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Executives

Jay Adair – President

Will Franklin - CFO

Analysts

Bob Labick – CJS Securities

Scott Stember – Sidoti & Company

Anthony Cristello – BB&T Capital Markets

Craig Kennison - Robert W. Baird & Co.

Scot Ciccarelli – RBC Capital Markets

William Armstrong – CL King & Associates

Justin Boisseau – Gates Capital Management

Edward Hemmelgarn – Shaker Investments

Copart, Inc. (CPRT) Q3 2008 Earnings Call June 4, 2008 11:00 AM ET

Operator

Good day everyone and welcome to the Copart Inc. third quarter fiscal 2008 earnings call. For opening remarks and introductions I would like to turn the call over to Mr. Jay Adair, President of Copart. Please go ahead sir.

Jay Adair

Good morning everyone to the third quarter results and conference call for Copart. Before we start I’ll turn it over to Will Franklin for some brief remarks.

Will Franklin

Thank you, Jay. During this call we may make forward-looking statements within the meaning of Securities laws. These forward-looking statements may include comments about our future revenue and earnings growth which are subject to various risks, including weather conditions that are adverse to our business, our ability to increase market share in a competitive market, and our ability to secure beneficial supply agreements. We also face risk arising from our increased dependence on proprietary technologies to conduct our auctions.

Finally our recent acquisitions in the UK expose us to new risk relating to international operations. For more discussions of these and other risks that could affect our business, please review the management's discussion and analysis, and the factors affecting future results contained in our 10-Q, 10-K and other SEC filings.

With that Jay I will turn the call back to you to begin comments on the quarter.

Jay Adair

Thank you Will. Again good morning, as you saw from the press release we had revenue and net income of $221 million and $46.5 million and EPS for the quarter of $0.52 a share. Will will talk about the EPS and revenue and expense analysis and balance sheet, stock repurchase that we made in the quarter and a number of those items.

I want to talk to you this morning just about some of the things that are occurring within the company in the US, Canada and the UK. We had new stores in the US, three for the quarter; Alabama, Minnesota, and Missouri. In the UK we had two locations that we acquired in Scotland and three new locations in England. This brings our total for the company to 128 locations in the US, two locations in Canada and 15 in the UK, so 145 locations total.

We completed the integration of another site in Q3 and we will complete the integration of all the sites in Q4 with respect to the United Kingdom. That gives us a total of 15 locations currently that will be fully integrated by July. We are in a—I get a lot of questions with respect the UK. We’ve been there almost a year now. We are fully expecting a lot of change in the next year or two. It’s a very emerging market for us. We’re putting in a lot of new systems, new procedures, looking at new technologies like VB2 and the way that we’re selling cars. We have seen record results in the last two months both in April and in May in that market. So VB2 has continued to improve, continued to generate higher returns and that’s obviously very exciting for us.

It was expected. It is something that we fortunately had hindsight with respect to doing it in the US five years ago and seeing the same affect as returns have gone up year after year after year in the US. We’re seeing that same impact in the UK now. All I can say to you is that there will be a lot of change. I would expect the market to be in that change mode for the next couple of years. It’s not going to be mature for this time period while we’re in the midst of doing integrations and having non-recurring expenses and that kind of stuff. You will see a lot of change and I think it’s all good right now.

We will be opening new stores in the UK in the next 12 months as we complete our network of facilities. We said 15 to 20 locations in that market and I expect that that will be the thing. Looking at the US for a moment, to tell you that fuel is up I think as we were talking this morning in the group here is about as obvious as telling you the sun rose today. So yes fuel is up and its probably just as obvious to everyone on the call that scrap price is up for shredded autos and that while scrap is up, that is going to have some impact in our industry and while fuel is up, that’s going to have an impact.

The impact right out the gate is that towing expenses are up and I expect that towing expense will continue to rise. I can’t control fuel costs and thus am limited to what I can do with respect to the control in towing expense. However there are some things that we can do as a company. In the UK, we are picking up cars in just over a day. Our goal in that market is to be below a day. I think the proof that that can happen is that in the US we are picking up cars today in less then a day nationally across the US from Florida to Washington, from Connecticut to San Diego. Less then a day in pick up times means that some cities are seeing customers calling in a car at 8:00 in the morning and it’s picked up obviously the same day.

Shop storage is up. This is where we pick vehicles up at tow companies, their expense, their storage costs are up and so for us, if we look at our controllable cycle time, the impact to cycle time that we have control—we don’t have control over how quickly a car is assigned to us. We don’t have control over how fast the state converts the title to a salvage certificate. We do have control over how fast we clear the car, how fast we pick that up. That’s been relatively flat and I think when you’re picking up nationally in less then a day, that that makes a lot of sense. I think people look at that and say, yes how good can you get. But I think the answer to that is I think we can get better. I think we can improve.

So I’m happy to announce on this quarter that in the next 12 months we plan to add an additional 10 to 15 locations company-wide. Those new locations in the US, talking US only, we’ll obviously be adding locations in the UK too, but those 10 to 15 new locations in the US we expect will be Greenfield locations. The thinking here is very simple. We pick up in markets where we are currently driving 60 miles to get a vehicle. If we can put a location, an additional location, in that market and now tow 30 miles to get that vehicle, we will reduce towing expense. Also because of that we’ll be able to pick cars up quicker. This will reduce controllable cycle time. This will allow us to get the vehicle without accruing maybe an additional day of storage for the insurance company at that shop and as long as we keep focusing on picking those cars up quicker, that reduces our cost which we can pass on to our clients and that reduces their cost directly in that shop storage.

At the same time this is going to increase our capacity as a company. So we’re currently with ample capacity across the country but we’re looking at markets where clearly we’ve got high numbers of towing costs and where we can add locations in those markets to obviously reduce towing, reduce shop storage, reduce cycle time and pass those benefits on to our sellers and our client base.

Okay just some final comments before I turn it over to Will, for the quarter we ended up 83% of our product being sold coming from the insurance industry, 17% of our product being sold being non-insurance which is becoming a growing segment of our business, 25.1% of units were sold internationally in terms of gross proceeds or value of the vehicles, that was 29.8% or 30%, 25.2% of the units were sold to interstate and 35.2% of that was the actual value of the car. So obviously a lot more value going out in both international and interstate. I think this is just the simple effect of higher scrap. Again, to not notice that scrap has increased year after year after year, for the last five years, I think you’d have to be not paying attention.

So at this point higher scrap means that more low value vehicles are going to get processed locally. We’re seeing that and the best news I can deliver this morning is that we are seeing a record high this quarter; an absolute record in the history of the company from all the preceding quarters in our average selling price and in our gross return percentage. So not only are we selling vehicles for more money but we’re delivering a higher return to our sellers in terms of when we take the selling price and we divide it by the payout, the actual cash value, the money that they paid out to the insured, we are actually delivering them a higher percentage at the end of the day.

Great, great quarter, we’re excited about that. With that I’ll turn it over to Will Franklin for financial review.

Will Franklin

Thank you Jay. In this our third quarter, consolidated revenue grew to $221.2 million. In North America revenue grew by 10.2% or $14.9 million to $160.6 million. Growth in same-store sales was 9.2%. The increase was primarily due to volume growth driven by market share gains in the insurance segment as well as growth in several non-insurance segments. We also during the quarter saw an increase in revenue per car.

Insurance cars represented approximately 83% of total cars processed, similar to our second quarter of this fiscal year. However, due to the seasonality of accident rates, our third quarter usually contains a higher percentage of insurance cars. In our Q3 of last year, that percentage was 85.4%. During the quarter, as Jay said, in North America both gross proceeds per car and return percentages reached their highest level in any quarter.

In the United Kingdom revenue for the quarter was $60.6 million and included the results of the Watson acquisition which we completed February 29th. Also sales either deferred or otherwise delayed in our second quarter were processed during this current quarter. Consolidated operating expense and cost of sales for the quarter was $133 million and included depreciation expense of $8 million of which $1.2 million was from the UK operations.

In North America operating costs for the quarter were $77.9 million, an increase of $5.3 million or 7.2%. The increase was driven solely by increased volume. We expect to see increased transportation costs in future periods due to the rise in the cost of fuel. Also included in operating costs for the quarter is an impairment to the value of a building of $1.1 million.

In the UK operating costs were $55.1 million and included $40 million in the cost of purchased vehicles, as purchased cars grew to 73% of all sales. The increase was due to contract mix. Also included are costs associated with the Watson and Simpson acquisitions completed during the quarter. Combined gross margin was $88.2 million or 39.9% of revenue.

Consolidated general and administrative costs for the quarter were $19.5 million and included $1.9 million in depreciation. In the depreciation numbers for the quarter is a $900,000 downward adjustment resulting from revisions to the estimated value of certain intangible assets acquired in the Universal and Sentry acquisitions. Consolidated operating income was $68.7 million and operating margin was 31.1%.

Income tax expense for the period was $24.4 million and included a $1.7 million favorable adjustment to its income tax reserves. We expect the normal effective tax rate to be between 37% and 37.5%. Consolidated net income was $46.5 million and net margin was 21%. Our cash was approximately $96.3 million, accounts receivable, inventory, vehicle pulling costs and deferred revenue all declined as we sold off winter inventory. Taxes payable increased due to the timing of estimated tax payments and other payables increased due to the timing of seller and [vat] payments.

During the quarter we repurchased approximately 2.8 million shares of our own stock at a cost of $107.8 million for an average price of $38.77 per share. After tax return on equity on a trailing 12 month basis, was 17%. In the quarter we generated $88.5 million from operations. Net income plus non-cash expenses, like depreciation and equity compensation, accounted for $61.1 million of the increase. The remainder resulted from movement in the balance sheet as inventories and receivables declined as we sold off winter inventory and payables increased.

Capital expenditures for the quarter were $31.2 million and included one lease buy-out. In addition we expended approximately $28 million for the acquisition of companies. Finally we consumed $106.6 million in financing activities for the quarter driven primarily by the share repurchase activity.

That concludes my comments. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Bob Labick – CJS Securities

Bob Labick – CJS Securities

You obviously touched on it in your opening remarks, but could you expand upon the towing costs and the impact of diesel fuel and more I’m just looking for how do you pass through or can you pass through some of this cost to your—you have a sub-hauling network, who pays for what when? Does it go straight to the insurance company? Does the sub-hauler pay it? Do you pay it? Just try to give us some clarity on that process please.

Jay Adair

We have a number—we have hundreds of subs that work for us across the country and obviously any expenses that they incur, whether it be Workers’ Comp, fuel, labor, maintenance, any of those expenses they incur, they’re going to directly incur those expenses. But then conversations, if costs continue to go up as fuel has; fuel probably is the biggest driver right now more than any other expense. They’re going to be as competitive as they can and they’ve got to compete with other subs in their market, but costs are what they are and if that eventually has to be passed on, it gets passed on to us. It doesn’t go to the insurance industry so we absorb that cost straight up. That’s how it is.

Our goal is to try to minimize those costs the best we can and the best way to do that is to tow the car less distance. So if you’re picking up cars 100 miles away from the store and you can put another location in, another yard in, then you cut that towing cost in half. And that’s the kind of thing we’ve always done and we’ve always looked at it, but its becoming a bigger factor today simply because of the greater increase in costs.

Bob Labick – CJS Securities

You mentioned obviously there’s not a lot you can do about the price of fuel, but you could change your pricing either to the buyers or sellers, has there been any opportunity—we’ve heard from other sources that you may have--

Jay Adair

Yes, we look at pricing all the time whether it be to buyers or sellers and obviously it’s something that we look at on a case-by-case basis but I don’t discuss it for competitive reasons.

Bob Labick – CJS Securities

Jumping over to the UK, obviously you showed the strong sales in the quarter and it still appears to be an investment phase, could you give us the sense of the ultimate profitability on a per-car basis a year or two down the road as it relates to the US, not on a dollar basis but is it going to be equal to the US, higher, lower or how do you see it maturing and how long should it take to mature?

Jay Adair

It’s a great market. I can’t give you an idea in pounds or dollars where we’re going to be in the future for that market but it’s a great market. Some of the dynamics that exist there today, the average selling price in that market is a little less then the US is today and the cars are a little smaller then they are in the US so you can store more cars, and the cycles turn a little quicker. There’s a lot of stuff that’s going on but it’s a very similar marketplace and our goal is to continue to roll our products. That’s where our focus has been is that we haven’t got the full functionality of the products that we have in the US in the UK yet. So we’ve got to get that down, we’ve got to roll those products out and get those out to our clients. We’ve got to build those interfaces, reduce their costs and throw out ideas to them and better ways to do it. At the end of the day, the biggest push for us is to get VB2 in that market and that was to see an increase in returns and that’s what we’ve seen and that’s where we’re excited. But we’ll continue to push products and we’ll continue to push service in that market and then we’ll just see how it goes.

Bob Labick – CJS Securities

Your G&A was down sequentially in dollar basis and significantly as a percent of sales, I know you’ve had some redundant expenses in the past, where do you stand in terms of the G&A in absolute dollar basis, is there still room to cut? Is this a sustainable level or was there anything unusual in the quarter?

Jay Adair

No, G&A I think Will and I can both comment on this, G&A is going to increase in the future. We’re going to be making some significant investments in products and some of the things that we do and again for competitive reasons I don’t want to tell the world what I’m doing, some of the things I’m working on but we’re going to be delivering some products to our sellers that I think will change the way they do business and it will reduce their costs and it will impact the industry significantly. So there will be an increase in G&A both as a percent as whole dollars.

Operator

Your next question comes from the line of Scott Stember – Sidoti & Company

Scott Stember – Sidoti & Company

Last quarter you had some cars that were hung up on the balance sheet and you had said that they were flowing through in the current quarter; do we still have any of those vehicles that are left on your last--?

Will Franklin

No, as I mentioned in my comments, they’ve all been processed.

Scott Stember – Sidoti & Company

Okay and as far as these bottlenecks, everything is running smooth right now and those are totally history right now right? In the UK.

Jay Adair

Our team is doing a terrific job. We’re really excited about just how well things are running at this point. We have room for improvement and we have room to see—we think VB2 will continue to increase but yes we’re doing a great job and everything is right on target.

Scott Stember – Sidoti & Company

Were there any one-time costs that stood out that are worth mentioning related to integrating the UK?

Jay Adair

I think we mentioned them in the last quarter, in the last conference call.

Will Franklin

We quantified them in the last conference call. We still have continuing integration costs and we will for a few quarters to come. But we haven’t quantified them on the call.

Scott Stember – Sidoti & Company

So there was nothing of the magnitude of last quarter I guess.

Will Franklin

No.

Scott Stember – Sidoti & Company

Jay, you had talked about I guess in April and May, the assignments of cars coming in and the returns are up nicely, could you maybe quantify like you did last quarter?

Jay Adair

How did I quantify last quarter?

Scott Stember – Sidoti & Company

I think you might have quantified the returns and the percentage basis.

Jay Adair

As a percent it is up, but I don’t I’ve actually gone out there and said the actual per-car or percent but as a percent and as in per-car basis, its up and it’s at a record level so just from that standpoint it’s very exciting.

Scott Stember – Sidoti & Company

You had mentioned the percentage of cars coming from insurance companies this year; can you talk about that versus last year just so we can get a framework of the mix?

Will Franklin

Yes what I did was I reflected upon the change between the Q3 of last year and the current quarter this year, because the seasonality of our business you can’t look at them sequentially. And like I said we’re down from 85.4% to 83% which—and but that doesn’t mean we’re getting a lower volume, we’re still getting a significantly higher volume in insurance companies which means we’re growing the non-insurance segments at a faster pace.

Scott Stember – Sidoti & Company

Do you have the free cash flow number as a year-to-date through the third quarter?

Will Franklin

I don’t, we can talk to you after the call. I’d like know how you want to measure that.

Operator

Your next question comes from the line of Anthony Cristello – BB&T Capital Markets

Anthony Cristello – BB&T Capital Markets

Jay, just a clarification, you said 10 to 15 new locations, is that company-wide North America or did you say that is inclusive of what you might add to the UK?

Jay Adair

It’s exclusive of the UK. That’s company-wide North America.

Anthony Cristello – BB&T Capital Markets

When I’m looking at the UK, I know they understand the adjacency benefit from adding facilities here in the US, can you just talk a little bit about geography in the UK and is that an opportunity or do you get those towing efficiencies through other processes?

Jay Adair

We’re just over a day in pick-up times right now which is really, really performing in that market. It’s a—I guess at the end of the day I’m feeling pretty good about my knowledge of geography in the UK. I almost feel like I can comment on a little if there’s not too many Brits listening right now. Yes, I think it’s a market where we need—there are some key places we can see where we need additional locations and often in the UK you may be able to compare it to some of the congested states in the US. You can look at the markets and say, well that’s only 60 miles away but that may be two hours’ drive because of congestion and traffic etc. So it’s not just simply looking on a map and plugging—every 60 miles put a spot in. Its more trying to figure out where the populations at and where the congestion is at and how long does it take to get trucks in. And so we’re doing that. We’ll be adding some additional locations and we fully intend to see the average pick-up time of a vehicle go below a day just like it is in the US.

Anthony Cristello – BB&T Capital Markets

And I guess on the UK theme, it looks like you made a good strategic hire now that’s going to sort of represent the UK, can you maybe talk a little bit about what the rationale—and you usually take a lot of this on yourself and I’m wondering do you feel comfortable with where you are in the process and does this now free you up to go do some other things or maybe just give some more color on the hiring.

Jay Adair

Nigel is a great guy; comes from the industry, worked for one of the largest insurance companies there, worked for the RAC there which is like an auto club in the US. So he’s got a very diverse background but its all automotive and very well known within the industry and at the end of the day I guess its—I’ve spent a lot of time there as well as the rest of the team. They’ve all spent a lot of time and it’s been a collective effort in making these acquisitions and the integrations and finding land and everything that we’ve done expanding locations. But the team over in the UK is going to run that business and that team is going to be led by someone from the UK and someone that is British and that’s what we’ve done and I think its great and we’re excited about it. We’re looking forward to seeing how we do and how we succeed in the next 12 months.

Anthony Cristello – BB&T Capital Markets

Now you mentioned that he has history with one of the larger insurance customers in the UK, are they an existing client of yours now and if you look at the top players, have you picked up any new customers since you’ve rolled out and if you were going to say here’s the top 10, we now have relationships with five of them.

Jay Adair

We have a relationship with every one of the players there, with every one of the top 10. Do we handle business for all of them? No and the company that he worked for we do not handle cars for so maybe there’s an opportunity there in the future as well. Right now our goal is then building a network and servicing the volume that we’ve got and yes, we’ve taken on some new accounts but that’s—to be really frank, that has not been our goal. One of our top four goals over there has not been go get additional business. It’s been logistics, locations, technology, service; it’s been those things where we’re focusing on making sure that we operate our business and service our clients better and not try to go out and get another 20,000 cars when you’re not taking care of everything else at home. So its take care of what’s at home and then the future will be—after we are picking up cars in less then a day and we do have these integrated technologies and VB2 continues to get stronger then you walk in and start to show the results of what you’ve done to existing customers over there that are prospects.

Anthony Cristello – BB&T Capital Markets

When you look at the expense classification or the P&L of the North America versus the UK, is there anything that is brought up from the G&A up into the yard expense in the UK that you wouldn’t necessarily see in North America? I guess what I’m wondering is will there continue to be opportunity to improve gross margins but SG&A is going to be a higher fix until that moves to more of an agency model?

Will Franklin

No, we characterize the expenses the same whether they’re in the UK or in the US. We haven’t moved anything above the line or into operations that would normally be in the G&A on the US side. The biggest difference obviously is the fact that we’re primarily principal-based in the UK which drives down our margin percentage.

Operator

Your next question comes from the line of Craig Kennison - Robert W. Baird & Co.

Craig Kennison - Robert W. Baird & Co.

Vehicle miles driven has been down more then usual, can you talk about anything you’re seeing industry-wide as it relates to accident frequency and severity?

Jay Adair

Will respect to severity, it’s actually up and so is frequency. I don’t think that we can—Will and I could sit here and spout off what we’re seeing in average miles driven and those kinds of things but I don’t think we’ve really seen an impact in our industry from that and I don’t know that we will. It may be occurring and we just can’t measure it. Its difficult when you’ve got clients and you’re growing business with them to try to measure how much of the—what would the business have been had you not gained an account, that kind of thing and what would have the—would the growth have actually declined. So right now we’re sitting in a position where we’re very happy with the volumes that are coming. Very happy with the organic growth and the continued gains in existing business and growth in the insurance and non-insurance markets.

Craig Kennison - Robert W. Baird & Co.

You talk about the growth in the non-insurance business, is that primarily the older vehicle market you’ve talked about and can you talk about how that business strategy is evolving?

Jay Adair

I’d say its both, its older vehicle markets, it’s also—we’ve had quite a bit of growth in the banks and going out there and processing repossessed, damage vehicles. So it’s across the board. You name it from dealers to banks to fleet, charities; you name it I think we’ve just been increasing across the board in our volumes.

Craig Kennison - Robert W. Baird & Co.

Given your comments on the 15 new US facilities, can you talk a little bit about your CapEx expectations going forward?

Jay Adair

It would be tough, but I’ll tell you what, it would be easier for me to do it in Q4 since we’ve done that in the past. I think last year we were so off in what our estimates were and what we really did in fiscal year 2006. I think in fiscal year 2007 we didn’t give any guidance and in fiscal year 2008 we can try in Q 4 to give you next year’s guidance for those locations. But I would have to say that would exclusive of major land purchases in key markets, things like that. It’s just a really tough number to do.

You can put if you want kind of a $4 million number on a new location and you can try to extrapolate that out on 10 to 15 locations but then there’ll be the purchase of property in LA that cost you $15 million and that kind of throws that number away. So we’ll do our best to try to give you a flavor for it but I guess at the end of the day you’ll have to have comfort that we’re going to make smart capital improvements and investments in key markets where we know we have potential to gain business and/or where we know we have the ability to reduce costs significantly because of the current network that we’ve got there.

Craig Kennison - Robert W. Baird & Co.

When you add these 15 sites, are they full service sites or are they—are you doing any kind of just like staging areas?

Jay Adair

No, full service.

Operator

Your next question comes from the line of Scot Ciccarelli – RBC Capital Markets

Scot Ciccarelli – RBC Capital Markets

Can you talk about the difference in the salvage vehicle buyer base in the UK, how is that maybe a little bit different then what you have in the US?

Jay Adair

Well you don’t have the South American, North America influence in the UK that you have here. You have much more of a European and Middle Eastern influence in that market. Where your big buyers in the US would be Europe, Lithuania, Russia, [inaudible], but also and even more so, would be Guatemala, Honduras, and Mexico. In those markets you’re not going to see Mexico and Guatemala and Honduras as big buyers. You’re going to see Poland and Russia and Lithuania and the UAE in those markets as well as Ireland, The Republic of Ireland, and then in some of the other markets around there—France, Germany, they’re all buyers of us. So its much more European when you think about out-of-country buyers, it’s much more European-related then it is South American or Central American influence that we have here.

Scot Ciccarelli – RBC Capital Markets

Does that have any kind of impact on profitability, I guess what I’m trying to get at is I’m trying to figure out the best way to think about the future profitability in the UK. I know right now it’s still a fundamentally different model but you had a huge surge in revenue but gross profit was maybe a little bit less then I was looking for, I’m just trying to figure out the right way to think about the UK business.

Jay Adair

Well I think the other thing you have look at here right now is we have a lot of expenses in that market and there’s a lot going on to build that network and to get things incorporated and a lot of trips over there and a lot of US support that over time will diminish. It is a very different market, at the same time, you’ve got to look at that market is that it just got VB2 and when you look at the US market five years, off the top of my head international sales were like 11%. They weren’t what they are today and this product has changed, this industry and this market over here and we expect that that will be the same over there as we continue to grow and get our arms out there to our client base in all those different markets and that will improve returns and you’ll see that improvement. Its just not going to happen in the next year or two, it will be a long-term five-year approach in that market for us.

Scot Ciccarelli – RBC Capital Markets

Do you have any kind of approximately revenue impact from the deferred sales you had in the UK because obviously you tried to not flood the market with vehicles, just trying to get a feel for what might not be recurring in the revenue you reported during the quarter?

Will Franklin

No, I really don’t. Obviously our third quarter in the UK similar to the US is our highest quarter as we sell off inventory. We really are not prepared to quantify the amount of revenue that was shifted from Q2 to Q3 at this point.

Operator

Your next question comes from the line of William Armstrong – CL King & Associates

William Armstrong – CL King & Associates

Just to clarify, in the UK is VB2 still in only 10 locations or is it in all 15 at this point?

Jay Adair

It is in 12 locations currently and will be in all the locations by the end of the quarter.

William Armstrong – CL King & Associates

Now you’re adding 10 to 15 new locations in North America over the next 12 months, so obviously the reduction in towing costs and turnaround time more then offsets the additional cost of building and then maintaining these facilities, what sort of payback period do you get out of these new facilities?

Jay Adair

I don’t think that’s actually so obvious. I don’t think that will be the case. I think there’ll be—the majority of the sites will be opening up with an expense that exceeds the savings in towing so it won’t be this offset that is purely driving towards that, its just that we will be utilizing that understanding to try to reduce the increased cost of putting those locations in but the primary driver of putting that store in is to reduce the actual cycle time and to reduce the pick-up time further to pick that vehicle up quicker, reducing costs to our seller and giving us more capacity in other key markets. So you take a market that’s maybe at 80% capacity, open a new store, now they’re at 60% capacity. So those are really the drivers behind doing that. Every single time we pick that vehicle up quicker we reduce storage for our client at the tow company.

William Armstrong – CL King & Associates

So then how do you get a return out of that or how would you measure that?

Jay Adair

Well we always anticipate two things when we open a new location; that there’ll be a reduction in towing costs because we’re going to be closer to the vehicle there and we anticipate new business and we’re going to grow it that market. That’s how we’ve done this for the last 15 years. We open up locations, we’ve opened up a number of Greenfields over the years with the anticipation of gaining business in that market and reducing costs from the yards that are servicing that market and it’s tough to put a number on it. We look for a return in 12 to 18 months but we may hit that, we may not.

William Armstrong – CL King & Associates

What was the inventory number not including the vehicle pooling costs, just the UK inventory number for the end of the quarter?

Will Franklin

I’ll have to get it to you—let’s talk after the call and I’ll get that number to you.

Operator

Your next question comes from the line of Justin Boisseau – Gates Capital Management

Justin Boisseau – Gates Capital Management

You talked about, I just wanted to clarify, you said 15 to 20 additional locations in the UK during the next 12 months, correct?

Jay Adair

No, not additional total. But we have said for the last couple of quarters that our goal is to be 15 to 20 total locations and we’re currently at 15.

Justin Boisseau – Gates Capital Management

So an additional five in the next 12 months?

Jay Adair

Well maybe two or three or five, who knows. But that’s why we’re giving you a range, 15 to 20 locations is where we want to end up.

Justin Boisseau – Gates Capital Management

And based on what you have on your plate today, how soon if the opportunity came up would you be prepared to enter another country?

Jay Adair

I think we’ve got plenty on our plate right now. So we’re focusing on taking care of the markets that we’re in and when we’re ready to go outside then we’ll do that.

Justin Boisseau – Gates Capital Management

Can you just remind us again the size of the market in the UK versus the size of the market in the US?

Jay Adair

Yes, its estimated somewhere around four million vehicles from the insurance industry in the US. When you go non-insurance its hard to get your hands around how big that market is. In the UK looking at insurance only it’s a little over 600,000 units.

Operator

Your final question comes from the line of Edward Hemmelgarn – Shaker Investments

Edward Hemmelgarn – Shaker Investments

Your tax rate for the year now is about 36%, is that what you expect for the fourth quarter too?

Will Franklin

No, like I said, our normal tax rate excluding any discrete items is between 37% and 37.5%. That could grow a little bit over the next year as we reduce our cash and reduce our tax exempt interest but I think that’s a fair estimate for the next quarter.

Operator

Gentlemen, there are no further questions in the queue at this time; I’ll turn the conference back over to you for any additional or closing remarks.

Jay Adair

Thanks again for attending the call and we’re excited about our future and we’ll be reporting on our success in Q4. Take care, goodbye.

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