Copart - Earnings Call - Q2 2012

Transcript

Speaker 0

Good day, everyone, and welcome to the Copart Incorporated second quarter fiscal 2012 earnings conference call. As a reminder, today's call 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. Please go ahead, sir.

Speaker 3

Thank you, Lisa. Good morning, everyone. We're going to change things up a little this morning. Will and I are in two different locations, and he's going to run through the disclaimer, go through his update on the company, turn it over to me, and then we'll open it up for question and answer. With that, it's my pleasure to introduce Will Franklin.

Speaker 2

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. Key risks include trends in average selling prices for cars and factors that can affect our gross margins. 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-Qs, 10-K, and other FCC filings. I'll now provide some brief comments on the financial performance in our second quarter. Yesterday, we reported our results for the second quarter of our 2012 fiscal year.

Consolidated revenue was $227.9 million compared to $207.4 million for the same quarter last year, an increase of 9.9%. Included in our second quarter of last fiscal year was a beneficial settlement with the UK tax authorities respecting the proper apportionment of auction sales proceeds between revenue and VAT. As a result of the settlement, we recognized in that quarter $1.8 million in purchased car revenue relating to prior periods' activities. Excluding the settlement, revenue growth would have been 10.8%. The growth in revenue was driven primarily by growth in unit volume, which increased 7.1%. On a same-store sales basis, unit volume grew by 5.2%. In North America, insurance volume grew by 6% and was driven by market winds and by the severe weather we experienced last summer.

Non-insurance volume grew by 8.1% and was driven primarily by growth in supply from franchise and independent car dealers and from individual consignors. Non-insurance volume represented 19.8% of our total North American volume. While the total number of purchased units sold increased by 2%, it declined as a percentage of our total units sold as we continue to migrate contracts in the UK from the principal model to the agency model. Yard and fleet expenses grew from $85.1 million to $86.4 million and reflect the higher volume of cars processed. Our gross margin grew from $85.9 million to $99.7 million or 16.1%. Excluding the impact of the beneficial settlement in the UK in our second quarter of last year, our gross margin would have grown 18.5%.

General and administrative costs, excluding depreciation, were $23.4 million compared to $23.7 million for the same quarter last year and included approximately $500,000 in headquarter relocation cost. In the current quarter, we determined that certain assets, primarily our fleet of private airplanes, will be removed from operations and disposed. Consequently, these assets, which also include certain real estate and computer hardware, were written down to their fair value, resulting in an impairment of $8.8 million. Our operating income, excluding the impairment, increased from $60.2 million to $72.3 million or 20.1%. Excluding the beneficial settlement in the UK in the second quarter of last year, our operating income grew by 23.8%. We ended the quarter with $127.6 million in cash. Accounts receivable grew as we increased inventory. During the quarter, we generated $26.2 million in operating cash flow.

We expended $7.8 million for capital assets and $91.4 million for the repurchase of 1.97 million shares of our common stock. At the end of the quarter, we had 63.3 million shares outstanding on an undiluted basis, and we had 25.5 million shares remaining in our share repurchase authorization. In the quarter, we fixed our interest rate in the previous quarter, we fixed our interest rate with respect to 75% of our outstanding term debt at 2.35%. During this quarter, we fixed the interest rate with respect to the remaining 25% of our debt at 2.19%, all through interest rate swap arrangements. Our outstanding term debt obligation is $481 million, and we have $100 million available on a revolver. That concludes my short comments. We'll now turn the call over to Jay Adair, our CEO, for further discussion of our second quarter's results.

Speaker 3

Thank you, Will. Good morning, everyone, and welcome to the second quarter call. I've got seven points that I want to go over with you this morning. We'll talk about CapEx, facilities and costs, ASPs, the impairment, give you a little more color on that, the transition, and Overdrive. Looking at CapEx for the second quarter, it was less than $10 million. Will's already discussed with you some of the details of that. My goal here is to explain the third quarter and fourth quarter trends. We do anticipate that CapEx will be higher in the third and fourth quarters of this year. That is primarily driven to my second point, facilities. We have currently over 12 facilities in the pipeline that will either be opening or expanding in the next year, and there will be capital requirements associated with that.

We tend to give capital goals or trends that we think the amount will be towards the end of the fiscal year, so we won't be doing that on today's call. The trend will be higher in Q3 and Q4. This is primarily due to market share gains across the company and increased volume associated with non-insurance company gains, as Will discussed in his opening remarks. As we stated in the first quarter, we believe that the strategy that we had in fiscals 2009, 2010, and 2011 to take advantage of growing revenue by spending and further deploying our team and building up a network of salespeople and operations teams has worked. As you've seen, we held costs down relative in Q1, and that has happened again relative in Q2.

We anticipate this trend to continue, that we will grow revenue going forward, and as we grow revenue, we'll be able to leverage that and hold costs rather steady relative to the revenue growth as a percentage. Looking at our fourth point, ASPs, the average selling price in Q2 was high, but in Q3, we are now on the last day of the first month of the quarter, and we are looking at record average selling prices for the company. That has continued to trend through the second quarter up, and it is doing so as we now come to the final day of the first month in the third quarter. We anticipate that will continue throughout the quarter at this time. We discussed the impairment in the opening remarks from Will. We are selling off both airplanes that the company currently owns.

We've had an aviation department for well over a decade now. Being a California company, it's almost imperative when you're running a business that has so many locations across the country. A typical day for Team Copart when we travel is to leave either on Sunday or very, very early on Monday morning, and at best, you'll still end up reaching the East Coast by 2:00 or 3:00 P.M., maybe with enough time for one meeting and then potentially dinner. What you'll also do is you'll tend to stay out on the road the whole week because of the travel time to go out and come back. Having an aviation department was part and parcel and critical to being as efficient as possible so that you weren't wasting time in airports. Being in Dallas, Texas, changes all that.

It now allows us to be a couple of hours from the majority of the country, whether it be New York, Chicago, Miami. There are flights in and out of Dallas on a regular basis, and the ability to jump a plane and head out to a market and come back is not only efficient, but it also can be done in a day or two as opposed to staying out all week. Again, another one of our reasons for moving the company to Dallas, Texas, that we talked about before. There will be a savings of not having those planes going forward, obviously. Currently, we've got those planes held as assets for sale. We anticipate that we'll be selling those planes off in the next year. Let's talk about transition. As Will mentioned, the headquarters relocation had a $500,000 cost associated with it in the quarter.

We anticipate the move to Dallas will be complete by the end of the fiscal year, and you will not hear us talking about transition costs associated with that in the next fiscal year, fiscal 2013. We anticipate being completely done and finished with our transition as we reach the end of the fiscal year, which is July 31. We've already reincorporated into Delaware, and we are now in our seventh month of Project Overdrive, my last point. Project Overdrive is an all-encompassing experience for the company. We are replacing our operating systems, our financial systems, our CRM, our online experience. Everything that is technology in Copart is being overhauled, and that is simply to make us a faster and easier, more comprehensive, and more transparent company to do business with. It will change the user experience at the facilities. It will change the user experience online.

It will change the user experience when on the phone calling in to talk to our team. We're really, really excited about that. That is on time, as we expect. Most of these systems, we think, will be happening. Most of these system changes, some of them have already taken place, but the ones that haven't, most of them will be happening in calendar 2012. We anticipate being fully complete with that in the end of fiscal 2013. We've talked about that on some previous calls, but I wanted to give you an update and let you know that it's going very well. We're excited about how the team is doing on that, and we've just got a lot of good stuff going on at Copart.

Right now, what I'll do is turn it over to Lisa, and Lisa, we'd like to open it up for any questions that we may have. Thanks.

Speaker 0

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you're using a speakerphone, please make sure your mute function is off to allow your signal to reach our equipment. We will proceed in the order that you signal us and will take as many questions as time permits. Once again, please press star one on your touch-tone telephone to ask a question. We'll pause for just a moment to give everyone an opportunity to signal for a question. We'll now take our first question from John Lovallo with Merrill Lynch.

Speaker 1

Hey, guys. Thanks for taking the call.

Speaker 3

Good morning, John.

Speaker 1

First question for you. Looking at the yard margin, it seems to be a little bit lighter than I was expecting in the quarter. Were there any factors that you could point to on that?

Speaker 2

Will, it seemed to be lighter than you expected?

Speaker 1

A little bit, yeah.

Speaker 2

No, I think this is in line with our expectations. Actually, we had a nice growth in yard margin on a year-over-year basis expressed as a %, and that's a result of simply more volume going to our system, which is primarily fixed cost.

Speaker 1

Okay. Fair enough. Maybe something's off in my calculation. The second question is, given where the stock price is today, do you guys still consider yourselves to be buyers of the stock?

Speaker 3

The company generates a significant amount of cash, and that'll be used to expand facilities, add new facilities to the company. The potential to buy stock back is there. The potential to acquire companies is there. We don't, on the calls, break out how we're going to do that and lay out our strategy, but that is definitely one of the options. You've seen the trend in the past. That's probably the best way to think about it.

Speaker 1

Great. If I could just sneak one last one in here, it looks like the tax rate was a little bit lower than historical quarters. Is that a reasonable rate to use going forward, around 35%?

Speaker 2

It is. We're fairly efficient in our tax strategy. We've been able to source a lot of our revenue to states with preferential tax rates. We're able to source some of our revenue internationally at lower tax rates. I think going forward, I think sub-35% is probably fair.

Speaker 1

Great. Thanks very much, guys.

Speaker 3

Thank you, John.

Speaker 0

I will go next to Jason Ursaner with CJS Securities.

Speaker 3

Good morning.

Good morning. Congrats on a very strong quarter. Thanks for taking my questions.

Thank you. Will, I think you mentioned you continued to build inventory in the quarter. I was just wondering what the typical inventory growth in total units, you know, agency and principal during November through January would be. Given that you were starting from a high base with the summer and are now dealing with an unseasonably warm winter, how did you actually fare in inventory growth compared to that historical?

Speaker 2

Our inventory grew, as it always does, due to the seasonality of our business. You are right. The growth this year is more modest than the growth that it was the same quarter last year. Without getting into specific numbers, which we don't do, I can just address the trends, which I just did. That has a somewhat beneficial impact on the margins as well. With the accounting, we don't capitalize on all those costs of recovery in inventory, and they flow through. This quarter, we had a little bit smaller amount of recovery costs expressed in our yard and fleet cost.

Speaker 3

Okay. Just on the cash flow statement, where does the towing and title change, where does that exactly flow through if it's not a principal-owned unit?

Speaker 2

In inventory and vehicle pulling cost.

Speaker 3

Okay. Just a quick question on sourcing vehicle supply. Within insurance salvage, I realize the overall pool is driven by these exogenous factors, but do you have any influence over volume from non-exclusive customers through your own incentives to get more volume through you, through pricing or other ways?

You're always trying to grow market share, and you're always working with clients at the local level in addition to a national approach. We're very aggressive. I mean, we're a very competitive company, so I think we definitely have an influence on driving market share, as most companies, I would say, do. I'm almost a little bit confused by the question, to be clear.

I guess I'm asking if there are less vehicles coming in in the winter period because of the weather. You know, if you could continue to fill your yards with incentives or if.

We're working. It's been a lighter winter. I mean, everyone knows that it's been a lighter winter than normal years, but we've continued to build inventory in the quarter, and we've continued to have significant market share gains. We anticipate volumes going forward are going to be up.

Okay, great. Thanks a lot.

Speaker 0

We will now go next to Scott Ciccarelli with RBC Capital Markets.

Speaker 3

Hi, guys.

Hey, Scott.

How are you, Jay?

I guess one of the questions is probably a follow-up to that last answer you just gave. You know, we did see a nice improvement in unit volume. Can you be any more specific regarding where the unit growth came from, and how should we think about the sustainability of the improvement going forward?

Will gave you some pretty good specifics of 6% insurance, 8.1% non-insurance. We're growing units across the company. The non-insurance business is growing a little faster than the insurance business, which is to be expected. We're continuing to grow volume across the company. I think there's a conception out there that it's a shrinking industry, and we just don't believe that's the case. We've talked about it in the annual report. We've talked about it on prior calls. This is a market where ASPs are increasing. There's a demand for vehicles out there due to a short supply of new vehicles over the last three years, and the average vehicle in America is aging. When vehicles age, they're more likely to be total loss. It's much easier to total a five-year-old car than it is to total a one-year-old car with similar damage.

We don't view it the way a lot of the analysts view it. I don't know what else to tell you other than that. I mean, you know, and the results, I think, are showing that at this point.

To be fair, this quarter, the insurance volume certainly, I think, was better than what we've seen maybe the last two quarters. I'm just wondering if there was any kind of change that helped propel that.

We've continued to see growth in our core business, and we had some very big wins back in calendar 2010, fiscal 2011 that we talked about and some large market share gains and unit growth back then. I honestly don't think about the business quarter to quarter. I think of it much more over a year to five-year horizon. The volumes are continuing to come up. As we said, you know, we want to make sure that we are giving as much information to the investment community as possible. We've had market share gains in the past, and we've had market share gains going forward. The company, at this point, we believe will be doing more volume over the next year.

Okay. I guess my second question is, are you all at all concerned that you're trying to touch so many different systems in a short period of time with Project Overdrive? If you guys were to have an area of concern where you're maybe pushing the envelope too much in terms of change for the organization, could you kind of highlight that for us?

Sure. I mean, we internally talk about ourselves as change-centric, and that's an internal term that we use about Copart. I talk about the systems piece of Project Overdrive because I think it's something the street can see, and it's a very tangible thing, but we're changing a lot more than that right now. The move to Dallas, Texas alone is a big deal as well. There's a lot of change happening at Copart right now. We're always concerned about making change, how we address change, and how we handle change. When we do things that make sense, we're happy, and when we do things that don't make sense, we don't continue with them. We change them, we fine-tune, and sometimes we even go back. We know how to manage change. I feel very confident in the team. They're really, really good when it comes to managing change.

I'm definitely of the mindset that it's something we need to watch. We are, as a team, doing that. I am concerned about how we implement that change. Yes, I have concerns, but I'm not worried, if that gives you any feel for it.

Yep, no, that's helpful. All right, thanks a lot, guys.

Thank you.

Speaker 0

We'll go next to Scott Stinburgh with Baird.

Speaker 3

Hey, Scott.

Speaker 2

Hey, Jay. How are you?

Speaker 3

Good.

Speaker 2

Will, could you just remind us, with the new accounting rules that are in place, how we should look at the yard margin on a seasonal basis, particularly for the back half of the year versus the first half of the year?

Speaker 3

Sure. It has to do with growth in inventory. In quarters in which you grow inventory, it has a suppressive impact on your margin percentage because you have to flush through much of the recovery cost, as opposed to formerly, we capitalized that in the balance sheet and recognized that at the time we sold it. Consequently, you'll see a nice growth in our margin percentage in our third quarter when we sell off the inventory that we've accumulated in our first and second quarter. I think if you look at last year, I think there was about a 460 basis point increase in our margin percentage between our second and our third quarters. You'll see that same movement, maybe not that magnitude, but that same movement this year.

Speaker 2

Okay. To that point, if there was less weather and less cars that possibly came into inventory, there might be an offset with lower volume coming through, but higher margins is pretty much what you're saying.

Speaker 3

That's right. It has that effect on your financials. Because there's a difference in the period in which you collect the car and which you recognize the revenue, I'll just restate what I said previously. When you grow inventory, you have lower margin percentages.

Speaker 2

Gotcha. Okay. As far as G&A goes, can you just talk about what the move costs, again, are expected to be at the end of the day? As far as the new IT system in this Project Overdrive, it seems like most of it will be capitalized at this point. How much, if any, will come through to the income statement?

Speaker 3

Right. We've always said that we anticipate the cost of relocation will be around $5 million. It may be a little less than that. So far, we've recognized $3 million. The timing of the balance of recognition of that is uncertain because it has to do with when people decide to move. In terms of the SAP project, we still think those total costs will be around the $35 million range. Once we start to utilize that system, which we think will be towards the last half of fiscal 2013, those costs will roll through our income statement as amortization. Depending on the life that we ascribe to it, at 7 or 10 years, it could be anywhere between $1.2 million and $1.6 million of extra amortization per quarter.

Speaker 2

Gotcha. All right. Alluding back to Jay's comments about the SG&A leverage, we should see a similar range for the back half of the year, but I guess it depends on the timing of when the balance of those relocation costs go through.

Speaker 3

That's correct.

Speaker 2

Okay. Last question, Jay, could you talk about the UK, the trends that you saw there, and if anything has slowed down whatsoever?

Speaker 3

Yeah, sure. No, the UK is doing fantastic. As we've talked about in previous calls, we've got all of our locations fully integrated, and we've continued to see growth in that market. We've got high ASPs, high average selling prices in the UK as well as high unit volume. Our team there is doing a fantastic job. If there's anything specifically that you want me to comment on, I can, but in general, they're doing very, very well, and we're happy with the results.

Speaker 2

Gotcha. That's it. Thank you so much.

Speaker 3

All right.

Speaker 0

We will now go next to Gary Prestopino with Barrington Research.

Speaker 4

Hi. Good afternoon or good morning, Jay and Will.

Speaker 3

Hi, good morning.

Speaker 4

Yeah. A couple of things here. Number one, Jay, you know that large contract that you took a year or so ago or two years ago, have you lapped that in terms of full implementation on a quarter-to-quarter basis? What I'm getting at, are we looking at an apples-to-apples comparison on the unit volume?

Speaker 3

Yes, we are. We had a full run of that account back in the second quarter of 2011 and a full run today in Q3.

Speaker 4

Okay, that's a great volume.

Speaker 3

Our Q2.

Speaker 4

That's great. Could you maybe address, I'm looking at the gross margin in the UK, you know, and I'm using sales minus cost of vehicles. You know, it looks like it was running in the 14, 15% throughout fiscal 2011, 14.5% in the first quarter, and now it dropped to 12.10%. Could you maybe address what's going on there?

Speaker 3

Yeah. Again, you've got rising ACVs right now, both in the U.S. and in the UK, and we pay a percentage of ACV. When ACVs drop, we get a significant benefit of that under a purchase because the cars typically don't drop at the same rate. When ACVs go up, it has a negative effect, because vehicles don't go up, quite frankly, at the same rate. Part of it's just mix. It's the type of cars that we're selling as well. Primarily, it's ACV.

Speaker 4

Okay. In the UK, what percentage of the cars are you still purchasing? I don't know if you've mentioned that in the quarter.

Speaker 3

Will, can you comment on that?

Speaker 2

Yeah. It's just in the high 20%. Let me add to this, Jay. The absolute amount of contribution from the purchased cars on a per-unit basis is higher this quarter than it was the same quarter last year, despite the fact that on a percentage basis, it's lower. Does that make sense, Gary?

Speaker 4

Got it. All right. A couple more questions here. The price of your ASPs, you said they're up at record levels. As we're looking at at least the wholesale car data, it looks like prices have flattened out over the last, say, six months. Obviously, there's probably increased demand there for the cars that you're selling. Could you help us out?

Speaker 3

Yeah. No, we believe that's exactly the case. We've been, due to our marketing efforts, and we've made a number of changes in our strategy since we implemented a very aggressive marketing campaign in 2009. We've deployed a lot of money towards bringing in additional members that eventually become additional buyers. We've seen a lot of success in that. We definitely believe in our technology and our auction platform and our ability to drive demand. That is the case. Again, that's another reason for the increased market share on the insurance side. It's another reason for the increased market share on the non-insurance. This is all supply-demand. If you can't drive demand, you're not going to build ASPs. We think we are outperforming the market at this time. We've got a team that's really, really not going to cover up the ball right now, and that's a good thing.

Speaker 4

You're seeing the network effect. Could you give us any idea of just over the last two years or so just how much you've increased your members on the buy side?

Speaker 3

Oh, yeah. It's six digits. I mean, it's over, it's well over 200,000 new members a year. We're doing some very aggressive marketing to bring in additional members, and we're expanding that member base in a big, big way. The last decade was about interstate selling, and eventually, that became out-of-country bidding. Today, I would tell you we're in the third chapter, which is really just being very dynamic in our approach to bringing in members. The way that we put cars up on the web, the way that we reach out to members to make sure that they see cars that maybe they miss so that they bid on them before the auction comes up, that kind of thing. We've got a lot of analytics that we're working, a lot of metrics that we're working. We're seeing some big, big improvement there.

Speaker 4

Could you, I mean, I don't know if you make this public, but do you talk about just how many members or buyers your buyer base?

Speaker 3

Oh, yeah. I don't have the number off the top of my head, but you know the member base is well over 20,000 new members a month. Our conversion ratios just continue to go up. Our goal is to get them to bid. I've talked about the process before. You want to sign up a member, then you want to get a member to browse the website, then bid on a vehicle, then become second high bidder, then become high bidder, and actually buy a vehicle. You have to walk through that process, and we're just continuing to improve there. I think we'll continue. That's really the question, are we going to continue to improve in that area? I believe, fundamentally, we will.

Speaker 4

This is an important part of what you're doing. Could you talk about what the conversion rate is, or is that something you can't share with us?

Speaker 3

Yeah. No, I can tell you that the conversion rate is improving dramatically month to month to month. We don't give out all the numbers simply because there's a lot of what we do, not just in acquiring a member and converting a member to becoming a buyer, but there's a lot in what we do in the interaction with members, in the data sharing with members. There are a lot of things we do that we think are special sauce for the company. You know we'll continue to do that, and the results will continue to reflect that. We do share that information with customers, obviously, with sellers. We've had market share gains in the past, and we think we'll continue to have market share gains because of that.

Speaker 4

Okay. One last question. You talk about you're going to step up your CapEx. Could you give a number for what that is going to be for the year?

Speaker 3

We may have given a range, but I'm not sure it will.

Speaker 2

No, we did not.

Speaker 3

Okay. I'd prefer not to right now. We've got plenty of cash, so I tell you that we're not worried about not having enough cash to manage the CapEx. I just wanted to talk about it in the call because CapEx was below $10 million last quarter, and we're very confident at this point that it'll trend above that. We've got some deals in the works that are coming out. We've got capacity across the organization, but we've had some significant market share gains recently, and there is going to have to be some cash deployed towards expanding existing locations and even adding some locations to the company.

Speaker 4

Does that change your thoughts on capital allocation, maybe where you were six months ago to now, the fact that you've got these facilities that you need to spend some money on? Is there an appetite to add more depth to the balance sheet?

Speaker 3

I was going to try and give you a quick answer, but that evolved into more than one question. As far as our outlook on stock buyback, I wouldn't say it changes it. I would say that we, all through fiscal 2010 and fiscal 2011, saw this growth that was coming down the line. We created it by spending more than we had previously and basically priming that pump. At this point, what we feel internally is that we can hold costs while growing revenues, but we knew that back then. We've got over a dozen facilities that we own that we don't even talk about. They're not listed as one of the Copart facilities. We consider them in holding, so the day that we need to add another location, that market will just turn that facility back on. We've got a number of those scenarios.

We've got hundreds and hundreds, if not thousands, of acres that have not been developed yet but are joining the yards that we own. We're very long-term in our view. If there's an opportunity to buy land next to a facility that is at 80% capacity, we'll buy it knowing that two, three, four, five years from now, we're going to need to expand that. We would prefer to have 150 hundred-acre locations than to have 1,000 fifteen-acre locations, obviously. Our goal is very much geared and driven towards expanding existing facilities before we add additional facilities. Nonetheless, we're going to be doing both. In the next year, we're going to have to do both. We'll continue to look at our stock as another growth driver for the company, as we've done in the past.

Speaker 4

Thank you, Jay.

Speaker 3

Thanks, Gary.

Speaker 0

We will go next to Ryan Brinkman with Goldman Sachs.

Speaker 1

Hi. Good morning, and congratulations on an excellent quarter.

Speaker 3

Thanks, Ryan.

Speaker 1

Obviously, you had a very strong gross margin rate quarter on the agency side. One way to look at this is that you were able to grow your agency revenues by $15.9 million year over year while growing your yard and fleet expenses by just $0.1 million. That seems really surprising. I would say that I would have thought that there would be more variable expenses associated with the increased volume. My question is, you know, how were you able to achieve 99% incremental margins at the gross profit line? Is that at all sustainable?

Speaker 3

Yeah. We've said in the past, I'm just going to jump in there for you because we've said in the past, in fiscal 2011, calendar 2010 and calendar 2011, that we were gearing up. You've seen big increases in operations expense. You've seen big increases in G&A expense. We’ve geared up in a lot of markets to be able to handle additional volume that we believed at the time was going to come in. We’ll be increasing it. We're not going to hold it that tight. There'll be some increases. We had a recent large market share gain that came on board. We're going to be adding additional people to the company. You'll see some additional costs. As I said in the opening remarks, we will be able to hold our expenses down relative.

You'll see a margin improvement relative to the revenue growth in the company because of prior investment in the past and because it's the nature of a fixed-cost business.

Speaker 1

That's great. In regards to this business, is this the first time you've referred to it? How does it compare in terms of scale to, for example, the Allstate business, which was fairly transformative?

Speaker 3

Right. It's similar in size, and it's similar in size in terms of new units to the company. Obviously, we're a bigger company today, so as a percentage of the total company, it'll be smaller in that regard. Yeah, it is similar in size.

Speaker 1

Okay. Because I note that Copart on their call yesterday suggested that they recently lost in R&D.

Speaker 3

Oh.

Speaker 1

Okay, it's going to be very significant in size. Okay, and then just my last question in trying to understand the gross margin a little bit more. Obviously, you answered it very well. It seems like you're taking off some of the more discretionary expenses. There were some variable expenses, but you're taking off some investments that you can now lever. What about the building of inventory during the quarter? I mean, there's an idea out there that there were fewer accidents in the month of December. A lot of companies have talked about the warmer weather. I think LKQ on their call even mentioned that there were fewer accidents. You mentioned that you're building inventory, and I guess that's because of your business wins. Was there less building of inventory because there were fewer accidents in December?

Could that have somehow helped explain the awesome margin performance, or am I just marking up the wrong tray there?

Speaker 3

The awesome margin performance, I would say, is just the additional units going through a company where we're holding costs. Why are those additional units taking place? It is definitely not weather. We've seen the mildest winter I've seen in a long, long time, very, very mild winter. It is not winter. It is market share gains. The only way we can break that out is look at contracts where we have 100% of the business and then look at contracts where we're adding volume and try to break that out. I would attribute our unit growth to some seasonality. Even though it's a mild winter, it's seasonally going to be more volume in second and third quarters than in the first quarter. Some of it's seasonality, but the majority of our growth going forward is going to be market share gains.

I mean, it's just the nature of where we're at right now as a company.

Speaker 1

Okay. Just a very, very last question. What's your latest thinking? This is long-dated, but in terms of the timing of when you would actually build a physical yard in an emerging market?

Speaker 3

I don't understand the question.

Speaker 1

When would you expand your operations, not to sell to people in emerging markets, but to actually build yards, salvage facilities in an emerging market like a Mexican market?

Speaker 3

Emerging markets like other countries, international?

Speaker 1

Yeah.

Speaker 3

Yeah. We've talked about that in prior calls. That could happen as early as this fiscal year. It will definitely happen in fiscal 2013. I mean, that'll be something we'll be pushing hard on. How much of that, how much growth will we see? That's all to be seen. Copart has not been shy about the fact that we are going to have an international expansion. This is a unique business. I don't think when Walmart opens up in England and has ASDA that they get additional buyers in England that help their Walmart stores in the U.S. Copart's the exact opposite of that experience. As we open up locations in other countries, it is every bit an accumulator of members and buyers. As we open up in other markets, we not only do business in those markets, but we bring additional buyers into the company.

Of course, that makes it a much more competitive environment. This is a complete supply-demand story if there ever was one. As we bring additional volume in through increasing the market, through market share gains, through weather, whatever the scenario is that's causing additional volume, you've got to have additional members. As we expand internationally, that will be the case. It has been in the past, and we know it will be going forward. Every time you open up a location in another market, they learn about you, and then they start to buy from you. This is very much an interstate business today. Somewhere around half of the cars that are sold in any given state on average will either end up being pushed by a buyer from another state or bought by a buyer from another state. That's just to exclude the international stuff for a minute.

This is not a localized market. When I got into the business back in the day, it was very localized. You saw buyers in the city that the auction was in buying in that market. They may drive 100 or 150 miles to another market. It was a very localized market. Today, it's very much not only a national marketplace on what's product selling, but it's very international. There's no question in our mind, as a team, we view the success of Copart as expanding that network of facilities across the globe and increasing the marketplace and making it much more of an international business.

Speaker 1

Interesting. Thank you very much.

Speaker 3

Okay. Thanks, Ryan.

Speaker 0

We will go next to Bill Armstrong with CL King & Associates.

Speaker 4

Good morning, Jay and Will. Most of my questions have been answered, but did you give out the same-store revenue increase for the quarter?

Speaker 2

No, Bill. We stopped giving that because it was just too complex, and there's too many variables when you've got CapEx and migration of contracts between agency and revenue. In the last probably three or four quarters, we've just talked about same-store sales in terms of units, which we gave out. It's 5.2%.

Speaker 4

Got it. On the volume growth on the vehicle sale side for where you're purchasing and buying for your own accounts, what was the volume growth there? I'm not sure if you gave that out.

Speaker 2

I did. It's 2%.

Speaker 4

2%.

Speaker 2

It primarily resulted from an acquisition that we made last March in the UK.

Speaker 4

Got it. Okay, thank you.

Speaker 2

Thanks, Bill.

Speaker 0

Please press star one on your telephone keypad to ask a question. We'll now take our next question from Craig Kennison with Baird.

Speaker 3

Hi, Jay and Will. Thanks for taking my question. Many have been asked, so I'll shift gears and ask more of a cultural question. How much of your staff in California has sort of turned over in the move to Texas? Has that been a challenge to manage or to really preserve your culture in that move?

Yeah. We've got an amazing culture. I won't go into specifics, Craig, on the numbers and that portion of it, but I'll just tell you, we have an amazing culture of folks. We're maintaining the culture, but we are changing it. Copart has, through Project Overdrive, we've talked about being a faster and easier, more comprehensive, more transparent company. If I were to sum it up into a couple of points, we want to be much more of a yes, we can company. If you want us to do something, we want to be able to do it. We don't want to find the reasons why it's a difficult process. We want to find the reasons why we can definitely do it. We want to be scrappy. I say pun intended, but it really is in the true sense of the word. We want to be as nimble as possible.

We want to be a company that can change direction quickly. We can deliver products quickly. That culture is stronger today than it was six months ago. We are pushing harder and harder to be a faster, more responsive company to our customers, to innovate at a quicker pace, to develop products at a quicker pace. I don't just mean technology. I mean products at the locations, the way that we interact with the customer, the way that we service the customer. The culture is stronger than it's ever been. It's definitely changing. There's no question about that. We're definitely in an evolutionary phase. In fact, we had a meeting, an all-hands meeting last week, and I told the team that Copart has gone through an evolution in the last decade. We are now in a revolution.

We are really, really changing the core of our company and how we're thinking about our market and our customers and how we interact with those customers. We're here to serve. We're here to please. We've got a great team, and we're going to do that. The folks that are staying with the company will do it. The folks that are coming on board will be geared towards that culture, for sure, without question.

Speaker 4

Thank you. A different question on the topic of China. One of your competitors has a partnership there. It sounds relatively small today, but it's a deal to move end-of-life vehicles to that scrap market. Is that an opportunity for you?

Speaker 3

Yeah. We have the same partnership with that company. We didn't feel like it was really something that we would talk about simply because you haven't seen us talk about the customers that buy from us in Abu Dhabi, Dubai, Lithuania, Ghana, or any of the other countries that we sell to. It's just another customer, another marketplace that we've got. We've, quite frankly, been selling to Asia now for quite a few years through Taiwan and through some of the other nations in that marketplace. We're comfortable with it. We like it. It's a good thing. That's really the story.

Speaker 4

Has there been any change to your fee structure or pricing ladder, or is all the growth driven by other factors?

Speaker 3

Yeah, you know we don't talk about pricing on the calls, so I'm just going to move right on from that one, buddy.

Speaker 4

Yeah, thanks. Take care.

Speaker 3

Okay. Thanks.

Speaker 0

We will now take our last question from Jason Ursaner with CJS Securities.

Speaker 1

Hi. Thanks for letting me take a follow-up here. Just on the inventory growth and the impact on margin, you mentioned that insurance volume was stronger than normal seasonality since it was helped by the summer and that inventory did grow, it grew, but more slowly than normal because of the winter. I thought you also mentioned year-over-year volume growth in salvage is being sustainable. I'm just a little.

Speaker 3

You're a little confused?

Speaker 1

On that, yeah.

Speaker 3

Yeah. If I look at September right now, September will be more units sold. I'm sorry, September. February will be more units sold this year than last year. It is a leap year. I haven't broken it all on a per day. I just looked at it, you know, for the month so far. We've got one more day to go here, but it will be bigger. A number of things could happen between now and the end of the quarter. We've got two more months in the quarter. At this point, yes, we've had a soft winter, there's no question, but we've had a lot of gains on the insurance and non-insurance side. We anticipate going forward, not just Q3 or Q4, but going forward into the next year that we'll be selling more volume year over year.

Speaker 1

Okay. I guess maybe just a different way, the inventory growth, I mean, can you put a number on it? I know you mentioned in your filings your facilities typically do 10% to 30% more.

Speaker 3

Yeah, no, we don't give numbers in terms of inventory or units sold or any of that. We can just give you the trends.

Speaker 1

Okay. Thanks.

Speaker 3

All right. Thanks, Jason.

Speaker 0

That concludes today's question and answer session, Mr. Adair. At this time, I'll turn the conference back to you for any additional or closing remarks.

Speaker 3

All right. Thank you, Lisa. Thank you to everyone else who came on the call and for asking the questions. We're pleased, obviously, with being able to report the quarter to you. We look forward to reporting Q3 and Q4 and then giving you some updates on how we think we'll be doing in fiscal 2013. That concludes our call. Thank you much. Bye-bye.