Copart - Earnings Call - Q3 2011

Transcript

Speaker 2

Good day, everyone, and welcome to the Copart Incorporated Fiscal 2011 Third Quarter Earnings Conference call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Jay Adair, President of Copart Incorporated. Please go ahead.

Speaker 3

Good morning. Thanks, Karina. You threw me off with the title there, but that's okay. I'm CEO now. That's the proper title on that. Again, my pleasure to welcome everyone to the Third Quarter Conference call for the company. Before we start, I'll turn it over to Will Franklin, our Chief Financial Officer, for some brief remarks. Thank you.

Speaker 0

Thank you, Jay. Before we begin our remarks, I would like to remind everyone on the call that our remarks will contain forward-looking statements. These statements are neither promises nor guarantees and are subject to certain risks, trends, and uncertainties that could cause the final result to differ substantially from those projected or implied by our statements and comments. For a more complete discussion of the risk that could affect our business, please review the management discussion and analysis and the factors affecting future results contained in our 10-Q, 10-K, and other SEC filings. With that, we'll turn the call back to Jay Adair to begin the comments on our Third Quarter results.

Speaker 3

Thanks, Will. Again, good morning, everyone. As I like to say, I think the results speak for themselves. We've had a really, really impressive 2011, a great year. A lot of change has taken place in 2011. I look back and I think of Copart in chapters. We talked internally about the different events that have taken place over the years with Copart from being founded in 1982 by Willis Johnson to being a company that went public in 1994, embracing growth and growing to building a national network, then taking on the role of technology and leading the industry in technology with first online platforms and vehicle imaging and online bidding, etc. It's pretty standard today in the industry. Everyone has an online presence, an online bidding platform.

It's fun to look back and look at all the changes that have taken place over the last couple of decades in our industry and in our company. 2011 is just that. It's a year of change. A lot of things are happening. When I think of 2011, I think of the fiscal year. I also think of the calendar year. Fiscal year starting in August was an amazing period of time for us. We looked at our stock price, obviously felt that we were going to see a lot of growth and a lot of positive moving dynamics in the company. I'll talk about some of that today. We took advantage of the fact that we had cash and the ability to borrow money at some really low rates. I'll just give you a quick update on the cash flow for the company.

Year to date, we've generated $200.7 million in operating cash flow. Will and I have made an effort this conference call to not try to cover some of the things that are already publicly out there or that we're going to be talking on. We try to cover separate items in the call. We're going to be fairly brief, and then we'll open it up for questions. As I said, the results really do speak for themselves. In the $200.7 million in operating cash flow, just to give you a little color on that, over $27 million of the cash has been used for land and lease buyouts. Over $35 million has been used for acquisitions, primarily in the UK. We bought back over $601 million worth of stock in the fiscal year. That represents 15.8 million shares or an average purchase price of $37.85, so under $38 a share.

We finished the quarter with $192.1 million in cash and approximately $387.5 million in debt. Looking at results of the company, we've been able to lower G&A as we talked about in the first quarter that we announced. We have finished the quarter with $24.8 million in G&A spend as opposed to $26.3 million one year ago. This also includes transition costs that Will will talk about. We will be happy to give you more flavor on that if there are questions. In addition, as I talk about moving from California to Dallas, we announced this year that we will be opening up three process centers, one in Hartford, one in Dallas, and one in Fairfield. We also announced that we sold our corporate building and that we'd be moving the home office to Dallas, Texas. This is bigger than just moving the company.

This is about repositioning the way that we're handling process, repositioning the way that we think about our corporate office and about the intellectual property that really is the corporate office. We're going to be coming, as we do this, we're going to be becoming a much more nimble, quicker-to-move company. We're going to be building a process center in Fairfield this year. We'll be building a process center in Dallas. Next calendar year, probably in the February to May timeframe, this calendar year will be the Fairfield process center. There'll be a slight amount of depreciation or CapEx associated with that, very small though. We'll be moving into a new corporate building next year in Dallas around the summertime. Not a lot of CapEx there because that'll be a lease opportunity.

Just looking here and thinking out loud, the 2012 year, in addition to that, when we think fiscally, will be the year that we implement new computer systems for the company. We're in the process now of doing all the groundwork so that in 2012, we can implement all brand new systems that'll operate our facilities both here and in the UK, so both North America and UK. This will be a big, big shift in our ability to perform going forward. It'll also impact the results and the changes that we'll be making online. Look forward to fiscal 2012 seeing the results of what we're doing right now. It's more than moving the company. It's more than process centers or buying shares back. What we're working on today will have impact in 2012 in terms of technology, both internally at our facilities and online with our web platforms.

I like to think of 2011 as really the start of this huge change. It's another chapter that we've had, just like we've done in the past with building a national network, going public, embracing technology. This will be the setup for a lot of change that's going to take place in 2012 as well. We're very excited about the results of the company, excited about the direction, and look forward to answering any questions that you guys may have. Thank you. Will?

Speaker 0

Thank you, Jay. Let me make a few brief comments before we open up the call to questions. Consolidated revenue was $236.8 million compared to $220.3 million for the same quarter last year. The growth in revenue was driven primarily by increased volume. Overall volume increased in most segments. In North America, we experienced growth in both non-insurance cars and non-Allstate insurance cars. In the UK, total volume grew by over 17%. Same-store sales grew by 6.5%. In the UK, we continued to transition contracts from the principal model to the agency model. 36% of the total units sold during the quarter in the UK were sold on the principal model compared to 50% for the same quarter last year. Excluding the impact of this transition, same-store sales would have grown over 11%.

General and administrative costs, excluding depreciation, were $24.8 million compared to $26.3 million for the same quarter last year. The decline was due primarily to refinement to our marketing spend and reductions in headcount. We ended the quarter with over $192 million in cash. On a sequential basis, vehicle pulling cost and deferred revenue decreased as we sold off winter inventory. In the quarter, we generated approximately $107.8 million in operating cash flow. Capital expenditures for the quarter were approximately $14 million and included the buyout of two facilities leases totaling approximately $4.8 million. We also had two acquisitions, one in the UK and one in North America, that combined totaled over $35 million. Finally, during the quarter, we expended approximately $60 million for the repurchase of 1.44 million shares of our common stock. At the end of the quarter, we had approximately 68.9 million shares outstanding, undiluted.

That concludes my comments. Now we'll open the call for questions and turn the call back over to you, Karina.

Speaker 2

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 turned off to allow your signal to reach our equipment. Once again, please press star one if you have a question. First, we'll go to Bill Armstrong with C.L. King and Associates.

Speaker 1

Good morning, Will and Jay. Just kind of a housekeeping question for Will. Were there any revenues and expenses associated with the accounting change for ancillary services as there have been over the last couple of quarters?

Speaker 0

Yeah, it's much less than it has been during the first quarter and similar to the second quarter. There was about $1.6 million that we would have otherwise recognized in this quarter and about $1.5 million in expenses that we would have recognized in this quarter, but for the change in accounting. It had about a 30 bps impact on our margin.

Speaker 1

Got it. Okay. The gross margin on vehicle sales where you're the principal looks like it was about 14% versus 21% a year ago. Could you discuss that, please?

Speaker 0

Certainly. The margin on an absolute basis is very similar. What we're seeing is that we're selling more expensive cars in the UK, but they also have a higher associated cost with those cars. You're seeing a reduction in the margin %, but not in the margin dollars. Excuse me, pounds in this case.

Speaker 1

Got it. Is that a kind of a function of the location of the auctions you're operating, or what's driving that?

Speaker 0

Nature of the contracts and the quality of the cars that are being sent to us.

Speaker 1

Are you seeing any change in insurance companies' behaviors in terms of the % of damaged vehicles that are declared total losses as wholesale prices continue to rise?

Speaker 3

Will, may I comment?

Speaker 0

Certainly.

Speaker 3

Yeah, good morning, Bill.

Speaker 1

Morning.

Speaker 3

This is something we look at, but we talked about this dynamic before. You've got used part pricing, lifetime quality, you've got aftermarket, you've got the cost to repair. All these dynamics are a piece of it. Of course, used car pricing. We're seeing the highest base fees that we've ever seen. Just to give you a little flavor on even the current quarter, May finished up with record average selling price. From that perspective, obviously, as we drive a higher average selling price, that's going to create more total loss vehicles. The negative of that would be rising fuel prices and increased costs to repair and that kind of thing. At this point, it's hard to really pinpoint which piece of that is driving. I can just tell you that volume's up right now, but a lot of that is probably catastrophe-related as well.

There's quite a bit of weather going on right now across the country.

Speaker 1

Got it. Okay, thank you.

Speaker 2

Moving on to John Lovallo with Bank of America.

Speaker 1

Hey, guys. Thanks for taking the call.

Speaker 0

Hi, John.

Speaker 1

A couple of questions for you. In terms of the acquisition market, how would you characterize that at this point? Does it still look fairly robust?

Speaker 3

I don't think it's been fairly robust in terms of acquisitions for a couple of years and probably won't be. Most of our growth right now is coming from segment growth. Looking at non-insurance growth continues to grow. We've had a huge increase in volume this year on the insurance side, yet we've been able to continue to grow, keep that percentage about the same because we continue to grow the other segments of the business, etc. That's really much more of our focus domestically. When we look over in the UK, we made another acquisition that was a large acquisition in the UK. That's a market where we've got a good network now. I don't think we're in place, and I don't really foresee a lot of acquisition growth there. The next steps in terms of acquisition will be more international play for us.

You can think about our growth strategy. We're looking internationally, and we're looking in the UK and North America in terms of segment growth. We'll continue to grow insurance, but we've got to really look at non-insurance and then thinking internationally. We're in the process. I talked a little about it in the opening remarks, but we're in the process of putting all new systems in that'll allow us to speak multiple languages and deal with those challenges ahead. That's the strategy right now, and that'll be rolling that out in fiscal 2012. From there, we'll talk more about the impact that'll have.

Speaker 1

Okay. Fair enough. In terms of miles driven, it's pulled back a little bit in the past month or so. I mean, have you guys seen any effect at the auctions?

Speaker 3

As I said to Bill, really what we're seeing right now is higher ASPs and more units. That is probably the fact that fuel is up and, yeah, miles driven is down, but there are so many other factors out there right now that are driving the dynamic the other direction that we're seeing more volume. I'm sure it's having a negative effect. We're just not seeing it because we've got a lot of volume coming in associated with weather and other factors.

Speaker 1

Great. If I could sneak in one quick last one here, could you just remind me the split between sellers who are on the fixed fee basis versus the percentage incentive program, and is there much of a yield difference between the two?

Speaker 0

Actually, it's about 50/50. The yield is approaching the equivalent yields, so we're somewhat more indifferent to that at this point than we have been in the past.

Speaker 1

Great. Thanks very much, guys.

Speaker 3

All right. Thank you.

Speaker 2

Now go to Scott Ciccarelli with RBC Capital Markets.

Speaker 1

Hey, guys. How are you?

Speaker 3

Hey, good morning, Scott.

Speaker 1

Hey.

Speaker 3

Could you guys give us any more color on the incremental sales impact from Allstate? Obviously, they've been a pretty big addition over the last couple of quarters. I'm just trying to figure out how much of the unit growth that you saw came from Allstate?

Speaker 0

Allstate was a significant impact in North America unit growth. There are a number of different ways to measure the value of that contract. We brought in some additional units at a price that may be below our average, but when we analyze the contract as a whole, it's been very beneficial. We continue to expect it to become more beneficial as time progresses.

Speaker 3

I guess what I'm trying to figure out is you're talking about the unit growth, and Allstate was a significant contributor. I'm trying to get, I guess, to the core unit growth outside of the Allstate impact. If you could give us some more color on that, that would be great.

Speaker 0

I tried to allude to that in my comments. We've actually had growth in non-Allstate insurance cars in a market that we think, in terms of volume, is flat at best. We're pleased with that result, and like we said, we've also had growth in our non-insurance business.

Speaker 3

If you're asking it first to break out the Allstate as opposed to other clients, we don't do that, Scott.

Speaker 1

No, I understand.

Speaker 3

I guess I'm just trying to do the compare and contrast versus your biggest competitor who continues to have unit growth despite the loss of Allstate. I guess I would have expected a little higher unit growth out of you guys unless there's not much ASP movement. You're suggesting that we're dealing with all-time high ASPs. I'm just trying to reconcile the various data points, Jay.

Speaker 1

Yeah, I got you right. We've had record ASP, average selling price, and record units. You're just trying to figure out how much of the revenue is coming from each. I get you. I hear what you're saying. It's just that at the end of the day, we don't break that out.

Speaker 3

Okay. Maybe we'll follow up afterwards. Can you outline kind of the key drivers to lower yard operations in the quarter? That turned out to be quite a bit better than I was looking for. Typically, we see a bit of a seasonality spike in the third quarter. Yet, if I look at yard operations in dollars, we were actually down sequentially from the first two quarters. Can you kind of outline what the key drivers were there?

Speaker 1

Sure. Other than transportation, because transportation costs are up right now with fuel prices, other than transportation, we're continuing to see improvements as we get more and more efficient at our home office and out in the field. I would expect, other than just enormous volume growth coming in, something that I don't predict, which, by the way, we're seeing a little of that right now with caps. If you put volume and caps aside, you kind of look at this inside of a test tube, the prediction for the future would be that we'd see continued improvement in that as we are able to run more units through the facilities and see margin improvement on that. I believe that'll be what we'll see in fiscal 2012. As revenue grows, we're going to be able to hold the expenses at bay, maybe a slight increase in field operations.

The goal for home office is to actually reduce home office expense. The caveat I would say there is you don't see any one-time, below-the-line kind of non-recurring expenses with us. We haven't done that in the past. We didn't do that in this quarter. We're incurring all the costs associated with moving the company and severance and everything else, and yet we're continuing to be able to reduce the G&A at the same time.

Speaker 0

Okay. Yeah. I'll add a little bit to that. If you're looking at our yard operating expenses on a sequential basis, keep in mind that we had the change in revenue recognition that had a huge impact on our first quarter. We accelerated the recognition of about $8.8 million in operating expense, and our second quarter is about $3.4 million. Now we're starting to hit a normal run rate with respect to operating costs on a per-vehicle basis.

Speaker 3

Yeah. I was also looking at it on a year-over-year basis where it wasn't much of an increase. Going forward, to summarize, should we be looking at kind of flattish in terms of dollars for yard operations? What's the.

Speaker 1

I'd love to be able to give you a definitive answer to that. The part we don't know is volume going forward. Right now, we're seeing a ton of weather. We're seeing a lot of volume coming in, and we've got a lot of people that are deployed right now to handle those cars. Of course, costs will go up associated with that. Again, I'd say if it's in a test tube and we look at this kind of in a vacuum as, hey, all things being equal, we should be able to leverage going forward as we put more vehicles through the system, both in insurance and non-insurance growth. Incrementally, the margin on those should be better, and we should be able to have a slight incremental increase. I would expect that in 2012. We'll see what happens.

I would expect in 2012 that revenue growth will occur, and you'll see margins improve.

Speaker 3

Got it. All right. Thanks a lot, guys.

Speaker 2

Next, we'll go to Craig Kennison with Robert W. Baird.

Speaker 1

Hi. This is actually Marking for Craig. Thanks for taking the question. A couple of things. First, Allstate acquired another auto insurer recently. I think it was E-Surance. Do you have a sense for the salvage volume or the market share associated with that business? Also, would Copart automatically win that volume based on the terms of the Allstate agreement?

Speaker 3

Yeah, I do have a sense for it because we have all their business. At this point, there's no change because they bought them, and we've already got a relationship with them, and we'll continue to have a relationship with them.

Speaker 1

Fair enough. Thanks. What is your appetite to buy back stock in the open market given you had the opportunity to buy back more shares at the tender price earlier this year? Has there been any change in the thinking regarding the priorities for cash?

Speaker 3

I mean, without sitting here and explaining everything we're going to do, the best way I can think of looking at that is, we obviously have been very bullish on the company and the future of the company to the tune of buying $601 million worth of stock back in the last three quarters. In the most recent quarter, just over $60 million worth of the what's our average price on that?

Speaker 0

43.

Speaker 3

I think you got a feel for how we feel about the company.

Speaker 1

Great. That's all I have. Thanks again.

Speaker 3

Thanks, Mark.

Speaker 2

The following question comes from Scott Stamber with Sidoti & Company.

Speaker 3

Hi, Scott.

Speaker 0

Hey, how are you?

Speaker 3

Good.

Speaker 0

About 11% same-store adjusted increase that you gave for the whole company. Is there any way to give us a framework of how North America did versus the UK?

Speaker 3

No. We don't break that out. We look at it on a consolidated basis, and that's the way we report this information. We did indicate that the majority of that came from volume, but also there was contribution from revenue per transaction.

Speaker 0

Gotcha. Could you talk about the non-insurance business? In the past, you've given some statistics about the growth there.

Speaker 3

Yeah, what's the max?

Speaker 0

It's slightly under 20% because of the growth you want.

Speaker 3

Yeah, you've given a lot of growth from a sales perspective.

Speaker 0

In our third quarter, we grew insurance volume significantly, and therefore, it dropped below 20% this quarter.

Speaker 3

Yeah. I mean, the insurance business is quite seasonal in terms of picking up vehicles through, you know, from basically November, December, January, and then selling those vehicles off in February, March, and April. The non-insurance business is not seasonal. Relatively consistent volume that comes in quarter after quarter. When you have a big blowout of units, as Will just said, you're going to have a reduction in %. In total units, it's up.

Speaker 0

Okay. Remind us again the areas within non-insurance which are really moving the needle. Is it Copart dealer services, banks, or is it all the above?

Speaker 3

We think of the non-insurance in terms of probably eight or nine segments. The biggest drivers of that would be our consumer model, our dealer model, and our VDC, our vehicle donation cars. Those would be the biggest drivers. The secondary drivers would be fleet, finance, and rental car volume sources.

Speaker 0

Just the last question is on the cost front. Could you talk about how much more you have to go with ratcheting down, I guess you'd say, NASCAR spending? Also, with this new IT system, maybe talk about the expense implications for 2012?

Speaker 3

Yeah. It's not really a marketing thing. At this point, we've got a consistent marketing spend in this year, and that'll continue into next year. Really, the cost savings is the fact that we're doing business so differently today. It's not a Copart dynamic. It's a world technology dynamic. It's something that exists in the world today, the way that we do business. We'll be looking at handling process very differently going forward through the centers and really changing the structure of the company. The technology that we had or that we still had that we'll be replacing is technology that's over a decade old. I mean, it's been great technology. It's brought us along to where we're at today, allowed us to consolidate locations and have online bidding. You can pay for a vehicle anywhere. You can assign a vehicle anywhere.

The technology that's coming is going to be much leaner, lighter, more nimble, easier to change, a lot less resource that will be needed to make improvements and to have reporting technology. There's a lot of savings that'll be coming out of that as well as the process-driven bits and pieces of change. As we look forward, there's really two dynamics that we have to look at. One is we've got the costs associated with a move like this. It's a big transition for a company of our size. There's costs associated with that. There's going to be all the benefits because of the changes, neither of which you hear me talking about is marketing spend. The marketing cutbacks that we've made are done. They're in place. Everything going forward in terms of additional savings is going to be associated with process and technology and the way we do business.

That'll be offset by the cost of moving. We'll be looking at improvements in 2012 and really a full run rate, probably fiscal 2013.

Speaker 0

Gotcha. That's all I have. Thank you.

Speaker 3

Thanks, guys.

Speaker 1

Thanks, all right.

Speaker 2

Tony Tristello from BB&T Capital Markets has the next question.

Speaker 1

Thank you. Good morning.

Speaker 0

Morning.

Speaker 3

How's it going?

Speaker 1

Jay, as a follow-up on the spending, when I look at sort of your positioning today, I think I definitely get the read that the industry's in one of the better positions it's been in some time. What you're trying to accomplish here is now lay the groundwork for sort of the next 5 to 10 years. I guess what I want to understand is, one, is the investment that you're going to make an investment to drive efficiency and cost savings and productivity, or is it an investment that's going to drive volume and top line and market share gains?

Speaker 3

That's a great question. It's both. We're focused on eliminating systems and processes that are clunky or that take a lot of, you know, if we've got people that are cranking out Excel reports every day, when that technology, that information should be at your fingertips with an iPad. We need to take advantage of that. iPhones didn't exist five years ago, so obviously, iPads didn't exist five years ago. We're in a new technology age today where people expect mobile computing, data at their fingertips, mobile bidding. That's the path we're headed down. That's going to drive efficiency. It's also going to drive unit growth because the more transparent you are, the more information that you can give your customers, the more likely they are in choosing you.

Because if they can see they're going to get a higher return, they can see what their results are going to be. If they've got all the tools at their fingertips, they're going to be more apt to use you. We look at it as both. It's going to drive efficiencies, but it's going to drive unit growth as well going forward. I can't disagree with you on it being a 5 to 10-year plan, but I would say it's more, it's going to be a lot quicker process than that. I anticipate today that our team will have everything that's been kind of laid out in fiscal 2011, which ends in two more months, will be implemented in fiscal 2012. By the time we finish fiscal 2012, we should be, with process centers, with the home office move, with the new technology that's running our systems.

Speaker 0

Sure. Thanks.

Speaker 3

With the new technology that's running our systems in the UK and the U.S. and our facilities, improvements to our website. When we look into fiscal 2013, this is going to be a year of implementing those new technologies with our customer base, getting them used to it, getting them comfortable with having that information at their fingertips, and then driving more non-insurance and insurance volume. When you think of our growth, I break our growth up very simply. We've got growth domestically in insurance and in non-insurance. If I look back 15 years ago or 10 years ago, we had growth domestically in insurance. We were a company that sold damaged cars for the insurance industry. Today, we don't look at it that way. We're a technology company that liquidates vehicles for a number of different segments.

Insurance represents about 80% of that volume, non-insurance about 20%, give or take, on a given quarter. We've had enormous growth in insurance and units, so you're not seeing that percentage shift much. That number will shift more in fiscal 2013, fiscal 2014, and fiscal 2012 as well. I mean, it will shift more as we move more and more into those segments going forward. The second piece of the growth is going to be, you know, I won't even say non-domestic, but non-markets that we're currently in. The UK and North America are great markets. They represent our company today. We need to start looking at where we can expand in other markets and leverage our technology, leverage our buyer base. This is all a game about cross-pollination.

Every time we open up a new site, and you go back to the 1990s, we'd open up a location in the East Coast. The East Coast had never met any Copart, had never seen Copart before when we came to the East Coast, but the Midwest had. The Midwest started to become aware of product in the East Coast. The East Coast buyers became aware of product in the Midwest and across the West Coast, etc. The same thing happened abroad. As we open up in foreign markets, we've got customers that become aware of our other locations. There is a ton of cross-pollination benefit as well. That drives returns, and as you drive returns, you drive more units. I really got to, before I finish this, I know it's kind of a long-winded answer, but I really got to push the Allstate piece as well here.

Allstate made a decision to go with Copart nationally. They are happy with that decision. They are extremely happy with that decision. It has been a very good decision for them financially. That is great for us and that is great for them because it is a win-win for both of us making money. It is also great for us from the standpoint of it is really a great example of why other customers should look at making the decisions that they have made recently versus the other approach to this. They make the decision, they do not like it, and they decide to change. That is not the case. They made the decision and they like it, and they are happy they made the decision.

Without putting words in their mouth, I can just say it is great for us to be able to use them as an example when we meet with other clients. I think that is another area where we are going to see additional growth because we have that fabulous example that we can illustrate to other customers.

Speaker 1

It seems like fiscal 2012, it sounds like the investment is this sort of inflection point year, if you will, and then you sort of springboard into fiscal 2013. I'm just wondering a couple of follow-up questions here. One, how should we think about the timing or the quarterly progression of inherent costs associated with this transition? I know you guys don't give guidance, but maybe if you can sort of give us at least some boundaries to use in terms of where those costs might be coming in and how we should think about that over the next 12 months.

Second, when we think about everything from adding, sort of investing in personnel, which you've talked about, as well as switching over to this new system and technology, what steps do you put in place or implement to ensure that training and the switchover, that there's no disruption to, one, your customers and your auctions, and two, that you're able to make sure you have successful training so that there's a pretty easy transition over?

Speaker 3

Yeah. That's an easy answer. We've got a great team that, you know, a lot of people have gone through conversions like this in the 1980s and the 1990s. In the 2000 period, I remember in the 1980s, I had a lot of transition associated with systems because you had systems from the 1970s and you had to update. What we've seen on technology is it really has not changed for a lot of companies. Where the web has changed completely, a lot of companies have done the Y2K thing in the 1990s and then not implemented a lot of change in the 2000s. We're in a different stage today. Mobile computing today is the standard. I mean, we've all got iPhones and Googles, Androids, and that kind of thing. You have to have information. You expect to have information at your fingertips. You expect to be able to bid.

We have to make these changes that'll put the improvements in. The good news is I'm very comfortable with it because we got a great team that has done this before. We went through this change in 1997. We did a great job of changing the company over to an all-new system. We'll do a great job doing it this time. I'm very comfortable that that'll happen. Not worried in the least. In terms of cost, you've really got operating costs and capitalized costs. I'll let Will talk on the capital front. I can just tell you on the operating front, there's a lot of costs associated with doing this kind of transition. You cannot worry about trying to cut every little cost out when you're going. There's nothing more important than doing a transition like this and making sure that it doesn't impact negatively internal or external customers.

It's got to be smooth. It's got to be easy. That's the first priority. After that, you start to take advantage of your systems that have more efficient ways. We may have people today that have to do a bunch of workarounds and things because the system wasn't designed to do some of the things we're doing with it today. The new system will be, and they go, "Wow, this is great. I love this new system. It's so much more efficient." We become more efficient. As we grow additional units, we may be able to do that without incurring additional costs. Operationally, there's going to be costs associated with this in fiscal 2012. Operationally, I would expect to see those costs starting to come off a little in 2012, but more so in 2013. Then you got capitalized costs, which I'll let you.

Speaker 0

Certainly. As Jay said, part of the costs are going to find their way to our income statement. By the way, we had about $800,000 of those costs in our G&A this quarter. We'll continue to see some incremental costs associated with this transition next several quarters. On the capital side, we expect the total capitalizable cost to be in the low tens of millions, not insignificant. In fact, we have that reflected in this quarter's CapEx. Those costs will find their way through our income statement through amortization, probably starting at the end of fiscal 2012.

Speaker 1

Okay, that's very helpful. Is it more of a front-loaded expense here as we move into the beginning of fiscal 2012, and then it tails off as we go through, so that by the time we get to the third or fourth quarter, you would have already anniversaryed a chunk of it? Is that how we should think about it?

Speaker 0

That's what we anticipate. Absolutely, especially with respect to the capital costs.

Speaker 1

Okay. Very helpful. Thank you.

Speaker 3

Thanks, John.

Speaker 2

We will now go to Ryan Brinkman.

Speaker 1

Hi, good morning.

Speaker 0

Hi, Ryan.

Speaker 3

Hi.

Speaker 1

Hi. A lot of my questions have been answered, but just sort of in keeping with the conversation on technology, could you elaborate on the Copart Sell My Car iPhone app released recently, which I think is very creative? First of all, you know, what has been the initial response thus far? Secondly, you know, it seems like, from what I could read of it, that you would be selling these vehicles on a principal basis, which I know is a bit of a departure for you in North America. Is that true? Thirdly, how do you think about the risk to this business given that you'll be, you know, essentially buying vehicles for your own account, which you have been unable to inspect, buying vehicles within 10 minutes from what I can understand?

Speaker 3

Yeah. Right. The app has been obviously positively received, and it's really the start. As we kind of play in that space, it's the beginning. The evolution that'll take place now is what other things can we do for our customers that are out there? Typically, these are customers that have never heard of us before. They're learning about us. They're going online. They're going to the App Store at Apple, and they discover Copart. The best way to impress your customer is to take the risk. The best thing you can do is say, "Look, here's a number we'll give you on the call right now," as opposed to, "Why don't you bring it down? Why don't you try to run it through the auction process?" It may or may not meet their expectations.

You may or may not have somebody that's out there supporting you and talking about you versus detracting. The best thing you can do is say, "Here's a number that we'll give you for the car right now." That's why we are principal on that model and then resell the vehicle. What that really creates is a ton of word of mouth. Yes, it's a driver for volume. Yes, it's profitable. It also creates awareness for the company. In some sense, I think of it as free marketing. You liquidate your vehicle, you sell it, you get a check immediately, you're happy, and you tell your friends about it. Some of your friends may sell more cars at Copart, but they also may buy more cars at Copart. That's the driver for us, Ryan. It's all about awareness and driving returns up and getting additional volume.

Speaker 0

Ryan, let me add that the working capital associated with this program is really less than what you might expect. We're holding the cars for about 12 days, and the average purchase price is not that great. We're not incurring obsolescence risk. We made a decision to sell the cars as soon as we can and not try to speculate in the movement of the market.

Speaker 3

If you think about the insurance purchasing like we did in the 1990s, you've got a 60-day lag, 90-day lag on those units. That's an enormous lag to buy a car today and sell it 90 days later. We saw 25% of the sale price evaporate in 2008. It's not unheard of for sale prices to move 5% or 10%. That's risky. Buying cars and selling them a week or two weeks later is much less, clearly much less. We can adjust as soon as we see that markets are moving, we adjust the purchase price up or down.

Speaker 1

Okay. Great. You know, early in the call, you talked about the record ASPs kind of in the month of May, I think it was. Was this a gathering tailwind throughout the quarter for you or was it steady state? Did you see any kind of an inflection point around the March 11 earthquake in Japan like some had speculated?

Speaker 3

February was less than March. March was less than April. We definitely saw an improvement in ASP month after month in the last quarter, and May has beaten them all. It's been the best month yet. We could speculate all day long. I always prefer not to. I think it's a lot of moving parts here. I think it's a demand curve that's created by a large buyer base. I think the price of scrap metal is higher right now. There are a lot of moving parts that are helping push that. There's not a lot of, there's been a lot more scrappage than there have been new car sales. Used car pricing is up, and that's how there's a lot of factors that are helping, including the dollar. I always prefer not to speculate. I just like to say it's definitely up.

At this point, when we look out, Will and I had a conversation about it yesterday, and we really don't see a reason for that to change in the near term.

Speaker 1

Okay. Just last question. You alluded to what are essentially one-time items running through your G&A associated with the headquarters move that you are unlikely to call out as such, just given your history of, I guess, conservatism. Will did state, I think, that there were $800,000 of systems costs in there. I'm curious whether you're incurring any, maybe not severance as of yet, but perhaps some stay pay expenses in the quarter. If so, you know what those could have looked like in Q3.

Speaker 0

Ryan, that figure I gave you was primarily stay pay and severance costs.

Speaker 1

Okay. $800,000 is probably the extent of it. Okay. Thanks, guys.

Speaker 3

You're welcome. Thank you.

Speaker 2

Moving on to Jason Ursiner with CJS Securities.

Speaker 1

Good morning. Just following up on the last question in terms of growth in domestic non-insurance volume and individual car owners representing a more important source of volume. I understand you're making the changes to your platform to handle that. Other than some of these awareness and marketing activities, do you think you really need to make changes to your brand at all to really embrace the change at the buyer base level?

Speaker 3

Yeah. That's an easy answer. Yes. We'll be doing that. We're working on that currently. You'll be seeing that in fiscal 2012. You won't really be seeing that in the current quarter, but you'll be seeing some brand, some big improvements to the brand. Look, we are, without a doubt, known for damaged cars. If you ask anyone in the body shop industry, the recycling industry, the insurance industry, they know Copart. They immediately think of Copart and that damaged car brand. When you get into the other segments, we met with a company yesterday that has a fleet of vehicles that needs to be disposed. Never heard of Copart before. There is a brand disconnect there on some of those segments, and we'll be making changes to that. A lot of that is the user experience.

A lot of your brand, you know, there are two ways of saying it. You can say that the brand, what people do in the company defines the brand, or you can define the brand and then that's what you want people in the company to do. That's a process that we're going through right now. It'll be changing in 2012, and the user experience will be changing so that when you come to our website, we show you and interact with you based on whatever segment it is that you're, whatever channel it is that you're coming into the company. Short answer is yes. Long answer is all that detail.

Speaker 1

Okay. Just more industrial-related for insurance. Obviously, we've mentioned the record average selling prices. As this trend continues and it's offsetting a relatively flat, possibly deteriorating volumes in the overall salvage industry, how do you think about the balance from an internal hedge point of view, given the composition of your fees? Is it a trade-off you'd like to see continuing?

Speaker 3

I'm not sure I understand the question. I'm looking at Will to see if he gets the question.

Speaker 0

Are you asking whether we'd rather have more volume or higher ASPs?

Speaker 1

Given the composition of your seller's fees versus buyer's fees now, how do you think about the balance of higher used car pricing impacting industry volumes?

Speaker 3

Can we take C, both?

Speaker 0

Yeah, Jason, obviously it depends on the magnitude of the change that you're comparing, but in general terms, this environment is beneficial to our model.

Speaker 1

Can you talk a little bit more generally about the growing importance of buyer's fees to your business model and maybe what opportunity you see in the marketplace to absorb higher fees over time?

Speaker 3

Now, we don't get into any of that kind of discussion in terms of pricing and such on the calls, for obvious reasons. I mean, look, if ASPs go up, it's a really good thing for us. Higher ASPs will drive additional volume. At the same time, because there's higher ASPs, there's higher demand right now for used cars, and that causes ACVs to go up as well. It depends on whether the ASPs are being driven because used car pricing is going up more or is used car pricing going down and ASPs going up. Obviously, you're going to get a lot more volume. Right now, we are seeing higher used car pricing, and so there's demand for used cars. That's because we didn't sell enough new cars in 2008, 2009, 2010, and even this year.

Now, we're seeing that go up. In 2008, 2009, 2010, you look at each one of the years, it continues to go up in terms of new car pricing. This is a lag. We saw this in 2000. I remember in 1999, the price of fuel was below $1 a gallon. When we saw the price of fuel drop below $1 a gallon in 1998, 1999, I think that was in Atlanta when I saw it. Immediately, everybody's out buying brand new Chevy Suburbans and big SUVs. We're now selling a high percentage, a double-digit percentage, of SUV-type vehicles. Those are great vehicles. They have huge ASPs. They're wonderful vehicles to sell as opposed to lower-end units. This is a business that clearly has a lag, and it's hard to predict where we're going to be three, four, five years from now.

My guess, if I were to guess today, is that we're going to have a higher average year of vehicle. As cars get older, they become more likely to total loss. I would expect that the frequency is going to increase as the average vehicle gets older, and it is, in fact, getting older. We're looking at data yesterday for the last three years, and the average vehicle year is getting older. The average vehicle we sell is getting older, and yet the ASP is up. That's supposed to go the other direction, but that's because of a bunch of other factors we talked about. Let's look out to 2012, 2013, 2014, 2015. We're going to see the average vehicle in the U.S. is going to age, and it's going to become more likely to be total loss. We'll see more units because of that.

Speaker 1

Okay. Great. Thanks for the details.

Speaker 3

You're welcome.

Speaker 2

As a reminder, if you have a question, please press star one on your telephone keypad. We'll now go to Bill Armstrong with C.L. King and Associates.

Speaker 1

Good morning, guys. Just a quick follow-up. Could you tell us what the UK revenues were for the quarter?

Speaker 0

Like I said, Bill, we don't split that out. We talk about the company as a whole and use.

Speaker 1

Okay. Did I hear you say, Will, in your opening remarks that UK volumes were up 17%? Did I get that right?

Speaker 0

Yes, you did.

Speaker 1

Okay. That would be principal and agency combined?

Speaker 0

That's correct.

Speaker 1

Got it. Okay. In terms of just the overall cost of the new systems rollout and headquarters move, I guess most of it is going to be in fiscal 2012. What do you think the total cost of these two very large projects will work out to be?

Speaker 3

I was just going to repeat what Will said. He gave below tens of millions. You've got costs associated. We sold our corporate office. We bought a new process center. We will be building a new process center on some land we own in Dallas. We'll be leasing a new corporate building. We'll be implementing the new computer systems. There's a lot of moving parts here. You know, low tens of millions is $30 million to $50 million, somewhere in there. Is that right? Okay. I'm getting a head nod from Will, so.

Speaker 0

That's capital and non-capital costs position.

Speaker 1

30 to 50. Is that going to be mostly capitalized?

Speaker 0

Most of that'll be capitalized.

Speaker 1

Okay. All right. That's helpful. Thank you.

Speaker 0

You're welcome.

Speaker 2

We have no further questions at this time.

Speaker 3

All right. In closing, I just want to thank everyone for coming. I also want to thank all of our employees on Team Copart. We are really working hard right now. There's a lot going on. I want to thank everybody that's out there that's listening to the call that is working right now on the CAPs in the Midwest and working on the transition for AMOS and all the other things that we're doing. You guys are doing a great job, and we appreciate it. I also want to thank you all for coming on the call. We look forward to reporting on the fourth quarter and the fiscal year 2011 as we enter into the new year. Thank you so much. Bye.

Speaker 2

Once again, this does conclude today's conference. We do thank you all for joining us.