Copart - Earnings Call - Q4 2011
September 21, 2011
Transcript
Speaker 1
Good day, everyone, and welcome to the Copart Incorporated Fourth Quarter Fiscal 2011 earnings 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, CEO of Copart Incorporated. Please go ahead, sir.
Speaker 2
Thank you, Matt. Good morning, everyone, and welcome to our fourth quarter for Fiscal 2011. We've got a lot to talk about, and I know there'll be a lot of questions. Before I start, I'll turn it over to William Franklin, CFO, for a brief disclosure.
Speaker 3
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. These statements are neither promises nor guarantees and are subject to certain risks, trends, and uncertainties that could cause the final results to differ materially from those projected or implied by our statements and comments. For a more complete discussion of the risks that could affect our business, please review the Management's Discussion and Analysis and the factors affecting future results contained in our 10-K, 10-Qs, and other SEC filings. With that, we'll turn the call back to you, Jay, to begin discussion of our fourth quarter results.
Speaker 2
Thanks, Will. We were talking about this morning, it seems like the year has just been extremely fast. It was just a year ago that we were talking about Fiscal 2010, and here we are on Fiscal 2011, and a lot has taken place. It's been a year of great achievement and a lot of change that's taking place in the company. We're really excited about that, but we're in a transition. When you're in a transition and doing so much, it's much more than moving headquarters. It's new systems that we're integrating in the company. It's some allocation of how we look at ops expense versus G&A expense. It's a number of things that are happening in the business. The first thing I wanted to talk about this morning was our G&A.
For the quarter, G&A was $23.7 million versus $27 million, and that includes transition costs of around $800,000 that we absorbed in the quarter. For the year, it was $98.9 million versus $106 million, and that includes roughly $2.2 million in transition costs that will continue in the next year. Our goal is to continue to refine how we operate and run the business. In that refinement, we'll be looking for obvious savings, but there will be costs associated with all the different things that we are doing in the company. Will will talk to you about all the stock that we've repurchased in the year. We just love this company. We think that we've got a wonderful future, and we believe that. As the old saying goes, we put our money where our mouth is.
He'll talk about the stock that we bought back, not only in the quarter but in the year. I just wanted to note that we have 8.5 million shares authorized for buyback at this time. Finished the quarter with $74 million in cash. If you recall, last year, we made a large purchase of stock in Q1, and finished the quarter with relatively the same amount of cash that we came into the quarter. This is a quarter where we generate, in fact, I'd say it's one of our largest, if not the largest, quarters, where we generate a lot of cash, and that's Q1. That is August, September.
Speaker 1
Good day, everyone, and welcome to the Copart Incorporated Fourth Quarter Fiscal 2011 earnings 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, CEO of Copart Incorporated. Please go ahead, sir.
Speaker 2
Thank you, Matt. Good morning, everyone, and welcome to our fourth quarter for Fiscal 2011. We've got a lot to talk about, and I know there'll be a lot of questions. Before I start, I'll turn it over to William Franklin, CFO, for a brief disclosure.
Speaker 3
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. These statements are neither promises nor guarantees and are subject to certain risks, trends, and uncertainties that could cause the final results to differ materially from those projected or implied by our statements and comments. For a more complete discussion of the risks that could affect our business, please review the management's discussion and analysis and the factors affecting future results contained in our 10-K, 10-Qs, and other SEC filings. With that, we'll turn the call back to you, Jay, to begin discussion of our fourth quarter results.
Speaker 2
Thanks, Will. We were talking about this morning, it seems like the year has just been extremely fast. It was just a year ago that we were talking about Fiscal 2010, and here we are on Fiscal 2011, and a lot has taken place. It's been a year of great achievement and a lot of change that's taking place in the company. We're really excited about that, but we're in a transition. When you're in a transition and doing so much, it's much more than moving headquarters. It's new systems that we're integrating in the company. It's some allocation of how we look at ops expense versus G&A expense. It's a number of things that are happening in the business. The first thing I wanted to talk about this morning was our G&A.
For the quarter, G&A was $23.7 million versus $27 million, and that includes transition costs of around $800,000 that we absorbed in the quarter. For the year, it was $98.9 million versus $106 million, and that includes roughly $2.2 million in transition costs that will continue in the next year. Our goal is to continue to refine how we operate and run the business. In that refinement, we'll be looking for obvious savings, but there will be costs associated with all the different things that we are doing in the company. Will will talk to you about all the stock that we repurchased in the year. We just love this company. We think that we've got a wonderful future, and we believe that. As the old saying goes, we put our money where our mouth is.
He'll talk about the stock that we bought back, not only in the quarter but in the year. I just wanted to note that we have 8.5 million shares authorized for buyback at this time. Finished the quarter with $74 million in cash. If you recall, last year, we made a large purchase of stock in Q1, and finished the quarter with relatively the same amount of cash that we came into the quarter. This is a quarter where we generate, in fact, I'd say it's one of our largest, if not the largest, quarters, where we generate a lot of cash, and that's Q1. That is August, September, October. There'll be a lot of cash that we'll be generating in Q1.
The $74 million in cash obviously depends on what we do with cash in the quarter, but if all things stay constant, there'll be a lot of cash that's generated nonetheless in the quarter. The Dallas move for the company is on track. The plans are the same. We still are looking at process centers. We'll be placing a lot of the functions that are from payments to receiving, call center, etc. The HQ will be all the folks that are associated with either integration, growth, buying companies, expanding. We're looking at a lot of different areas company-wide for expansion into other markets. We're also continuing to push hard on our U.S. and UK operations—I should say, North American and UK operations—to expand not only in insurance but outside of the insurance market.
The Dallas move, as I said, is on track, and we should be relocated with our HQ by the summer of 2012. We've got a little delay in our integration of our new technology systems. The system that we've got in the company was implemented over a decade ago, so it's time to take advantage of the new technologies that are out there in our enterprise technology systems. Our auction inventory management OS, we were expecting it to be done sometime in Fiscal 2012. That will probably take place now sometime in Fiscal 2013. It's not a huge delay by any stretch; it's about doing it right anyway. This is all about the future. It's not about something that we have to have today. It's about making these changes the same way that we did this back in the late '90s.
By making these changes, it'll give us the ability to catapult over the next decade with all the new technologies that are out there. Finally, I would just say that we launched Project Overdrive in Fiscal 2012 in August at the beginning of the year with all of our company. Project Overdrive is all about changing the experience at Copart for everyone, internal and external customers. We're going to be pushing really, really hard on that program this year to make it a faster, easier company to do business with for everyone. We look forward to seeing the technology changes come into place, and we also look forward to seeing the changes in our service and the quality and the speed at which we deliver that service for all of our customers. With that, I'll turn it over to Will, and then we'll open it up for questions.
Speaker 3
Thank you, Jay. Yesterday, we reported our financial results for the fourth quarter of our 2011 fiscal year. Consolidated revenue was $215.4 million compared to $190.5 million for the same quarter last year. Volume increased in both North America and the UK. Total volume increased over 7%. Purchase car revenue, as a percentage of total revenue, grew from 16.8% to 19.2%.
Speaker 2
October. There'll be a lot of cash that we'll be generating in Q1. The $74 million in cash obviously depends on what we do with cash in the quarter, but if all things stay constant, there'll be a lot of cash that's generated nonetheless in the quarter. The Dallas move for the company is on track. The plans are the same. We still are looking at process centers. We'll be placing a lot of the functions that are from payments to receiving, call center, etc. The HQ will be all the folks that are associated with either integration, growth, buying companies, expanding. We're looking at a lot of different areas company-wide for expansion into other markets. We're also continuing to push hard on our U.S. and UK operations—I should say, North American and UK operations—to expand not only in insurance but outside of the insurance market.
The Dallas move, as I said, is on track, and we should be relocated with our HQ by the summer of 2012. We've got a little delay in our integration of our new technology systems. The system that we've got in the company was implemented over a decade ago, so it's time to take advantage of the new technologies that are out there in our enterprise technology systems. Our auction inventory management OS, we were expecting it to be done sometime in Fiscal 2012. That will probably take place now sometime in Fiscal 2013. It's not a huge delay by any stretch. It's about doing it right anyway. This is all about the future. It's not about something that we have to have today.
By making these changes the same way that we did this back in the late '90s, it'll give us the ability to catapult over the next decade with all the new technologies that are out there. Finally, I would just say that we launched Project Overdrive in Fiscal 2012 in August at the beginning of the year with all of our company. Project Overdrive is all about changing the experience at Copart for everyone, internal and external customers. We're going to be pushing really, really hard on that program this year to make it a faster, easier company to do business with for everyone. We look forward to seeing the technology changes come into place, and we also look forward to seeing the changes in our service and the quality and the speed at which we deliver that service for all of our customers.
With that, I'll turn it over to Will, and then we'll open it up for questions.
Speaker 3
Thank you, Jay. Yesterday, we reported our financial results for the fourth quarter of our 2011 fiscal year. Consolidated revenue was $215.4 million compared to $190.5 million for the same quarter last year. Volume increased in both North America and the UK. Total volume increased over 7%. Purchase car revenue, as a percentage of total revenue, grew from 16.8% to 19.2%.
Speaker 1
By the digit one on your touch-tone telephone keypad. If you're on a speakerphone today, please make sure your mute function is turned off to allow your signal through to our equipment. Once again, please press star one now to pose a question. First, we will go to Bill Armstrong with CL King and Associates. Please go ahead.
Speaker 5
Good morning, Jay and Will. The vehicle sales were up about, I think, 28% year-over-year. I was wondering if you could just maybe flesh that out a little bit more for us. What was driving that particularly? I was surprised because, you know, you're transitioning to an agency model in the UK. What was driving the vehicle sales increase?
Speaker 2
Yeah, sure. Good morning, Bill. I would just tell you that that's really two things. One is that we did make an acquisition in the UK that brought in a lot more purchase cars, and we are buying more cars in the U.S. We've got a business called Copart Direct that buys cars from anywhere. That model is a pure purchase model. It's not a model where we offer the auction method. We go principal on those cars, and we make a higher margin in doing that. There's a number of reasons why we do it, but that's probably the biggest reason.
Speaker 5
Okay. Was that UK acquisition done during the fourth quarter, or was that earlier in the year?
Speaker 2
No, it was done during the third quarter.
Speaker 5
Okay, could you discuss trends in the average selling prices in the U.S.?
Speaker 2
Yeah, sure. ASP is up. It's been a good year compared to, comparing Q1 all the way to Q4. It's been a nice trend in the way that ASPs have moved. Will, I don't know if you've got something specific.
Speaker 3
No, that's exactly right.
Speaker 2
Okay.
Speaker 3
Yeah, I thought I would anticipate them to increase going forward.
Speaker 2
Yeah, they are at an all-time high. I mean, we are looking at really high ASPs right now.
Speaker 5
Got it. Finally, what were same-store revenues for the quarter?
Speaker 3
You know, it's getting more difficult to express the same-store sales or same-store movement in terms of revenue just because of a number of different factors. You've touched on a few of those. The transitioning of contracts in the UK, the movement into purchasing cars in the U.S., FX, that causes us to make a number of assumptions if we want to talk about same-store sales in terms of revenue. For this quarter, let me express it just in terms of units. On the same-store sales basis, units were up 6%.
Speaker 5
Great, thank you very much.
Speaker 2
Thanks, Bill.
Speaker 1
Moving along, we will go to Tony Criscella with BB&T Capital Markets.
Speaker 2
Hey, Tony.
Speaker 5
Hey, thanks. Good morning, guys.
Speaker 2
Morning.
Speaker 5
I guess one question. You talked about sort of a delay or push out of the system into 2013. I'm just wondering, is that your timing? Is that the third party that's helping you with that timing, or is there just something you need to get fixed internally before you could roll that out?
Speaker 2
Yeah, I mean, the answer is a yes to all that. I mean, we are sitting here looking at an enterprise system that is very different than the system we've got today, in so many ways. This is a company that has a great system now.
Speaker 3
As both volume and ASP increased, the yield per purchased car remained relatively constant with the same quarter last year. However, because the ASP increased, the yield as a percentage of the selling price declined. The percentage of cars sold on the principal basis in the UK declined on a year-over-year basis from 44% to 39%, but increased on a sequential basis due to the contracts inherited with the acquisition in our previous quarter. Per car revenue for fee-based transactions were up, both in North America and the UK. The change in accounting rules, which became effective in our first quarter of this fiscal year, altered the period in which we recognize certain revenues. Revenues generated for recovering a car, for converting a title with the state, and for cleaning, washing, and protecting a car are now recognized when performed.
These services are generally performed near the time the car is assigned to us. Last year, these revenues were recognized when the car was sold, usually around two months after the assignment date. Because these revenues are low in margin, in quarters in which we grow inventory, revenue has increased and margin percentage has decreased. The total revenue for the quarter associated with this change in accounting was approximately $3.4 million. Yard and fleet expenses grew from $68.5 million to $81.8 million and reflect the higher volume of cars processed, a significant increase in the cost to recover a car due to the increase in the cost of diesel, and the increase in costs associated with developing new markets, including the public dealer markets. Our gross margin grew from $86.2 million to $89.6 million.
General and administrative costs, excluding depreciation, were $23.7 million compared to $27 million for the same quarter last year. The decline was due primarily to reduced marketing and reduced headcount. Our operating income increased from $57.2 million to $63.5 million, and operating margin was 29.5% compared to 30% in the same quarter last year. Diluted EPS from continuing operations was $0.59 compared to $0.43 for the same quarter last year. We ended the quarter with over $74 million in cash. Sequentially, accounts receivable, vehicle pulling costs, and inventory cost increased as inventory grew. In the quarter, we generated over $42 million in operating cash flow, and for the year, we generated almost $243 million. Capital expenditures for the quarter were approximately $14 million, primarily for land, facilities improvements, and software development cost. Finally, during the quarter, we expended approximately $135 million to repurchase 2.99 million shares of our common stock.
For the year, we have repurchased over 18.8 million shares at an average price of $39 per share. At the end of the quarter, we have had approximately 66 million shares outstanding on an undiluted basis. This concludes my comments. Matt, we'll turn the call over to you to build questions.
Speaker 1
Okay. Thank you, ladies and gentlemen. If you'd like to ask a question, please signal by pressing the star key.
Speaker 2
Technology now, and so we're going to be making changes to the enterprise technology systems, making changes to our website going forward. Those are things that need to be done gently, and they need to be things that are brought along in a fashion that works for everyone, not something we try to push or set a date. We made a decision in the last month when we hit a bit of a roadblock with some things going on on the IT side that we said, "You know, let's not try to keep to these dates. Let's push it out a little further." It's going to be a little bit of a delay. Like I said in the beginning of the call, boy, you know the year just goes by boom, boom, boom.
It seems like you report on each quarter, and the next thing you know, the year is over. We've got our hands full right now with the Dallas move and the process center moves and Project Overdrive and all the other things that we're doing. Having systems going in in Fiscal 2013, quite frankly, just makes it easier than trying to do two things at once.
Speaker 5
Is that the system also that will ultimately allow you to have multiple languages and expand?
Speaker 2
Yeah.
Speaker 5
Okay. Okay.
Speaker 2
Yeah, that's what it does.
Speaker 5
Will, maybe a point of clarification on the accounting change because I guess a couple of quarters back, I went back and sort of reread the transcript from the call. I thought that the accounting change would have the effect more on the first and second quarters on the margin side and less into the third and fourth quarters. It seems like you saw that certainly in the April quarter, but then you sort of stepped back a little bit in terms of where I would have expected margins to have been for this. Can you maybe discuss a little bit on how we should now think about seasonality? Has something changed, or is it just going to be volatile as the year progresses?
Speaker 3
It does introduce some volatility to our margin percentage. When I reference those quarters, it's because normally, that's when we have movement in our inventory. It so happens that in this quarter, we had a growth in inventory of about 8%. Anytime you have a growth in inventory, you're going to advance those low margin revenues and decrease your margin expense. That's exactly what happened this quarter.
Speaker 5
Okay. Now, going into your first and second quarters, we should expect that you've anniversaried it, but you're still going to see some seasonality to that impact. I mean, how, I guess maybe the better question is, when we think about how margins were in the first quarter and second quarter of this year, is that the basis or framework we should think about when we're modeling on a go-forward basis today?
Speaker 3
No, not the first quarter because the first quarter, we introduced this accounting change and recognized, I believe, it was about a $9 million adjustment based on that. Second quarter, I think it's appropriate. Now, what we can't predict is the magnitude. I think we're fairly comfortable in telling you that it will be affected in the same nature. Once again, I'll refer back to just it depends on how much inventory grows on a quarter-over basis.
Speaker 5
Okay. All right. Maybe just one last question. How is the migration now looking from principal agency over in the UK? Are we now sort of at a plateau, or do we still think that there's further to go in terms of acceptability over there?
Speaker 3
It's a continuing effort. I referenced some trends in my comments. In our third quarter, we were at 36% of total volume on the principal model, and that grew to 39%. I would expect over the course of the next 16, 20 quarters that will come down, but I don't think it'll come down at a really strong or precipitous rate. I think we'll just manage that down as we can.
Speaker 5
Is there any reason for us to think about the macro situation and what's going on in Europe? Does that have any impact on your business operations, or are they sort of defensive in nature that you don't see much fluctuation?
Speaker 2
I'll comment on that one because as the economy changes, it obviously changes average selling prices for non-damaged cars. That affects ACVs. There is some self-regulating, if you want to look at it that way. There is a big piece of this where as the demand for used cars goes up, ACVs go up. As demand for used cars goes down, ACVs go down. When you're buying cars, you're buying them off of a percentage of ACV. We saw this in 2008. When the 2008 crash, so to speak, hit, we looked at a huge drop-off in ASP. That followed with a huge decline in ACVs. Now those are coming back because there's been a big improvement, huge improvement in ASPs again. There is, you know, I'm not going to tell you you shouldn't be concerned about it because we're always concerned about all those things.
There is a process there where we would adjust and correct the pricing.
Speaker 5
Okay. That's very helpful. Thanks, guys. I appreciate it.
Speaker 3
You're welcome.
Speaker 2
Thanks, Tony.
Speaker 1
Moving along, we will go to Jash Patwa with CJS Securities.
Speaker 2
Good morning. Good morning, Jay.
Speaker 3
Good morning, Jay.
Speaker 2
You mentioned selling prices being, you know, way up. Can you talk about the impact this is having on salvage frequency in North America? If buyer fees in North America increase as a percentage of your overall transaction revenue, can you talk about the trade-off of volume for higher car pricing? Is it one you'd view favorably for Copart?
Speaker 3
Yeah. I mean, salvage frequencies right now are trending down a little bit. One of the things that we've got going on right now, and it's very hard to sit here and poke at severity and frequency because the economy is horrible. When you've got an economy that's like it is right now and unemployment like it is, people start dropping policies and go with liability only. They also choose to raise deductibles. The frequency and severity are very much tied to costs and coverage and all those kinds of things. There's a lot of factors that are going on right now. I would tell you, based on all the numbers I've looked at, that as the economy turns around, we're going to see a lot more volume coming through this industry because right now it's definitely being impacted.
While it's not enormous, it is being impacted by the fact that there's less people out there right now that are either insured or that have lower deductibles.
Speaker 2
Got it. The expansion outside the insurance market with Copart Direct, you know, how fast is this business actually growing now in terms of volume? Can you broadly discuss some of the initiatives you're planning to increase success with sourcing whole car volume?
Speaker 3
Yeah. I mean, I can. It's one of these things where it is growing at a very high rate, but it's a relatively small book of business. While it generates a large amount of revenue, the fact is you're buying the cars as opposed to just handling it as an agent. When we get into what are we doing on initiatives, we've got some great people on the team that are working on that. I don't like to get into specifics because, obviously, we think some of the things we do are unique to Copart. We are focused heavily on this. It's a nice market. It's a great upside for us. It's a great opportunity. Do you know where we finished the quarter as far as insurance versus non-insurance business?
Speaker 2
Non-insurance was up, but as a percentage of total sales, it was 21%. Same quarter last year was 22%.
Speaker 3
Yeah. Okay. We're seeing a nice growth in the non-insurance, but we're also seeing a ton of cars coming in on the insurance side. As Will said, the inventories are up quite a bit. When we look at next quarter, I wouldn't be surprised if the trend that Will just gave continues because we're going to be selling off a lot of damaged vehicles in the next quarter associated with inventory builds right now.
Speaker 2
Okay. The Copart or the move to whole car, is the plan still to keep that with the Copart brand? I know we talked last quarter about what, you know, what's synonymous with a wrecked car versus a whole car.
Speaker 3
Yeah, right now it is. I mean, because we sell so many non-damaged vehicles in the company that yes, Copart is synonymous with that damaged vehicle. It's that damaged vehicle brand. We've got thousands of customers out there that send non-damaged vehicles to us, but they're aware of the fact that we sell non-damaged product. We just continue to improve in that segment. For right now, we don't see a reason to change the name. That may shift in the future. I guess I'll use the Netflix example. We're not thinking Netflix and Quickster right now. We're just thinking Copart.
Speaker 2
All right. That's good news. Thanks a lot for taking my questions, guys.
Speaker 3
Okay. Thank you, Jason.
Speaker 2
Thanks, Jason.
Speaker 1
Next in queue will go to Craig Kennison with Robert W. Baird.
Speaker 5
Hi, guys. Thanks for taking my question.
Speaker 3
All right. Hello, Craig.
Speaker 5
On yard margin, Will, on the last call, I think you mentioned you thought that yard expense might be flat on a per-unit basis. First, I'm wondering whether that panned out. Second, maybe you could help me understand the major buckets in that line item and identify which of those are volume-dependent.
Speaker 3
Sure. Probably the one that had the most impact this quarter was just the cost of fuel. I mean, we measure the distance for pickups in terms of zones, and zones are roughly about five miles. Our average zones are about eight, a little over eight, so it's about 40 miles for the average tow-in for a car. We look at our subhaulers, and they're getting about five.
Speaker 2
Great technology now. We're going to be making changes to the enterprise technology systems, making changes to our website going forward. Those are things that need to be done gently, and they need to be things that are brought along in a fashion that works for everyone, not something we try to push or set a date. We made a decision in the last month when we hit a bit of a roadblock with some things going on on the IT side that we said, "You know, let's not try to keep to these dates. Let's push it out a little further." It's going to be a little bit of a delay. Like I said in the beginning of the call, boy, the year just goes by boom, boom, boom. It seems like you report on each quarter, and the next thing you know, the year is over.
We've got our hands full right now with the Dallas move and the process center moves and Project Overdrive and all the other things that we're doing. Having systems going in in Fiscal 2013, quite frankly, just makes it easier than trying to do two things at once.
Speaker 5
Is that the system also that will ultimately allow you to have multiple languages and expand?
Speaker 2
Yeah.
Speaker 5
Okay. Okay.
Speaker 2
Yeah, that's what it does.
Speaker 5
Will, maybe a point of clarification on the accounting change because I guess a couple of quarters back, I went back and sort of reread the transcript from the call. I thought that the accounting change would have the effect more on the first and second quarters on the margin side and less into the third and fourth quarters. It seems like you saw that certainly in the April quarter, but then you sort of stepped back a little bit in terms of where I would have expected margins to have been for this. Can you maybe discuss a little bit on how we should now think about seasonality? Has something changed, or is it just going to be volatile as the year progresses?
Speaker 3
It does introduce some volatility to our margin percentage. When I reference those quarters, it's because normally, that's when we have movement in our inventory. It so happens that in this quarter, we had a growth in inventory of about 8%. Anytime you have a growth in inventory, you're going to advance those low margin revenues and decrease your margin expense. That's exactly what happened this quarter.
Speaker 5
Okay. Now, going into your first and second quarters, we should expect that you've anniversaried it, but you're still going to see some seasonality to that impact. I mean, I guess maybe the better question is, when we think about how margins were in the first quarter and second quarter of this year, is that the basis or framework we should think about when we're modeling on a go-forward basis today?
Speaker 3
No, not the first quarter because the first quarter, we introduced this accounting change and recognized, I believe, it was about a $9 million adjustment based on that. Second quarter, I think it's appropriate. Now, what we can't predict is the magnitude. I think we're fairly comfortable in telling you that it will be affected in the same nature. Once again, I'll refer back to just it depends on how much inventory grows on a quarter-over basis.
Speaker 5
Okay. All right. Maybe just one last question. How is the migration now looking from principal agency over in the UK? Are we now sort of at a plateau, or do we still think that there's further?
Speaker 3
Miles per gallon. It's about another dollar, and the change in the diesel fuel is $0.98 a quarter over. You've got another dollar for every zone. It costs our subhaulers an extra $8 on a quarter-over basis to pick up a car and bring it into us. That's reflected in the increase in yard margin this quarter.
Speaker 2
Just to be clear, was that versus the third quarter or the fourth quarter of last year?
Speaker 3
That's year over, fourth quarter of last year.
Speaker 2
Got it.
Speaker 3
The other increase, as I've referred to, is just the increase in revenue recognition. We brought forward all those costs to recover the car, to title it, and to service it. That increased about $3.1 million in the quarter to that yard and fleet expense. The third bucket would be our increase in cost in operations to grow these non-insurance markets. I guess there's probably a fourth bucket, and that's the increase in IT cost to support the transition to SAP into Dallas.
Speaker 2
Is it still fair to say, you know, relative to Q4, maybe a flattish on a per-unit basis is a decent assumption?
Speaker 3
It's not. You have to look at it. It used to be that you could look at it, and it would be fairly static quarter to quarter. With the change in revenue recognition, it's going to fluctuate far more. In quarters in which you grow inventory, your cost per car will go up. Quarters in which you deplete inventory, your cost per car will go down.
Speaker 2
Got it. That's helpful. Thank you. We had a big hurricane come through the Northeast. Copart is usually the insurance industry's best friend when a devastating hurricane hits. You proved that in Florida and with Katrina. Any impact you're seeing from this hurricane season so far?
Speaker 3
That's a big reason why the inventories are up to the extent that they are right now. There's a lot of activity going on right now in the country. The team is working really hard to address that, and we're picking up cars in a number of different states and dealing with the catwalks that are out there. It's definitely been a busy year in that, with respect to the hurricane side.
Speaker 2
Jay, in the past, you've guided that usually expenses rise fairly dramatically with respect to all of the efforts you make on the hurricane, so that it's not that profitable. Any change in that thought process?
Speaker 3
No. I mean, that tends to be the scenario with a hurricane. There's a lot of expense associated with handling these cars in the quarter. Of course, we'll be selling those off, and as Will just explained with the revenue recognition. We'll be selling those off. In the past, what would happen is with the vehicle pooling, we'd handle a bunch of those cars and defer those costs and then incur those costs when we sell the cars. Now we're incurring car expense upfront.
Speaker 5
to go in terms of acceptability over there?
Speaker 3
It's a continuing effort. I referenced some trends in my comments. In our third quarter, we were at 36% of total volume on the principal model, and that grew to 39%. I would expect over the course of the next 16, 20 quarters that that will come down, but I don't think it'll come down at a really strong or precipitous rate. I think we'll just manage that down as we can.
Speaker 5
Is there any reason for us to think about the macro situation and what's going on in Europe? Does that have any impact on your business operations, or are they sort of defensive in nature that you don't see much fluctuation?
Speaker 2
I'll comment on that one because as the economy changes, it obviously changes average selling prices for non-damaged cars. That affects ACVs. There is some self-regulating, if you want to look at it that way. There is a big piece of this where as the demand for used cars goes up, ACVs go up. As demand for used cars goes down, ACVs go down. When you're buying cars, you're buying them off of a percentage of ACV. We saw this in 2008. When the 2008 crash, so to speak, hit, we looked at a huge drop-off in ASP. That followed with a huge decline in ACVs. Now those are coming back because there's been a big improvement, huge improvement in ASPs again. There is, you know, I'm not going to tell you you shouldn't be concerned about it because we're always concerned about all those things.
There is a process there where we would adjust and correct the pricing.
Speaker 5
Okay, that's very helpful. Thanks, guys. I appreciate it.
Speaker 2
You're welcome.
Speaker 3
Thanks, Tony.
Speaker 1
Moving along, we will go to Jason Ersner with CJS Securities.
Speaker 2
Good morning. Good morning, Jay.
Speaker 3
Good morning, Jay.
Speaker 2
You mentioned selling prices being, you know, way up. Can you talk about the impact this is having on salvage frequency in North America? As buyer fees in North America increase as a % of your overall transaction revenue, can you talk about the trade-off of volume for higher car pricing? Is it one you view favorably for Copart?
Speaker 3
Yeah. I mean, salvage frequencies right now are trending down a little bit. One of the things that we've got going on right now, and it's very hard to sit here and poke at severity and frequency because the economy is horrible. When you've got an economy that's like it is right now and unemployment like it is, people start dropping policies and go with liability only. They also choose to raise deductibles. The frequency and severity are very much tied to costs and coverage and all those kinds of things. There are a lot of factors that are going on right now. I would tell you, based on all the numbers I've looked at, that as the economy turns around, we're going to see a lot more volume coming through this industry because right now it's definitely being impacted. While it's not enormous, it is being impacted.
Then selling the vehicles off in subsequent quarters. Yeah, I mean, it hasn't changed, Craig. We're working like crazy and spending a lot of money to handle the cars, and the team's all doing a good job. The way that we book the revenue and the expense has changed. You'll be seeing those vehicles sold off September, October, the months we're in now and next month, and then even into, even into Q2, to be blunt. There's just a lot of volume still coming in right now that we're picking up. It's been a very active year, and it will definitely cause volume to be pushed out in Q1 and Q2.
Speaker 2
Helpful. I'll get back in the queue. Thanks.
Speaker 3
Thank you.
Speaker 1
Moving along, we'll hear from Scott Stember with CJS Securities.
Speaker 5
Good morning.
Speaker 3
Hello, Scott.
Speaker 5
Could you talk about off date? Are we up to full run rate right now with the exclusive contract, and at the point where we can fully anniversary some of the lower margin assumptions that we had to deal with last year?
Speaker 3
We are. Yeah, we're full. Actually, we were at full run rate in our second quarter of this year and probably 90% of run rate in our first quarter, if that gives you help in analyzing the quarter-over results.
Speaker 5
Okay. You guys talked about maybe slowing down or pushing out some of these projects that you have in place, like the IT system. Last quarter, you gave some general thoughts on what the total cost could be. Have those changed whatsoever, or are we still in the same ballpark we talked about?
Speaker 3
No, we're in the same ballpark. The numbers really haven't changed. As you're trying to put systems like this in place, you come up with dates, and I wouldn't call them optimistic. I'd just say that they're realistic, and then you find speed bumps along the way. Where the time has been pushed out a little bit, the cost really hasn't.
Speaker 5
Okay, have you guys given any preliminary thoughts to CapEx for 2012?
Speaker 3
We talked about that. Last night, we're sitting here going through the numbers and decided at this point we really couldn't give out any estimates because we've talked about what our CapEx belief is for systems, but there's just a lot of transition going on right now. We don't really foresee a lot of acquisition targets domestically. There are some acquisition opportunities that are outside of the U.S., and then there'll be the occasional lease buyout and, you know, new store. We might open up a store or two this year, but you know, you can look historically. The range that we'd have to give you would just be such a wide range. It'd be one of those really low to really high.
I'm sitting here right now almost doing it, and we just don't want to do it because I don't want to mislead anyone on what the CapEx will be. We'll report Q1 and Q2, and then we'll move into Q3. By then, we'll have relocated our HQ, and we'll have a lot of better visibility. The fact of the matter is, Scott, we're in a transition right now, and it's really hard to come up with estimates when you're transitioning as much as we are.
Speaker 5
Okay, that's a tie-in to my last.
Speaker 3
By the fact that there's less people out there right now that are either insured or that have lower deductibles.
Speaker 2
Got it. The expansion outside the insurance market with Copart Direct, you know, how fast is this business actually growing now in terms of volume? Can you broadly discuss some of the initiatives you're planning to increase success with sourcing whole car volume?
Speaker 3
Yeah. I mean, I can. It's one of these things where it is growing at a very high rate, but it's a relatively small book of business. While it generates a large amount of revenue, the fact is you're buying the cars as opposed to just handling it as an agent. When we get into what are we doing on initiatives, we've got some great people on the team that are working on that. I don't like to get into specifics because, obviously, we think some of the things we do are unique to Copart. We are focused heavily on this. It's a nice market. It's a great upside for us. It's a great opportunity. Do you know where we finished the quarter as far as insurance versus non-insurance business?
Speaker 5
Non-insurance was up, but as a percentage of total sales, it was 21%. Same quarter last year was 22%.
Speaker 3
Yeah. Okay. We're seeing a nice growth in the non-insurance, but we're also seeing a ton of cars coming in on the insurance side. As Will said, the inventories are up quite a bit. When we look at next quarter, I wouldn't be surprised if the trend that Will just gave continues because we're going to be selling off a lot of damaged vehicles in the next quarter associated with inventory builds right now.
Speaker 2
Okay. The Copart or the move to whole car, is the plan still to keep that with the Copart brand? I know we talked last quarter about what, you know, what's synonymous with a wrecked car versus a whole car.
Speaker 3
Yeah, right now it is. I mean, because we sell so many non-damaged vehicles in the company that, yes, Copart is synonymous with that damaged vehicle. It's that damaged vehicle brand. We've got thousands of customers out there that send non-damaged vehicles to us that are aware of the fact that we sell non-damaged product. We just continue to improve in that segment. For right now, we don't see a reason to change the name. That may shift in the future. I guess I'll use the Netflix example. We're not thinking Netflix and Quickster right now. We're just thinking Copart.
Speaker 2
All right. That's good news. Thanks a lot for taking my questions, guys.
Speaker 3
Okay.
Speaker 5
Thank you, Jason.
Speaker 3
Thanks, Jason.
Speaker 1
Next in queue will go to Craig Kennison with Robert W. Baird.
Speaker 2
Hi, guys. Thanks for taking my question.
Speaker 3
All right. Hello, Craig.
Speaker 2
On yard margin, Will, on the last call, I think you mentioned you thought that yard expense might be flat on a per-unit basis. First, I'm wondering whether that panned out. Then, maybe you could help me understand the major buckets in that line item and identify which of those are volume-dependent.
Speaker 3
Sure. Probably the one that had the most impact this quarter was just the cost of fuel. I mean, we measure the distance for pickups in terms of zones. Zones are roughly about five miles, and our average zones are about eight, a little over eight. It's about 40 miles for the average tow-in for a car. We look at our subhaulers, and they're getting about five.
Speaker 5
Could you just give any thoughts on how close we are to making another push into continental Europe?
Speaker 3
That is probably why Tony asked the question about the system piece. One of the things our new system brings is multi-language. It's really got a lot of hooks for future bells and whistles for the existing business. It is key when it comes to expanding into foreign markets with foreign language, etc. We do have to get that system in place before we start to do that.
Speaker 5
Gotcha. That's all I have. Thank you.
Speaker 3
Okay, thanks, Scott.
Speaker 1
Moving along, we'll go to Gary Prestopino with Barrington Research.
Speaker 5
Hi.
Speaker 3
Gary.
Speaker 5
Hi, Gary.
Speaker 3
How are you doing?
Speaker 5
Good. Hey, Jay, there's a lot of stuff going on here. I mean, you've got the Project Overdrive, Dallas move, the process centers, the systems change. Could you maybe just kind of, and this may have been answered or may have been asked, but kind of chronologically give us when you think all of these milestones or these projects are going to be completed so we have an idea of when we're going to have your company going from a transition to where you're, you know, where you want to be in terms of all these issues?
Speaker 3
Sure. For the most part, for the street, I'll answer it two ways because for the street, the integration of our auction inventory management operating system, the changes we're going to be making to copart.com, the impact on moving home office, all of that should be finished by Fiscal 2013. When we get into Project Overdrive, that is a cultural thing. That is a service experience that we're implementing in the company, and that's a three-year plan. That doesn't have the integration, and costs and transitions and all these other things that go along with the other items. When it comes down to moving to Dallas and process centers and AMOS and all those bits and pieces that we've got going on, that's going to be Fiscal 2012 and 2013. A big chunk of that will be done in 2012, finished in 2013.
As we go into Fiscal 2014, we really should be completely past these transition points.
Speaker 5
What about the process centers? Is that part of Project Overdrive, or is that?
Speaker 3
No, that's part of Project Overdrive internally. Externally, to the street, we really look at them differently because you all are so much more focused on what costs are going to be flowing through. Internally, we're looking at how we're going to be delivering service, etc., etc. They are different. Yes, it is part of Overdrive, but that will be happening in Fiscal 2012. Process centers should be complete, up, running, done, Fiscal 2012. HQ move should be Fiscal 2012. The ERP system should be more like Fiscal 2013, and then there's some other things that we've got going on that'll be pushing into 2013. Like I said, Fiscal 2014 should be about as, you know, non-transition as you can get.
Speaker 5
Okay. In terms of your marketing spend and all that, I would assume you're going to continue to do the sponsorship of the hot rods.
Speaker 3
Yep, right now.
Speaker 5
IDRA or whatever. NASCAR is not something you want to revisit?
Speaker 3
Oh, we're not revisiting it. Right now, we've got a plan. You know, we're going to continue to market, and it's served us well. We've been happy with everything we've done. We're always open to change. You know Copart's that way. We're, as we say, we're change-centric. We'll look at any of the opportunities that are out there, see how they fit our business. We're a very different company than we were four years ago. I mean, four years ago, we were just coming out with these non-insurance programs and just thinking about some of the major changes and, you know, never thought we'd be going through new auction inventory management system changes and all the other stuff that's going on. A very different company today.
You know, when you look out, like I said, when it comes to the transition, really, 2014 is probably the best year to think about us being kind of a straight move. By then, we'll be expanding internationally and doing other things. We're always going to be changing.
Speaker 5
One last question. As far as the Copart Direct, what you're doing with the public, are you still using, how are you getting the word out to the public, beyond what you're doing with the IHRA?
Speaker 3
Yeah, I mean, it is. It's NHRA. It's marketing, advertising. It's a number of methods that we go. I mean, you can Google us and you'll see us on Google searches. There's a lot of things that we're doing to reach the public and make them aware of who we are and pick up their vehicle. We'll continue to refine that. We're definitely not perfect yet. We're doing a good job. This was an invented business. It didn't exist four years ago. We came up with it, and now it's a nice business. It needs to be, you know, I want to see it grow into something that's material to the business, you know, 10% of the business or more, something that is a major impact to the business. Right now, it's a great area.
It's a proven product because it works and it continually works month after month, quarter after quarter, and it's continued to grow. It's had growth ever since we implemented it. I would like to just see our team figure out the process to making that something that becomes even more meaningful to the company.
Speaker 5
Is it bigger than Dealer Services at this point?
Speaker 3
No, Dealer Services is larger.
Speaker 5
Okay. Thank you, Jay.
Speaker 3
Sure. Thanks, Gary.
Speaker 1
Moving along, we'll go to Scott Zuccarelli with RBC Capital Markets.
Speaker 5
Hi, guys. This is Patrick Palfrey sitting in for Scott. Thanks for taking my question.
Speaker 3
Hi, Patrick.
Speaker 5
Hello, Patrick.
I guess just looking at the vehicle sales for you the principal, could you talk a little bit more about the quality of the vehicles you're sourcing in the UK? I know last quarter you mentioned that you were sourcing more expensive cars.
Speaker 3
Do you want to talk about that? Do you want me to?
Speaker 5
I want you to.
Okay. Yeah.
Speaker 3
Go ahead.
Speaker 5
It's not that we're sourcing them. These are cars given to us by the insurance company. It has to do with the nature of the insurers that these insurance companies deal with. The ones that we've ultimately, the contracts we've pertained, have the higher-end cars.
I guess just looking at it, should we continue to see higher revenue and higher margin dollars from those vehicles, but a lower margin percentage just based upon the makeup?
Speaker 3
That's been the trend, and I don't expect that to change.
Speaker 5
Thank you. I guess just one last question. Thinking a little more higher level, with the average age of vehicles beyond 10 years, which should lead to more total losses and new vehicle sales increasing over the next couple of years, how do you see that affecting volumes out over, say, the next 5 to 10 years?
Speaker 3
The volumes decrease as they don't produce new cars because, obviously, ASPs go up. Then volumes increase because older vehicles are more likely to total. You have to weigh both those. At the end of the day, after you've weighed them both, the trend is going to be more units. It's just a fact. As we see vehicles getting old in America, as we go from 10 to 11, cars become much more likely to total. Thus, there'll be more vehicles that are being totaled. The question is how many of those vehicles will come to us. That is a factor of how many people have on and have liability only on the older vehicle as opposed to comp and collision.
There's no doubt in my mind that as we go forward, because of what's happened in 2008, 2009, 2010, and 2011 with new car sales, we're going to see the average age go up, and we're going to see more units coming through. The question is, when will the economy turn around so that more and more people actually have insurance, like they did back in 2007? Those are both the factors. You can see what 2008, how we reacted to 2008, what it had economically, how it affected us, and then 2009, 2010, 2011, and how we've responded. It is a relatively recession-proof business from that standpoint.
Speaker 5
Yeah. Let me add a couple of comments. In terms of the uninsured motorists, there's a direct correlation between unemployment and uninsured motorists. I think if you refer to CCC, the economist there suggests that for every 1% point increase in unemployment or movement, there's a three-quarters of a point increase in or movement in uninsured motorists. The other factor that Jay alluded to was used car pricing, and that's a function of new car sales, quite frankly. New car sales generate a trade-in and a used car transaction in itself. When new car sales are down, you have a restricted supply of used cars, which increases their value. We see the pricing of used cars tied to the sale of new cars.
As the economy improves and there's more new cars hitting the market, we think we see the pricing diminish, which we think will have a positive influence on our volume.
Okay, thank you for taking my question, guys.
Speaker 3
All right. Thank you.
Speaker 1
Just a reminder, folks, that's star one to queue up for questions. Right now, we'll go to Ryan Brinkman with Goldman Sachs.
Speaker 2
Hi, good morning.
Speaker 3
Morning, Ryan.
Speaker 2
Good morning. Thanks for updating us on the progress of the headquarters move and on the SAP implementation. I know that both initiatives should ultimately end up cutting costs over time, but it would be reasonable to think that there could be some sort of short-term increases.
Speaker 3
Selling the vehicles off in subsequent quarters hasn't changed, Craig. We're working like crazy and spending a lot of money to handle the cars, and the team's all doing a good job. The way that we book the revenue and the expense has changed. You'll be seeing those vehicles sold off September, October, the months we're in now and next month, and even into Q2, to be blunt. There's just a lot of volume still coming in right now that we're picking up. It's been a very active year, and it will definitely cause volume to be pushed out in Q1 and Q2.
Speaker 2
Helpful. I'll get back in the queue. Thanks.
Speaker 3
Thank you.
Speaker 1
Moving along, we'll hear from Scott Stember with Citi and Company.
Speaker 5
Good morning.
Speaker 3
Hello, Scott.
Speaker 5
Could you talk about off date? Are we up to full run rate right now with the exclusive contract, and at the point where we can fully anniversary some of the lower margin assumptions that we had to deal with last year?
Speaker 3
We are. Yeah, we're full. Actually, we were at full run rate in our second quarter of this year and probably 90% of run rate in our first quarter, if that gives you help in analyzing the quarter-over results.
Speaker 5
Okay. You guys talked about maybe slowing down or pushing out some of these projects that you have in place, like the IT system. Last quarter, you gave some general thoughts on what the total cost could be. Have those changed whatsoever, or are we still in the same ballpark we talked about?
Speaker 3
No, we're in the same ballpark. The numbers really haven't changed. As you're trying to put systems like this in place, you come up with dates, and I wouldn't call them optimistic. I'd just say that they're realistic, and then you find speed bumps along the way. Where the time has been pushed out a little bit, the cost really hasn't.
Speaker 5
Okay, have you guys given any preliminary thoughts to CapEx for 2012?
Speaker 3
We talked about that. Last night, we're sitting here going through the numbers and decided at this point we really couldn't give out any estimates because we've talked about what our CapEx belief is for systems, but there's just a lot of transition going on right now. We don't really foresee a lot of acquisition targets domestically. There are some acquisition opportunities that are outside of the U.S., and then there'll be the occasional lease buyout and, you know, new store. We might open up a store or two this year, but you know, you can look historically. The range that we'd have to give you would just be such a wide range. It'd be one of those really low to really high.
I'm sitting here right now almost doing it, and we just don't want to do it because I don't want to mislead anyone on what the CapEx will be. We'll report Q1 and Q2, and then we'll move into Q3. By then, we'll have relocated our HQ, and we'll have a lot of better visibility. It's just the fact of the matter is, Scott, we're in a transition right now, and it's really hard to come up with estimates when you're transitioning as much as we are.
Speaker 5
Okay. That's a tie-in to my last call. Last year at this time, I remember you giving us directional G&A guidance for Fiscal 2011. I think you said then that you expected overall dollars to be down year over year. Just given all the various puts and takes associated with the costs and the benefits of both the move and the systems change, are you able to maybe help us out more in terms of how you're thinking about G&A expense shaken out for Fiscal 2012?
Speaker 3
It's tough because this year we're going to have some significant costs. Last year, cost was $2.2 million associated with transition costs, rather. It'll be clearly more than that. If I were to say, you know, minus transition, I know we'll be down on G&A. Factoring in transition costs, it's hard to tell. That's why last year, we wanted to give you, you know, give you an idea of what our goal was. We told you we'd be down year over year, and we were. That was entering the year with $108 million run rate. If anyone has ever run a company and gone through that process, no. It's
Speaker 1
You've got this spending, and you've got to turn that around in four quarters. It's pretty tough. Now we're on a run rate, finishing the quarter for something less than what last year's G&A was. We're going to be as efficient and mindful of every dollar that we spend going into the year. We're going to try as tough as we can. It's just hard to predict and give estimates or an idea of what that's going to be when you've got the transition costs that we've got runs right now.
Speaker 2
Okay. Great. You were asked earlier on the call about the potential to expand into continental Europe. Regarding geographical opportunities in general, can you help us understand how you're thinking broadly about the potential that might exist outside both North America and Europe? For example, in emerging markets like Brazil or Mexico, where the car parks are exploding and more people are insured, how do you weigh those opportunities, which are probably more tantalizing longer term, versus the opportunity to expand further into developed markets?
Speaker 1
We don't go through a process of weighing them. We look at them as we can do both, and once we've got our systems in place, we've got more than enough talent that can basically push on two fronts. That's really the approach that we've been taking. We've got to get these system changes made to do that when in the middle of a massive transition as a company. From this standpoint, we'd like to get the transition done, and we'd like to get the systems implemented in 2013, and then we can be expanding at a much faster pace. In the interim, we can expand into some markets without those systems because we can run them on the existing systems they have. That's an option. If there's an opportunity that comes along and we need to seize it, we'll do that.
As you've seen with Copart in the past, we're big believers in integration and taking advantage of our systems, VB2, our auction technology, and all the other benefits that Copart brings. That's really when we get into when are we going to be growing and how fast are we going to be growing. I know that we can grow on multiple fronts, and I know that we need multi-language to do that with our systems. That'll be a couple of years away to get all that put into place.
Speaker 2
Okay. Great. Just last question. You know, for those of us in the.
Speaker 3
Last question. Could you just give any thoughts on how close we are to making another push into continental Europe?
Speaker 1
It's probably why Tony asked the question about the system piece. One of the things our new system brings is multi-language, and it's really got a lot of hooks or future bells and whistles for the existing business. It is key when it comes to expanding into foreign markets with foreign language, etc. We do have to get that system in place before we start to do that.
Speaker 3
Gotcha. That's all I have. Thank you.
Speaker 1
Okay, thanks, Scott.
Speaker 5
move along. We'll go to Gary Prestopino with Barrington Research.
Hi, Gary.
Speaker 3
Hi, Gary.
Speaker 1
How are you doing?
Speaker 5
Good. Jay, there's a lot of stuff going on here. I mean, you've got the Project Overdrive, Dallas move, the process centers, the systems change. Could you maybe just kind of, and this may have been answered or may have been asked, but kind of chronologically give us when you think all of these milestones or these projects are going to be completed so we have an idea of when we're going to have your company going from a transition to where you're, you know, where you want to be in terms of all these issues?
Speaker 1
Sure. For the most part, for the street, I'll answer it two ways because for the street, the integration of our auction inventory management operating system, the changes we're going to be making to copart.com, the impact on moving home office, all of that should be finished by fiscal 2013. When we get into Project Overdrive, that is a cultural thing. That is a service experience that we're implementing in the company, and that's a three-year plan. That doesn't have the integration, and costs and transitions and all these other things that go along with the other items. When it comes down to moving to Dallas and process centers and AMOS and all those bits and pieces that we've got going on, that's going to be fiscal 2012 and 2013. A big chunk of that will be done in 2012, finished in 2013.
As we go into fiscal 2014, we really should be completely past these transition points.
Speaker 5
What about the process centers? Is that part of Project Overdrive, or is that?
Speaker 1
No, that's part of the, that's, it is part of Project Overdrive internally. Externally, to the street, we really look at them differently because you all are so much more focused on what costs are going to be flowing through. Internally, we're looking at how we're going to be delivering service, etc., etc. They are different. Yes, it is part of Overdrive, but that will be happening in fiscal 2012. Process centers should be complete, up, running, done, fiscal 2012. HQ move should be fiscal 2012. The ERP system should be more like fiscal 2013, and then there's some other things that we've got going on that'll be pushing into 2013. Like I said, fiscal 2014 should be about as, you know, non-transition as you can get.
Speaker 5
Okay. In terms of your marketing spend and all that, I would assume you're going to continue to.
It's harder for us to track the volume environment in the salvage market versus the whole car market where we have the benefit of the National Auto Auction Association or something. It might be difficult for you guys too, but sitting where you are and all the information available to you, obviously, your volumes are a good data point by Allstate. What do you think is happening overall in the market in volume? Is it up? Is it down? How is miles driven affecting total industry volumes?
Speaker 1
Yeah, I would say total industry is down a little. That goes back to what we talked about before, the points that Will brought up, about unemployment and how it affects people with respect to either deductible or completely dropping coverage, or completely, not, you know, maintaining liability but dropping comp and collision. We think it's down a little bit. We think that, you know, obviously, that comes back when the economy starts to turn the other direction. More people are employed. More people drive. I don't know about you, but I notice as I travel the country that there's just a lot less traffic on the freeways. You just don't see the kind of congestion that you saw right around the summer of 2008 and prior to that. I'm convinced from my perspective that as people go back to work, they'll start driving more. They'll have to have coverage.
They won't be driving uninsured, etc., etc. It will help the industry as a whole in terms of the number of policies and number of total loss vehicles.
Speaker 5
Okay, thank you very much.
Speaker 3
Ryan, let me just add to that. There are basically three factors that drive the market. There's the number of cars on the road, how often those cars are involved in an accident, and then of the cars involved in accidents, how frequently they are salvaged. The recent trend is all three of those factors are slightly down. We don't expect that to continue. When we say we've grown the non-insurance or non-Allstate insurance market by 2%, we're fairly happy with those numbers.
Speaker 5
Great. Thanks very much, guys.
All right, thanks.
It appears we have no further questions in queue. At this time, I'll turn it back over to the speakers for any additional or closing remarks.
Speaker 1
Thank you, Matt. Thank you, everyone, for attending the fourth quarter. We look forward to reporting Q1, and that will be happening very soon, about a couple of months. Look forward to telling you how we're doing and look forward to having a really great fiscal 2012 for Copart. Thank you.
Speaker 5
This does conclude today's conference call. Thank you for your participation.
Sponsorship of the hot rods.
Speaker 1
Yep, right now.
Speaker 5
IDRA or whatever, but the NASCAR is not something you want to revisit?
Speaker 1
Oh, we might revisit it. Right now, we've got a plan. You know, we're going to continue to market, and it's served us well. We've been happy with everything we've done, but we're always open to change. You know Copart's that way. We're, as we say, change-centric. We'll look at any of the opportunities that are out there, see how they fit our business. We're a very different company than we were four years ago. I mean, four years ago, we were just coming out with these non-insurance programs and just thinking about some of the major changes and never thought we'd be going through new option inventory management system changes and all the other stuff that's going on. A very different company today.
When you look out, like I said, when it comes to the transition, really, 2014 is probably the best year to think about us being kind of a straight move. By then, we'll be expanding internationally and doing other things. We're always going to be changing.
Speaker 5
One last question. As far as Copart Direct, what you're doing with the public, are you still using—how are you getting the word out to the public, beyond what you're doing with the IHRA?
Speaker 1
Yeah, I mean, it is. It's NHRA. It's marketing, advertising. It's a number of methods that we go. I mean, you can Google us, and you'll see us on Google searches. There's a lot of things that we're doing to reach the public and make them aware of who we are and pick up their vehicle. We'll continue to refine that. We're definitely not perfect yet. We're doing a good job. This was an invented business. It didn't exist four years ago. We came up with it, and now it's a nice business, and it needs to be, you know, I want to see it grow into something that's material to the business. You know, 10% of the business or more, something that is a major impact to the business. Right now, it's a great area.
It's a proven product because it works, and it continually works month after month, quarter after quarter, and it's continued to grow. It's had growth ever since we implemented it. I would like to just see our team figure out the process to making that something that becomes even more meaningful to the company.
Speaker 5
Is it bigger than Dealer Services at this point?
Speaker 1
No. Dealer Services is larger.
Speaker 5
Okay, thank you, Jay.
Speaker 1
Sure. Thanks, Gary.
Speaker 5
Moving along, we'll go to Scott Zuccarelli with RBC Capital Markets.
Speaker 0
Hi, guys. This is Patrick Palfrey sitting in for Scott. Thanks for taking my question.
Speaker 1
Hi, Patrick.
Speaker 2
Hello, Patrick.
Speaker 0
I guess just looking at the vehicle sales where you're the principal, could you talk a little bit more about the quality of the vehicles you're sourcing in the UK? I know last quarter you mentioned that you were sourcing more expensive cars.
Speaker 1
You want to talk about it? I think I'll meet you.
Speaker 2
Much too.
Speaker 0
Okay.
Speaker 2
Go ahead.
Speaker 3
It's not that we're sourcing them. These are cars given to us by the insurance company. It has to do with the nature of the insureds that these insurance companies deal with. The ones that we've ultimately, the contracts we've pertained, have the higher-end cars.
Speaker 0
I guess just looking at it, should we continue to see higher revenue and higher margin dollars from those vehicles, but a lower margin percentage just based upon the makeup?
Speaker 3
That's been the trend. I don't expect that to change.
Speaker 0
Thank you. I guess just one last question. Thinking a little more higher level, with the average age of vehicles beyond 10 years, which should lead to more total losses and new vehicle sales increasing over the next couple of years, how do you see that affecting volumes out over, say, the next 5 to 10 years?
Speaker 1
The volumes decrease as they don't produce new cars because, obviously, ASPs go up. Volumes increase because older vehicles are more likely to total. You have to weigh both those. At the end of the day, after you've weighed them both, the trend is going to be more units. It's just a fact. As we see vehicles getting old in America, as we go from 10 to 11, cars become much more likely to total. Thus, there will be more vehicles that are being totaled. The question is how many of those vehicles will come to us. That is a factor of how many people have on and have liability only on the older vehicle as opposed to comp and collision.
There's no doubt in my mind that as we go forward, because of what's happened in 2008, 2009, 2010, and 2011 with new car sales, we're going to see the average age go up, and we're going to see more units coming through. The question is, when will the economy turn around so that more and more people actually have insurance, like they did back in 2007? Those are both the factors. You can see what 2008, how we reacted to 2008, what it had economically, how it affected us, and then 2009, 2010, 2011, and how we've responded. It is a relatively recession-proof business from that standpoint.
Speaker 3
Yeah. Let me add a couple of comments. In terms of the uninsured motorist, there's a direct correlation between unemployment and uninsured motorists. If you refer to CCC, the economist there suggested for every 1% increase in unemployment or movement, there's a 0.75% increase in or movement in uninsured motorists. The other factor that Jay alluded to was used car pricing, and that's a function of new car sales, quite frankly. New car sales generate a trade-in and a used car transaction in itself. When new car sales are down, you have a restricted supply of used cars, which increases their value. We see the pricing of used cars tied to the sale of new cars. As the economy improves and there's more new cars hitting the market, we think we'll see the pricing diminish, which we think will have a positive influence on our volume.
Speaker 0
Okay, thank you for taking my question, guys.
Speaker 1
All right, thank you.
Speaker 5
Just a reminder, folks, it's star one to queue up for questions. Right now, we'll go to Ryan Brinkman with Goldman Sachs.
Speaker 4
Hi, good morning.
Speaker 1
Morning, Ryan.
Speaker 4
Good morning. Thanks for updating us on the progress of the headquarters move and on the SAP implementation. I know that both initiatives should ultimately end up cutting costs over time, but it would be reasonable to think that there could be some sort of short-term increase as well. Last year at this time, I remember you giving us directional G&A guidance for fiscal 2011. I think you said then that you expected overall dollars to be down year over year. Just given all the various puts and takes associated with the costs and the benefits of both the move and the systems change, are you able to maybe help us out more in terms of how you're thinking about G&A expense shaken out for fiscal 2012?
Speaker 1
It's tough because this year we're going to have some significant costs. Last year, cost was $2.2 million associated with transition costs, rather. It'll be clearly more than that. If I were to say, you know, minus transition, I know we'll be down on G&A. Factoring in transition costs, it's hard to tell. That's why last year we wanted to give you, you know, give you an idea of what our goal was. We told you we'd be down year over year, and we were. That was entering the year with a $108 million run rate. If anyone has ever run a company and gone through that process knows you've got the spending and you've got to turn that around in four quarters. It's pretty tough. Now we're on a run rate finishing the quarter for something less than what last year's G&A was.
We're going to be as efficient and mindful of every dollar that we spend going into the year. We're going to try as tough as we can. It's just hard to predict and give estimates or an idea of what that's going to be when you've got the transition cost that we've got running right now.
Speaker 4
Okay. Great. You were asked earlier on the call about the potential to expand into continental Europe. Just regarding geographical opportunities in general, can you help us understand how you're thinking broadly about the potential that might exist outside both North America and Europe? For example, in emerging markets like Brazil or Mexico, where the car parks are exploding and more people are insured, how do you weigh those opportunities, which are probably more tantalizing longer term, versus the opportunity to expand further into developed markets?
Speaker 1
We don't really go through a process of weighing them. We look at them as we can do both, and once we've got our systems in place, we've got more than enough talent that can basically push on two fronts. That's really the approach that we've been taking. We've got to get these system changes made to do that. We're in the middle of a massive transition as a company. From this standpoint, we'd like to get the transition done, and we'd like to get the systems implemented in 2013, and then we can be expanding at a much faster pace. In the interim, we can expand into some markets without those systems because we can run them on the existing systems they have. That's an option. If there's an opportunity that comes along and we need to seize it, we'll do that.
As you've seen with Copart in the past, we're big believers in integration and taking advantage of our systems, VB2, our auction technology, and all the other benefits that Copart brings. That's really when we get into when are we going to be growing and how fast are we going to be growing. I know that we can grow on multiple fronts, and I know that we need multi-language to do that with our systems. That'll be a couple of years away to get all that put into place.
Speaker 4
Okay. Great. Just last question. For those of us on the outside, it's harder for us to track the volume environment in the salvage market versus the whole car market where we have the benefit of the National Auto Auction Association or something. It might be difficult for you guys too. Sitting where you are and all the information available to you, obviously, your volumes are a good data point by Allstate. What do you think is happening overall in the market and in volume? Is it up? Is it down? How is miles driven affecting total industry volumes?
Speaker 1
Yeah, I would say total industry is down a little. That goes back to what we talked about before, the points that Will brought up about unemployment and how it affects people with respect to either deductible or completely dropping coverage, or completely not, you know, maintaining liability but dropping comp and collision. We think it's down a little bit. We think that, you know, obviously, that comes back when the economy starts to turn the other direction. More people are employed. More people drive. I don't know about you, but I notice as I travel the country that there's just a lot less traffic on the freeways. You just don't see the kind of congestion that you saw right around the summer of 2008 and prior to that. I'm convinced from my perspective that as people go back to work, they'll start driving more. They'll have to have coverage.
They won't be driving uninsured, etc., etc. It will help the industry as a whole in terms of the number of policies and number of total loss vehicles.
Speaker 4
Okay, thank you very much.
Speaker 3
Ryan, let me just add to that. There are basically three factors that drive the market. There's the number of cars on the road, how often those cars are involved in an accident, and of the cars involved in an accident, how frequently they are salvaged. The recent trend is all three of those factors are slightly down. We don't expect that to continue. When we say we've grown the non-insurance or non-Allstate insurance market by 2%, we're fairly happy with those numbers.
Speaker 4
Great. Thanks very much, guys.
Speaker 1
All right, thanks.
Speaker 5
It appears we have no further questions in queue. At this time, I'll turn it back over to the speakers for any additional or closing remarks.
Speaker 1
Thank you, Matt. Thank you, everyone, for attending the fourth quarter. We look forward to reporting Q1, and that will be happening very soon, about a couple of months. Look forward to telling you how we're doing and look forward to having a really great fiscal 2012 for Copart. Thank you.
Speaker 5
This does conclude today's conference call. Thank you for your participation.