.9 million and CapEx of $106.4 million in the quarter. It has a slight deviation from the past few quarters, 40% of these expenditures were for yard and transportation equipment.

Tax reform created a one-time benefit for us of acquiring equipments and placing it into service in fiscal '18 of approximately an incremental 6% that we would not receive had we made those purchases in fiscal '19 and beyond, which caused us to accelerate the limited set of purchases into fiscal '18.

The balance of our CapEx, as usual, was attributable largely to capacity expansions and big buy outs. And the last brief commentary I'll provide is on Germany before turning it to Will for additional explanation. As you know already, we've been running options at our two existing Copart Germany locations.

In comparison to conventional remarketing methods in Germany, Copart Germany's options are already achieving substantially better returns at auction. As we penetrated German market, these superior returns will ultimately accrue to the benefits of German insurance carriers, policy holders, our buyer base and Copart itself.

If you consider strategic drivers of our success in the markets in which we are more mature, we have world class capabilities in developing a robust buyer base, real estate for vehicle storage, physical logistics and transport and access to vehicles.

On each of those four fronts, we have substantial initiatives underway that we'll discuss with you in greater detail on the next call. With that, I'll turn it over to Will Franklin..

Thank you, Jeff. First, let me provide some updates on hurricane Florence. As we have stated previously, our goal is to be in the constant state of readiness for these cats. That requires us to have permanent cat storage capacity.

Relative to Florence, in the region, we have recently added a 90-acre facility near Raleigh and a 96-acre facility located in Spartanburg, South Carolina. In addition, we have available new facilities near Charleston, Winston-Salem, Atlanta and Fredericksburg, which are near completion, yet currently available to store cars.

To supplement these new facilities and our 11 existing facilities in the cat region, days before the storm hit, we secured 17 temporary storage locations. We also mobilized almost 100 loaders, hundreds of tow trucks, our dedicated cat teams and we staged in the region our six mobile command centers.

In total, we estimate that we have spent nearly $1.7 million in preparation for Florence, prior to the landing of the storm. Our response to hurricane Florence demonstrates our unmatched cat capabilities and our commitment and ability to execute during these events.

In a cat, we don’t have the luxury of waiting for the storm to clear and then assess our needs. We have to be on the ground days, even weeks beforehand, preparing for the worst outcome. Florence was a category four hurricane, the same as Harvey, while out in the Atlantic. It landed as one and quickly dissipated into a tropical storm.

While it's too early in the claims cycle to know with certainty, we believe volumes generated in Florence will require only a limited use of our cat resources. Now, let me provide some commentary on our fourth quarter's operational results. In the U.S., our volume grew by 9.8% for the quarter and 12.9% for the year.

When adjusted for cat activity, the year-over growth was 10.7%. Our volume growth continues to be driven by organic growth and market wins within the insurance markets, continued growth in the non-insurance markets and our NPA acquisition.

Volume from noninsurance sellers, which includes franchise independent dealers, finance companies, charities, municipalities, equipment dealers and wholesalers, grew by 27.6%. In total, non-insurance cars comprised 23.5% of total U.S. volumes compared to 20.2% for the same quarter last year.

The growth in volume was spread broadly across multiple seller segments. Volume from dealers was up 26%, bank and financial institutions 23%, rental car companies 29%, wholesalers which almost doubled at 99% and industrial equipment, which more than doubled at 122%. In the U.S., our service revenue per car was up almost 6%.

The increase in revenue per car was due primarily to higher ASPs, which grew by 11.9%.

The increase in ASPs was driven by a number of factors; a 4.8% increase in the value of used cars as measured by Manheim index; an 18% increase in the value of crushed car bodies; the beneficial mix of crushed cars sold as non-insurance cars and power sport vehicles are generally run-in drive vehicles that yield a higher selling price; and the increase in our marketing activity.

We are also seeing a behavioral change in the industry as insurance companies are totaling cars with less damage. We continue to expand our marketing activities and to enhance our auction platform.

We have two objectives; first is to increase the number of bidders that participate in our online auction; and second is to increase the bidding activity of those who do. We are executing well on both. The number of unique bidders is up over 30% and the increase in number of bids received per lot is up almost 9%.

Our marketing activity seeks to identify and encourage buyers wherever they are in the world to search our Web site to join our auctions. Despite the headwinds caused by the stronger dollar, buying activity from international buyers increased. Total sales to buyers with international business addresses, was 23.8%.

When we include all the export activity, including buyers with domestic addresses who only export based on license our international markets represented 34.2% of U.S. units sold. Our international buyers and exporters also influence auctions by pushing bids higher by being the second high bidders.

When we include this metric, our international buyers and exporters impact over 50% of all U.S. items sold. Additionally, our work on auction dynamics include continues as we improve the effectiveness on our online auction platform, which we believe to be the best in the world.

Due to the electronic nature of our auction platform, we can capture all search and bidding activity, including individual product preferences and bidding tendencies. Utilizing that data, we may, when appropriate extend the auction for certain units in anticipation of further bidding activity, or employ other measures to elicit additional bids.

We're also addressing the change in bidder behavior as they move towards mobile searching and bidding by improving our mobile experience. This quarter, 40% of all web traffic and 24% of winning bids were on mobile, up 80% and 20% respectively.

In Canada, our volume grew by 29% for the quarter and 46% for the year due to market wins, as well as organic growth within the market as the Canadian salvage market, like the U.S. market, has seen growth in total loss frequency. In addition to the growth in volume, we've seen a meaningful growth in revenue per car as Canadian ASPs, like U.S.

ASPs, have risen in Canada over 14%. To accommodate the increase in volume in Canada, last year, we expanded our yard in Calgary by 14-acres and we expect to announce 14-acre expansion of our Edmonton yard in the first quarter of our fiscal 2019. Turning to the UK, we delivered another strong quarter as EBIT and GBP.

And after eliminating the impact of one-time payroll tax expense associated with an option exercise was up 10.8%. The growth was driven by an 8.1% increase in volume, and an increase in revenue per car also tied to higher ASPs.

UK ASPs were also beneficially impacted by a change in mix as dealer car volume grew by 18.7%, and represented 10.2% of total volume compared to 9.2% in the same quarter last year. We are also seeing meaningful progress in Brazil where volume was up almost 9% quarter-over and 10% year-over. This growth was achieved in a very challenging market.

Brazilian new car sales in 2017 were down 40% from 2013. The car park is aging and auto policy count has been declining. Nevertheless, we have grown volume by gaining market share due we believe to our ability to deliver exceptional operational and marketing results.

On a quarter-over-quarter basis, our revenues and EBITDA grew by almost 11% and 30% respectively, after adjusting for a beneficial one-time adjustment. We believe Copart Brazil will become an increasingly more meaningful contributor to our overall financial performance.

We're seeing rising diesel fuel, labor and health insurance product costs across the board. Nevertheless, on a consolidated basis and excluding the costs associated with the exit of dismantling activity in Finland, our average cost to process each car grew only marginally over the same quarter last year, as we leverage our fixed cost model.

Our inventory was up in North America, the UK and worldwide by 3%, 5.5% and 3.8% respectively. This quarter, North America sales grew by 10.2%. Over the last 16 quarters, our year-over-year quarterly volume growth has averaged 11.3%. We have previously discussed extensively the drivers for the growth in the North America total loss market.

While the growth rate and accident frequency is moderating, we see no such trends in total loss frequency. We expect to see continued growth in both car park and total loss frequency.

Accordingly, we remain extremely active in our yard expansion program to accommodate the growth produced by both market wins and organic growth and the insurance market, our continued expansion in non-insurance markets and our need for additional cat capacity. We did not announce the opening of any new yards this quarter.

However, in addition to the yards in Leipzig, Germany, Spartanburg, South Carolina, Chiba, Brazil and our new NPA site in Madison, Wisconsin, which we have all opened after the close of the last quarter, we currently have 28 other land development projects currently under construction, representing over 1,500-acres of new capacity, 26 of those in the U.S., one each in Canada and Germany.

That concludes my remarks. Katy, now we'll turn the call back over to you for Q&A..

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

I wanted to just take a step back on G&A. You gave us a lot of detail there, and I'll certainly go back through the transcript and stuff. But just I know you won't guide to numbers specifically.

Could you talk a little bit about the profile as a percent of sales? Has anything materially changed? Whereas you know there'd be negative operating leverage going forward.

Do you still expect to get operating leverage on that line? And how should we think about G&A going forward given the significant volatility over the last few quarters?.

In short, yes. We do expect to achieve, as we have very consistently in history, our operating leverage on G&A. This quarter, as you know, we -- on the non-stock comp, non-G&A line item, the $13 million increase included $7 million itself just on the payroll taxes and the legacy sales tax liabilities.

So those are true non-occurring, not in the baseline so to speak. Then there was about $3 million that we picked up from the acquisitions of our businesses in Finland and in NPA. And the balance is the actual growth in G&A for the quarter.

So yes, we do expect to achieve leverage, so there will be some inflation as we add complexity in the business as we expand into Germany and the rest of Western Europe initiators of that sort. There can be modest increases, but still on balance, we will achieve better growth in operating income than we do in gross profit and revenue..

And then, I think Will touched on this in the end and on last call. You have something like 11% or close CAGR in volume over the last four years in the U.S. car volume. Have you kept up with that in land? I know you've reported lots of land acquisitions, but you haven't given us a sense of how much you picked up.

And so, I guess the question is have you kept up with the volume with land, and if not, what have you done to maintain the efficiencies in the yards as utilization rate seemingly creeps up?.

We have kept up, Bob. I can't say this, though that whatever excess capacity we had three years ago is dissipated. But our procurement, our acquisition, and our development activity is one of our primary focuses here as across the world.

We employ, I think, a very aggressive and when I say aggressive, I mean high assumption in terms of growth rate when we plan our expansion and our capacity needs. So, I think we're developing to that number. So, when you look at those elevated growth rates, we're anticipating an additional permanent CAT capacity that we're pursuing, it's a big job.

But to answer your question, we think we've got it covered. I'd like to say we've got 28 projects in construction. I think you'll see a number of those being announced in the next two quarters, and if you are looking at the targets that we're pursuing and I would say contracts that we have entered into, there’s about another 45 of those.

So, I think we're well situated to accommodate the growth in the market as well as any CAT needs..

And last one from me, just on Germany. Can you give us some updates in terms of the number of either insurance companies or rental car companies that are participating in those auctions, and other milestones we should look for there as you build that? I think you mentioned there's another yard to come there as well..

We've changed some of our approach and strategy in the German market, and we're going to give you an update on that in the next quarter. So where we've got two locations today, we're going to be opening a significant number of locations in this quarter. I don’t like to talk about what we're going to do. I would like to talk about what we've done.

So in the next Q, we'll be reporting on how many new locations we've opened, and we're clearly looking at the market as we’ve got to have the logistics and facilities in place to service the insurance industry.

With that said, we are handling some insurance volume in that market, but primarily the majority of the volume that we're handling right now is noninsurance, and that allows us to build their salvage vehicles. They’re just not procured directly from the insurance. They’re procured directly from owners of vehicles.

These are owner retentions where the insurance company has had the insured retain the vehicle and we’ve reached out to the insurers and acquired the vehicle from them to flip it through auction. And in that environment, what we're doing is, we’re creating a marketplace where today we’re the largest auction house in the country that you can come.

I’ll give you a great example, today we had 150 cars on auction in Hanover. All those vehicles, if you bid, you own them. And that is the only auction environment I know of in Germany where you have 100% chance to getting the car if you bid on it.

Everything else is, in the country, is contingent auction environment where you may not end up getting the vehicle, so we’re selling -- you can go online, I can tell you we’re selling over 400 cars a month right now, but you can go online, look at the auctions, I’d encourage everyone to do that.

And then let's wait until next quarter when we report on a much bigger update on our strategy and our approach in that market. But I'll finish by saying it’s taking up a significant amount of my time now.

I'm spending a fair amount of my own time on Germany, and we are very committed to the market and succeeding before the end of the calendar year in terms of large locations and large volume..

And Bob, just to elaborate briefly on that point. So the sourcing car is from some policyholders directly, bars the function of the way the German insurance markets and its indemnification provisions have evolved over the years. However, then sales to Copart Germany that’s what lead me to the statement that we clearly are achieving better returns.

So our conviction that the Copart’s model is the right one for the German insurance market long-term remains as true as ever, and the evolution Jay described is merely how we achieve that outcome..

Thank you. Our next question will come from Stephanie Benjamin with SunTrust..

I just wanted to go back and follow-up on the G&A, or I am sorry, overall operating income and the one-time expenses. And happy to do this offline if that’s easier. But I think you mentioned that there’s about $20 million in non-recurring in the quarter.

Of that, what was broken out in the non-GAAP adjustment schedule in the press release? I just want to make sure I'm getting it correct based on that..

In the non-GAAP schedule, you have everything but the $10.5 million of depreciation and amortization that burdened gross profit for the quarter. Otherwise, in the non-GAAP reconciliation, you see on a post tax basis, the pretax numbers that I just walked through..

So really -- and you said the operating income had $20 million of one time that we would not expect to occur, going forward….

Correct..

My next question is actually is just on Brazil. I think that very positive there, and almost seems like -- and I think the comment that it’s going to be a more meaningful contributor.

Is there something that has materially changed just in the last couple of months in that market, either on your end or from just the market standpoint to cause this to be a larger contributor? Or just more color there would be really helpful? Thanks..

There’s a change, it just wasn’t recent. It’s take -- we entered the market in, I think 2012 and it takes a while to build out not only your team but your processes, and to gain the kind of reputation that you need to grow the business, kind of reputation, the kind of brand that we have here in the United States.

And in Brazil, we're starting to gain that brand recognition, especially with the insurance companies. And you saw that we have expanded north in Betim. Recently, we added a new yard south in Curitiba.

And we think there's opportunity to grow, simply because we operate better than everyone we think and we provide the highest returns through our re-marketing efforts. And we just think it's the byproduct of that will be growth in our volume and our presence in the market..

And will you be able to provide the percent, or the percent contribution Brazil had in the quarter? Or by top -- or should I wait until the 10-K? Or how should we go around that?.

We haven't sized in that respect and we probably won't until it becomes a material number with respect to the total..

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

Jeff, I think you mentioned a small issue but a change in lives of the fixed assets and some change in assumption there.

Can you shed more light on that decision?.

Yes. So in short, I was commenting in total on the $10.5 million non-recurring depreciation charge that burdened yard expenses and shows up in gross profit.

And the two drivers there are, one, assets newly placed in service with a substantial depreciation charge associated with that, as well as change in certain useful lives, and this is based on a change in management estimates. We have a number of facilities with different useful lives and we harmonize them, so to speak, and adjusted them accordingly.

So that charge is not one you would see on an ongoing basis for the quarter..

And I guess I'm just trying to understand what drove that decision to change the length of the lives..

I think as you know in the past few years alone, we have significantly increased our own experience in acquiring land and developing it, including with our own in-house team in Bright Excavation. So I think our -- the information we have available to us, our understanding even of our land has improved significantly even over the past two years.

So when reviewing historical fixed asset ledgers, we bring that heightened awareness to bear and that caused us to revise certain of those numbers accordingly..

And then as we think about Germany and maybe the acceleration in activity there through the end of the year.

Should we anticipate costs running ahead of revenues for a period of time here?.

Craig, I think from the perspective of the overall P&L, I think the effect would not be that pronounced of what you just described. So there certainly will be moments when we invest when we have costs that are ahead of the contribution.

There'll be moments when the opposite is true when we see the flow through the contribution in connection with costs that we've previously invested. I don't think that on balance you would see -- from your perspective, a meaningful drag on the P&L..

And then with respect to CapEx.

Could you just lay out your plan for CapEx spending in fiscal '19, and maybe give us some of the bigger buckets where you expect to allocate capital?.

CapEx in fiscal '19 will continue to be dominated by capacity expansions. So it will be land developments and acquisitions. In some cases the weak buyout. So I think the rough number over the past say eight quarters would be 85% or so of our CapEx has been for those.

And as for capacity, in general, you know that our capital expenditures have been up over the past few years. We largely expect that to continue into fiscal '19..

[Operator Instructions] Our next question comes from Ben Bienvenu with Stephens Inc..

I wanted to ask about revenue per unit. It's been really strong for some time here. Obviously, ASP growth has contributed to that. But you guys have also talked about some of the things that you've been doing around being dynamic in the auctions.

So I'd be curious to, to the extent that you can, delineate between how much of the ARPU increase is from external factors, a reflection of the market? And how much of that is because of decisions you guys are making?.

Ben, I would like to be fair, those variables would be really hard to isolate, because they both happen concurrently with literally every auction we run. So we can't isolate either the market effects or what we do as opposed to what we do we can to some extent.

But what I would tell you is that both have been meaningful that as we've look at the market for used car prices, they are very strong but they're certainly not up 12% year-over-year either.

So there is some function of the marketplace being strong, but also some meaningful function of our innovations, our member recruitments, our auction management..

And then my second question is just around a follow up on capital allocation. Cash continues to build on the balance sheet. And I know you don’t make a practice of talking about your future plans for buyback. But I'd just be curious we haven't heard an update around the M&A landscape in sometime.

I'd be just curious to hear little bit more about how you think M&A fits in your future prioritization of use of cash flow?.

It’s a fair question, Ben. M&A certainly has been a part of Copart's journey over the past few decades. It has driven growth in the business. And in some cases, I think that will continue to be true, going forward. That said, I think as you know in our core markets in which we are strongest, the U.S.

and UK and so forth, there are more limited opportunities to acquire company.

Beyond that, we do revisit this topic from time-to-time we always have as our hurdle that; one, we have to like the acquisition in isolation that it has to make financial sense as to generate the kinds of returns on capital that Copart is going to expect; and secondly, that it has to dovetail well with our strategic initiatives broadly, whether that’s international expansion in Brazil, Europe and the likes, or expanses into additional future spaces.

So that rubric that calculus hasn’t changed at all. We won't largely comment on this kind of activity until after the fact, as you know, for all these reasons. But M&A will be a part of Copart's future as well..

And just a quick follow-on to that. A lot of the acquisitions you guys have made historically have been either geographically or capacity focused.

When we think about building out future capabilities, are those all elements of your business that you can build organically? Or are you looking at targets from time-to-time that potentially bring capabilities to bear fruit for Copart as well?.

The latter. So 2Q illustrations, National Powersport Auctions, an acquisition we completed in June of last year clearly an extension into the non-salvage power sports arena. So the addition or capabilities via acquisitions that was not organic per se.

And even in Germany, our first foray into Germany was in connection with the acquisition of WOM, which is one of the listing services you heard us describe on prior conference calls as well. So from time-to-time, we will extend beyond what I would characterize as Copart’s traditional salvage auction business in our M&A activity.

But for the reasons we just described, those of course have higher hurdles still if it deviates from what we know and have done day-to-day forever, we have to be that much more sure..

Thank you. Our next question comes from Bret Jordan with Jefferies..

As we maybe accelerate the business in Germany, I think in the early comments, you discussed your purchased vehicle volumes were up partially as a result of Germany.

Do we think the purchase mix is going to accelerate from here, and I guess as we think about the gross margin impact going forward?.

And Bret I think to be -- I think it’s a fair question. I think to be fair, we don’t -- we wouldn’t manage the business that way. I understand that as the purchased car volumes were to increase that would depress our nominal margin rate, but that's a particularly sophisticated way to run the business where we want to maximize contribution and profit.

And so we wouldn’t think in those terms except when we end up on quarterly calls like this one….

Well, I was just wondering whether we should think about that going forward as you try to project your nominal margin rate.

Is Germany’s acceleration going to be meaningful from here?.

On Germany specifically, let me comment more generally. On Germany specifically, I think you heard Jay and I both say, we’ll have a whole lot more to say on the next call than on this one.

But more generally, when Copart has grown into new spaces, we have often expanded, first, through the purchased car model until we have achieved liquidity and proven it in the various counterparties in the market, we’re often better off buying the cars ourselves, selling them at auctions, generating a profit and improving to all the market participants that we do so.

Overtime, that very naturally evolves the consignment model as was true, for example, in the UK, most notably. Or you may remember from back in the day, we were heavily tilted to the purchase model when compared to the consignment. The opposite is true today as we’ve achieved that liquidity. So when we are growing in new spaces, NPA is another example.

NPA has a five -- historically had a five store footprint, so to speak, in the United States. They had tremendous credibility among dealers in and around those locations. As they expand beyond those geographies, initially will they buy a few more bikes to prove their model? Yes.

And the same will be true in Germany and could be true in other international markets as well. So it will have an effect. But as per that two lengthy paragraphs about purchased cars, I wouldn’t overweight that in the overall analysis. But yes, I think purchased cars could or will outgrow consignment sales for the near future..

And then a follow-up question. So Will’s commentary around Florence, sounds like an incremental $1.7 million spent to prep and I think volumes may be light coming out of that storm.

Is that about the magnitude of the loss? Was there -- or the impact of the cap that may come from Florence? Or are they incremental expenses that have -- that will come along the way? And I guess there will be some volume to offset that expense. So it’d be maybe less than that $1.7 million..

It’s really too early to tell. When all the water subsides and the claims start coming in, the assignments come in then we’ll have a better picture of that. The $1.7 million that I quoted was just what we spent to prepare for the storm. So there’ll be other expenses to follow-on throughout the course of next weeks and months..

Thank you. Our next question comes from Gary Prestopino with Barrington Research..

You said your U.S. inventory was up 3% year-over-year.

Were you comping against the impact of catastrophic events last year?.

Not largely, Hurricane Harvey hit it August of last year. So July 31, '17 had some catastrophic events, hailstorms and the likes, but not the meaty ones you might have in mind..

So it's more of a seasonal impact and it just ebbs and flows, but this is a seasonally slow time for accidents.

Is that more a way we should read that?.

The seasonality, I don't think would factor into a year-over-year number, but I think this even should be set the same year-over-year..

And then your tax rate you said was I think somewhere around 28% for the year. And then you said something about a 5.3% decrease for next year.

Is that 5% decrease off of that 28%?.

Yes, fair question. And I would perhaps let me clear it. The fiscal '18 normalized tax rate includes big lumpy stuff, like the stock option exercises, would have been approximately 28% blended for the company. 28% includes the 26.9% U.S. federal and that includes state income tax through some foreign taxes and the like.

The point about fiscal '19 is that for the U.S. portion of our income, which historically is in the 80% to 85% range of the total income for the company that on that specifically our U.S. federal rate will decline from 26.9% in fiscal '18 to 21% in fiscal '19. So that will in and of itself somewhat meaningfully lower our tax rate in fiscal '19..

And then could you just -- I was trying to write this down. Could you just give me your unit growth in the U.S.

and international, and then on a combined basis in the quarter?.

9.8% U.S. 12.2% international, global 10.2%..

And then lastly on your ASPs, you said the U.S. we're up about 11.9%. I couldn't write this down again.

How much of that change was due to scrap?.

It's tough to quantify. We can tell you how much scrap was up. The scrap year-over-year, it remains a pretty healthy environment, was up 18%. I think sometimes the perception is a little overwhelmed on the importance of scrap in our business.

So if you consider the typical car that Copart sells, a passenger sedan has a ton and half of total content, the crushed car body just the usual number is just $200 per ton. So it's $300 of scrap content in a car for a car that sells for thousands.

But even if the scrap is up 18%, you're talking about $40 or $50 change to the underlying value of a car that sells for thousands of dollars. So the expected matters in particular on our lowest end vehicles, I suspect it had virtually no effect on the cars that will be rebuilt and brought back on to the road.

In some theoretical form, you could imagine that 10 years from now when that car is done that scrap value [indiscernible] back. But I think the scrap matters, it’s a contributor, but I don't think it's nearly -- it's not that meaningful a portion of that ASP..

[Operator Instructions] Our next question comes from Chris Bottiglieri with Wolfe Research..

I wanted the thought on the dealer first kind of descriptive details, I am not sure I got them all. But I think you were up 90% last quarter year-over-year, and maybe I'm misinterpreting that metric.

But can you give the comparable metric, what it was this quarter? And collectively you've given these different sub-segments, the rental cars and whatnot.

If you're aggregate what you're doing in the whole car space and how that's growing, maybe just provide some context to what that also had done last quarter?.

I'm not sure the numerical questions that you had. I can talk about the segments in general.

I mean, we're finding that -- we're tracking more and more buyers for these types of cars, which allows us to just the chicken egg, provide higher returns, which allows us to approach those who have these types of cars and ask them to test our re-marketing and our auction platform.

And through that process, they found it to be fruitful in terms of increasing their returns, and in turn has grown that market. We've also developed specific programs for different buyers. So we have a different program for equipment sellers, or we have a different program for wholesalers, or we may have a separate program for financial companies.

And so we're becoming more astute in identifying their specific needs and addressing those through our processes and our technology..

Let me rephrase it differently.

Did your growth in dealer cars accelerate or decelerate, and what you've done last quarter it makes the simple question?.

I think it accelerated..

Accelerated, that’s helpful. And then maybe just like holistically as you think about the strategy, given that you're growing pretty aggressively. But I would think your capabilities and service are lower and than -- your platform effect is a little bit lower right now.

Can you talk about how your product is differentiated relative to the incumbents and what's driving that growth? And how we think about sustainability of how much longer you can compound this growth and dealer consignment?.

We think there is a long runway ahead of us in terms of growth and dealer consignment. I think we're in the first or second inning of this game. And I think we're refining our processes. We're adding more resources to the pursuit of this volume. And we think that the sellers who are trying and utilizing our platform are very happy with the results.

So I think there's a robust opportunity ahead of us with respect to dealer cars..

Thank you, sir. At this time, I am showing no further questions. I'd now like to turn it back over for closing remarks..

Well, thanks Katy. Thank you everyone for attending the call. And we look forward to reporting on Q1 in November. Bye, bye..

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect. Have a great day..