Operator:

Good day, everyone, and welcome to the Copart Incorporated Third Quarter Fiscal 2024 Earnings Call. Just a reminder, today's conference is being recorded. Before turning the call over to management, I will share Copart's Safe Harbor statement. The company's comments today include forward-looking statements within the meaning of Federal securities laws, including management's current views with respect to trends, opportunities and uncertainties in the company's markets. These forward looking statements involve substantial risks and uncertainties. For more detail on the risks associated with the company's business, we refer you to the section titled Risk Factors in the company's annual report on Form 10-K for the year ended July 31, 2023, and each of the company's subsequent quarterly reports on Form 10-Q. Any forward-looking statements are made as of today, and the company has no obligation to update or revise any forward-looking statements. I'll now turn the call over to the company's CEO, Jeff Liaw.

Leah Stearns:

Thank you, Jeff. I'll begin with our third quarter sales trends. During the quarter, our global unit sales increased over 11%, including the modest benefit of the consolidation of Purple Wave. While inventory increased 4% from the year ago period, this growth was a function of a partial recovery and total loss frequency and share gains. Focusing on our U.S. business unit growth was over 9%, which reflected fee unit growth of over 9% and purchase unit growth of over 17%. Consignment or fee units continue to constitute the vast majority of our U.S. unit volume. Insurance unit volume increased about 7% year-over-year. As Jeff mentioned, our non-insurance unit volume growth has continued to outpace out of our insurance business. This volume growth substantially came from dealer units, which increased nearly 18% in fleet rental and finance units, which increased over 23%. Inventory levels in the U.S. increased over 3% in quarter and over 5% when excluding low value in cat units. Turning to our international business, we saw unit growth of over 21% with fee units increasing nearly 21% and purchase units increasing by over 24%. Our international business ended the quarter with inventory levels over 7% ahead of prior year. For the quarter, global ASPs declined by about 3% from the year ago period. With U.S. Insurance ASPs down less than 2% and international ASPs down about 5%. Overall, our ASPs continue to show resilience compared to the nearly 14% year-over-year decrease in the Manheim Used Vehicle price index. Turning to our financial results for the third quarter, global revenue increased to $1.13 billion, representing growth of over $105 million or about 10%. Global service revenue increased nearly $100 million or almost 12% for the third quarter, primarily due to increased volume. U.S. service revenue grew by over 10%, and international service revenue grew by nearly 22% for the quarter. Global purchase vehicle sales for the third quarter increased $6 million or 3.5%, and global purchase vehicle gross profit increased by over $2 million or over 17%. In the U.S. our purchased vehicle revenue was up nearly $7 million or 8%, while gross profit increased less than $1 million or almost 3%. This trend was primarily due to a mixed shift towards lower ASP units in the U.S. Internationally purchased vehicle revenue decreased by less than $1 million or almost 1%, while gross profit increased by over $2 million or about 29%. These results were primarily driven by significantly higher margins on purchase units in Germany. Global gross profit increase to more than $525 million, an increase of over $42 million or about 9%, and our gross margin percentage decreased approximately 70 basis points to 46.6%. In the U.S. our gross profit margin decreased to 50.9% with DNA being the most impactful driver of margin compression. As we continue to focus on investments in our yard infrastructure and technology and our international gross profit margin increased to 27.6%. Turning to general and administrative expenses, excluding stock-based compensation and depreciation spend in the quarter was $76 million, reflecting an increase of more than $23 million and less than $4 million on a sequential basis. As we've highlighted over the past quarter, our year-over-year, G&A increase continues to reflect our investments in our sales marketing product and technology functions. The financial consolidation of Purple Wave into our results as well as an increase in third-party related projects. This increase includes two key system implementations, which we kicked off during the quarter relating to our finance and HR functions. We expect these investments will result in more scalable processes and systems and provide us with a greater operating leverage over the long-term. Finally, GAAP operating income increased by over 4% to $437 million and third quarter GAAP net income increased by over 9% to $382 million or $0.39 per diluted common share. During the quarter, we benefited from over $18 million of incremental interest income as we have actively invested our cash into treasury securities as well as a lower effective tax rate of 19.1%. Turning to our capital structure, as of the end of April, we had $4.3 billion of liquidity, which is comprised of nearly $3.1 billion in cash and investments and held to maturity securities and our capacity under our revolving credit facility of over $1.2 billion. We believe that, our conservative capitalization is a distinct competitive advantage in our industry, empowering us to operate our business with a horizon that prioritizes long-term success for both ourselves and our clients. For the quarter, we generated operating cash flow of over $496 million and $408 million of free cash flow. Our capital expenditures in the quarter were about $88 million with nearly all of our investments attributable to expanding our real estate and physical infrastructure to enhance capacity, while simultaneously reducing our transportation costs and corresponding fuel consumption. As I've highlighted in the past, we expect our capital allocation strategy will enable Copart to focus entirely on delivering outstanding products and services. To further this objective over the last 12 months, we have deployed over $540 million into our real estate portfolio, fleet and technology. Today, our global portfolio of approximately 19,000 acres of outdoor vehicle storage, a robust fleet of transportation assets and more than two decades of virtual auction technology development are the foundation of what truly differentiates Copart. With that, Jeff and I would be happy to take some questions.

Bob Labick:

I want to start with the question about dealer cars in general. Obviously, a lot of success there. But just as a little context, we've talked on previous calls about the dropping used car value to Manheim Index and the impact on rising total loss frequency and the fact that your salvage ASPs have held up because the incremental salvage car going into being total is the higher end car. The question is, what's the relationship for Copart and your dealer car ASPs as used car values are dropping, if any?

Bob Labick:

Okay, great. And then I guess just in general, so you just mentioned that part. The other, how are ASPs trending all else equal? In other words, if total loss frequently or if Manheim was flat year-over-year right now, you guys have obviously pushed more into dealer, you've added arbitration and inspection and at certain points. And has your, have your ASPs been going up over time or what have been the trends if you were to level set, kind of the Manheim index to Copart dealer ASPs?

Jeff Liaw:

And Bob, I'd say in both directions, the Manheim used Vehicle index, you followed us long enough to know it's never been a perfectly linear predictor of outcomes at Copart auctions. I think over the very long haul, our ASP performance has generally outpaced Manheim for the reasons you mentioned a moment ago. Total loss, frequency rising improving the quality of cars that we sell and our mix, our growth among the non-insurance segment doing the same. But even then, we have our use, our prices have certainly decreased less than Manheim has over the same comparable period. But that's misalignment of the two metrics has always been true.

Jeff Liaw:

I think you accurately the universe of competitors for the vehicles that we sell. So the insurance world, I think is unique. But as for the cars we sell on behalf of other parties, they also have, they have many different outlets. And depending on who you're talking about, a dealer can certainly sell the car at his or her lot can sell through the other online channels you're aware of, can sell at physical auction as well, and can sell to wholesalers to take principal positions in those vehicles. Financial institutions have a different set of possibilities afforded to them. They, by and large don't hand sell as you know, rental car companies in some cases operate their own quasi retail sites from which they sell vehicles directly. Some will use the other major auction houses you're aware of. So the competitive landscape is multidimensional for our non-insurance cars for sure. And I think we are competing effectively, but again to different folks for different types of sellers.

Chris Bottiglieri:

Two high level questions for you. I'll start with the first one. So Jeff, in the past you've talked about how much higher total loss rates could be if insurers had full access end-to-end access to data. So I'm curious, just given some of the advancements in AI, like you spoke to that conference and some of more, more recent executive hires, like how much closer are you on that path to better monetizing that data and driving better total loss rate decisions?

Chris Bottiglieri :

And then my second big picture question is on international mix. I think it's been a couple years since you've commented. Where that sits at the last I recall was 50% to 55%. I just think given the lack of global vehicle production, I would think emerging markets, international buyers probably face even tighter supply than we face here in the U.S. So just curious if that's caused any shift in demand towards international, if you've seen that in your business at all?

Operator:

Our next question comes from the line of Alice Wycklendt with Baird.

Jeff Liaw:

Presuming your question is principally U.S. centric, the uninsured motorist ratio is vary tremendously by market. For example, it won't surprise you. They're considerably higher for us in Brazil than they are in the U.S. or the UK, for example. But for any given market, the uninsured motorist ratio, I think is a function, yes, of rates, which in turn are a lagged byproduct of inflation. Many of our insurance clients I think are just now in recent quarters achieving the rate relief that comes with state level approvals for changes they wanted to make, which then in turn correspond with inflated costs on repairs and personnel and so forth that you noted, that you observed a moment ago. I don't think it will have a meaningful appreciable effect in the U.S. Perhaps, you'll see some trends to liability only coverage instead of collision and comprehensive or what have you. But I think those effects would be on the margin. In the end, the economic decision, once a car has been meaningfully impaired, functions have been meaningfully impaired in an accident, whether there's an insurance -- it certainly helps expedite matters to have an insurance company mediating the resolution of that car. But if it makes economic sense to total it, it eventually will be totaled regardless.

Jeff Liaw:

Got it. No, I appreciate that. We've described addressed that question, but happy to do so again. I think our advantages with our clients are, first, to drive better auction outcomes. I've mentioned that, the auction liquidity, our international buyer base, the technology platform, the machine-learning enabled tools that allow us to drive better returns at auction. Ultimately, our insurance clients are, of course, economically motivated. They have to achieve the best possible cost outcomes they can to ensure the best possible combined ratios to ensure that, they're competitive in turn on rates and that they can protect and grow their businesses accordingly. We believe that, we generate superior returns at auction and that that has been persuasive to many of our insurance clients. The second element of what we do is to manage cars quickly. Cycle times are by their nature very positively correlated with costs for insurance companies in particular on the front end. Our ability to retrieve vehicles quickly reduces their advance charges. It would surprise you how many cars that are very clearly eventually bound for a total loss auction like Copart are nonetheless subject to $2,000, $3,000 of advance charges, tear downs and estimates and partial repairs or what have you before the car is ultimately disposed of. Our ability to help insurance companies to reduce those front-end cycle times is very economically meaningful to them as well. We've talked before about catastrophic events. Memories in some cases are short, sometimes long, but we distinguish ourselves in a moment of crisis. The storms like Harvey, Ian and Ida are acute cost events and perhaps more importantly, acute policyholder service events for the insurance companies as well. Our ability to support them, to support the communities, to be their ambassadors effectively on the ground in places like Florida and the Northeast, in turn equipped by the land we've acquired literally 100 of acres of idle capacity that stands ready to serve them in a storm as well as the communications technology, our own fleet of vehicles, our Copart Catastrophic Response Team, the folks that we deploy upon a moment's notice that's distinctive as well. So those are, I've talked about a few other elements, but those are three meaningful ones. As to durability, in general, when we are able to earn the trust of our clients, we run through walls to preserve that over the long haul. So in general, those relationships have proven durable, but we never take it for granted. We wake up each morning committed to delivering better today than we did yesterday this year than we did the year before. So it has been durable in the past, but we never assume it will be forever. We'll make sure that we earn the right to serve them for with each passing year.

Jeff Liaw:

Sure. Purple Wave we're delighted to have Aaron and Suzy and the team on board. I think we noted that last quarter as well. They continue to grow GMV very well year-over-year. The growth opportunities for them include both geographic expansion. Certainly they were at the time of our investment in Purple Wave, principally central time zone oriented, but they continue to expand their footprint from there. Aaron and Suzy have done an extraordinary job building, what they would call the community of buyers and sellers at Purple Wave. And they continue to invest in their capabilities there. So even within the markets in which they're currently participating, there remain growth opportunities to bring on new sellers, to bring on additional equipment for existing sellers. So, I think it's across the board. They are still early enough in their journey and we are early enough in our journey with them, there remain growth levers across all of those dimensions. And frankly, the key management challenge, the key leadership challenge for Aaron and Suzy is to figure out how to prioritize among them. But the growth trends have been very promising there.

Bret Jordan:

Following up on that last question on Purple Wave, is your foreign buyer base, is it, does that differentiate your ability to sell the commercial equipment? Are they buyers of what Purple Wave is selling?

Bret Jordan:

And the question of international, I mean, 21% growth, are you seeing, it looks like sequential improvement, is that traction in Europe? You called out flooding in Brazil and CAT events in the Middle East, but what's the big driver of international and are you getting traction in some of those bigger vehicle markets like the EU?

Operator:

[Operator Instructions] Our next question comes from the line of Jash Patwa with JPMorgan.

Jeff Liaw:

Great. Yes. So as you noted, it has been an area of emphasis for us for years, of course to serve the Copart dealer network better over time so that more of their cars are addressable by Copart auctions. There is the natural tailwind, as we discussed earlier today of total loss frequency, bringing better cars into our network to begin with from insurance companies, which in turn brings the buyers that are relevant for an expanding portfolio of dealer cars as well. You asked a good question about the relevant range of services that we need to provide to those sellers which in some cases are more extensive or they're different. Frankly, the range of services provided to insurance companies for salvage cars is certainly robust as well, but in many cases different. It is more like loan settlement, title procurement, salvage title issuance, a range of different things provided to them in comparison to dealer cars and frankly rental cars, financial institution vehicles and the like. So yes, we continue to evaluate the range of services we provide, continue to test, a range of these things to expand so that we can better serve them. Yes, that's very much a priority.

Jeff Liaw:

Yes. And to clarify, when by operating expenses, do you mean, the gross level or you mean general administrator, or do you mean both?

Jeff Liaw:

Yes. I think that, over the long haul, I think you probably followed us for a while, you'll know we have almost always achieved operating leverage relative to G&A growth or we happened to in the last few quarters of experienced more meaningful year-over-year growth for the reasons that Leah described a moment ago. The very long-term horizon we expect to grow operating income, to grow gross profits in excess of the rate of growth of OpEx or G&A, OpEx as you described at G&A as we do. But on any given quarter, any given month, quarter, frankly even year, that's not necessarily the priority for us. We want to make sure we achieve the right long-term outcomes. If that requires short-term investments, if that requires long-term investments, we are happy to make it. As you know, as a rule, we don't provide forward-looking guidance, but we continue to spend these resources very prudently. We take our responsibilities as stewards of capital very seriously and we'll invest those dollars when it makes sense to generate the right long-term returns for Copart and when they don't, we won't.

Jeff Liaw:

Thanks, everybody. We'll talk to you next quarter. Have a good night.

Operator:

Good day, everyone, and welcome to the Copart Incorporated Second Quarter Fiscal 2024 Earnings Call. Just a reminder, today's conference is being recorded. Before turning the call over to management, I will share Copart's Safe Harbor Statement. The company's comments today include forward-looking statements within the meaning of Federal Securities laws, including management's current views with respect to trends, opportunities, and uncertainties in the company's markets. These forward-looking statements involve substantial risks and uncertainties. For more detail on the risks associated with the company's business, we refer you to the section titled Risk Factors in the company's annual report on Form 10-K for the year ended July 31, 2023, and each of the company's subsequent quarterly reports on Form 10-Q. Any forward-looking statements are made as of today, and the company has no obligation to update or revise any forward-looking statements. I'll now turn the call over to the company's Co-CEO, Jeff Liaw.

Leah Stearns:

Thanks, Jeff. I'll begin with our second quarter sales trends. During the quarter our global unit sales and inventory increased over 7% and 6% respectively, from the year ago period. Given the relatively quiet 2023 hurricane season, this growth was a function of a partial recovery, total loss frequency and shared gains. Focusing on our U.S. business, unit growth with nearly 5%, which reflected fee unit growth, over 4% and purchase unit growth of over 10% consignment or fee units continued to constitute the vast majority of our U.S. unit volume. Our insurance unit volume was flat year-over-year and up 9%, when excluding Hurricane Ian units from a year ago. And as Jeff mentioned, our non-insurance unit volume growth has continued to outpace that of our insurance business. This volume growth substantially came from dealer units which increase over 21% and fleet rental and finance units which increased 35%. Inventory levels in the U.S. increased over 4% and over 6% when excluding low value and cat units. Turning to our international business. We saw unit growth of over 21% with fee units increasing 22% and purchased units increasing by over 19%. Our international business ended the quarter with inventory levels over 16% ahead of prior year. For the quarter, global ASPs and U.S. insurance ASPs declined by nearly 5% from the year ago period, and U.S. insurance ASPs excluding Hurricane Ian units were flat. In addition, international ASPs were up about 1%. Overall, our ASPs continue to show resilience compared to the more than 7% year-over-year decrease in the Manheim used vehicle price index for the quarter. Turning to our financial results for the second quarter. Global revenue increased to $1.02 billion, representing growth of over $63 million or about 7%, including a 0.7% tailwind due to currency. Global service revenue increased nearly $72 million or over 9% for the second quarter, primarily due to higher average revenue per unit and increased volumes. Our U.S. Service revenue grew by over 7% and international service revenue grew by nearly 26% for the quarter. Global purchased vehicle sales for the second quarter decreased to about $8 million or 5% and global purchased vehicle gross profit decreased by less than $1 million. In the U.S., purchased vehicle revenue was down over $7 million or about 9%, which was primarily due to a mix shift towards lower ASP units, while gross profit increased over $1 million. Internationally, purchased vehicle revenue decreased by $1 million or about 1% and gross profit decreased by $2 million. Global gross profit increased to more than $464 million an increase of nearly $38 million or about 9%, and our gross profit margin percentage increased by approximately 100 basis points to 45.5%. In the U.S., our gross profit margin increased to 50.2% and our international gross profit margin increased to 24.9%. The year-over-year margin increase on a consolidated basis was driven primarily by a revenue mix shift resulting from strong growth in fee units, which generate higher margins and a decline in direct cost per unit sold. On the cost front, during the first and second quarter of last year, we incurred cat expenses, specifically related to Hurricane Ian, which did not occur. Turning to general and administrative expenditures, excluding stock-based compensation and depreciation expenses. G&A spend in the quarter was over $72 million, reflecting an increase of over $24 million. The increase in G&A includes over $3 million in onetime costs associated with the conclusion of our CMA process in the U.K. The remainder reflects the financial consolidation of Purple Wave into our results, third-party project-related costs and the impact of investments in our technology and sales organizations to support Copart's business growth. We expect that the investments we are making in our people, processes and systems will provide us with greater operating leverage over the long run. As a result, GAAP operating income increased by nearly 4% to $380 million. Finally, second quarter GAAP net income increased by nearly 11% to over $325 million or $0.33 per diluted common share. During the quarter, we benefited from nearly $20 million of incremental interest income as we have actively invested our cash into treasury securities as well as a lower tax rate of 20.7%. Turning to our liquidity and financial position. Liquidity was $3.9 billion as of the end of January, which is comprised of nearly $2.7 billion in cash and investments in held to maturity securities and our capacity under our revolving credit facility of over $1.2 billion. For the quarter, we generated operating cash flow of nearly $162 million, which is a decrease of 14% from the prior year. In addition, we invested about $123 million in capital expenditures, with nearly all of this amount attributable to our real estate and physical infrastructure to support capacity expansion, which contributes to our ability to serve our customers while simultaneously reducing our transportation costs and corresponding fuel consumption. Finally, for the quarter, if you take our operating cash flow, less CapEx, we've generated about $39 million of free cash flow. As I've highlighted in the past, our top priority is to invest to grow our core business. To achieve this, over the last 12 months, we have deployed over $540 million into our real estate portfolio, fleet and technology to provide best-in-class products and services to our customers. And with that, Jeff and I will be happy to take some questions.

Peter Lukas:

Yes. Hi, good afternoon. It's Peter Lukas for Bob. First, just a general question. I was just wondering, can international buyers on your U.S. platform easily buy at other auctions, a German, Finland, et cetera? Or do they have different log-ins and different interfaces? Basically, just trying to understand if all your buyers are seeing global auctions equally and getting alerts on the cars they're looking for, regardless of point of origin.

Peter Lukas:

Helpful. Thanks. And then just one more. I guess, in terms of the whole car side, given the relatively recent additions of arbitration and outsourced inspections in the industry, how would you describe Copart's role and in the non-salvage market versus other industry participants?

Peter Lukas:

Great, thanks. I’ll jump back in the queue.

Daniel Imbro :

Hi, good evening, everybody. Thanks for taking my question. I want to start on a longer-term one on the top line. The total loss rate, I think you said 20.9%. I believe that exceeds prior highs we saw last time before this kind of near-term dip. If we dig into that data, how divergent are different carriers on your platform? Are you seeing some that are already in maybe the high 20s? And I think in the past, you've said you thought total loss rate could exceed 30% over the very long term. Is that still an applicable long-term goal, I guess, as you see the data today?

Daniel Imbro :

That makes a lot of sense. I appreciate all that color, Jeff. And then maybe one on the financials. Jeff, I know we shouldn't extrapolate any one quarter, is probably the answer, but it has been a multi-quarter trend of maybe accelerating G&A spend. So if we look back in that line item, can you maybe parse out what has been accelerating? And given it's a multi-quarter trend here, is it kind of a fair thing to extrapolate that there may be some things changed and that line the needs to keep growing at a faster rate?

Leah Stearns:

And from just an inclusion of Purple Wave, we did have about a little over $7.5 million related to the incremental consolidation of that business in the quarter, which was obviously not in the prior year period.

Leah Stearns:

So that is permanent. But other than that, I would say everything else we're focused on is really to drive incremental operating leverage in the future.

Operator:

Our next question is from Chris Bottiglieri with BNP Paribas Exane. Please proceed with your question.

Jeff Liaw:

Got it. We don't comment on individual accounts, but to your broader question about our capacity to handle additional volume. We invest years ahead of the curve as reflected, of course, in capital expenditures over the course of the past 7 or 8 years. We invest ahead of the curve in the various geographies in which we do business. And so we would be delighted to serve new volume and certainly have the capacity to do so. As you know, it's not even just the storage capacity itself. It's also the logistics capabilities trucking, both owned trucking assets as well as third-party assets, it's people and it's the scalable technology, auction platform and buyer base. And so to the answer more generically across all of those dimensions, it's absolutely yes. And the flywheel effect, frankly, applies to some of those dimensions, not just the auction dimension as well. For example, the stronger we become and the larger we become as a logistics company, the better access we have to both third-party and first-party transport capabilities, the better we are about deploying people to a storm and so on and so forth. So the answer is affirmatively yes.

Jeff Liaw:

In a word, yes, though, I think it's always worth commenting on what the relevant substitutes might be, right? So in so far as you're talking about ocean freight, the demand for mobility in these various countries, the countries that sell vehicles too, which is effectively every country in the world, but the growth tends to come from what we would characterize as developing economies and their demand for mobility is real and sustained and the growth is real and sustained. So the question becomes what their natural alternatives might be? And in many cases, they will still ultimately turn to Copart cars as a result. And then the last comment I'd make on that front is that, while ocean freight rates can rise I think it's still systemically naturally the case that ships mostly come to the U.S. or to the UK, for example, to our dominant origin markets. They come here full and they leave empty. So it's often the case that the backhaul legs are considerably cheaper. So the headline numbers may or may not be representative of our buyers' lived experience.

Operator:

Our next question is from Craig Kennison with Baird. Please proceed with your question.

Jeff Liaw:

No, not appreciably so.

Leah Stearns:

Sure. Absolutely. So just as our overall mix shifts within the underlying unit makeup of our business and what's selling through the Copart platform, that is one driver. So as you think about the increase in our unit volume coming from our Blue Car sellers, our dealer units, those are higher ASP units. But also as you think about used car pricing coming down and total frequency increasing, the incremental unit that is totaled by an insurance company is inherently a higher value unit, and that's because when total loss frequency came down as a result of rising used car prices that resulted in the underlying borderline units falling out of the mix, and those are now coming back. So as insurance companies are facing elevated repair costs, they're incrementally totaling the higher-value vehicles more frequently, and that's driving additional resilience within our ASP.

Craig Kennison:

That helps. And if I could sneak in one more, Jeff, on Purple Wave. Just curious if you've made any -- you've taken any initiatives since you've acquired a stake in that business and maybe highlight what those might be?

Craig Kennison:

Great. Thank you.

Bret Jordan :

Good evening, guys. Could you talk a bit more about the international market as far as various country performance?

Bret Jordan:

And then I guess in the Blue Car or just the noninsurance business in general, could you talk about the unit economics? Are you getting a better seller fee because you're not negotiating with a very large insurance company for high volume? Or as you're growing that business, do you charge a lower seller fee to get the volume?

Bret Jordan:

Great. Thank you.

Unidentified Analyst :

Hi, good evening and good afternoon. This is Josh on for Ryan Brinkman. Thanks for taking our question. Just maybe the first question on capital allocation. Could you maybe share your latest thoughts around capital allocation and how you're thinking about capacity expansion and category diversification into 2024? Thanks, and then I have a follow-up.

Jeff Liaw:

The one after thought I'd offer is that our capitalization with our clients is a distinctive competitive advantage. Our conservative balance sheet, our net cash balance equips us such that we can be patient even through a crisis. So in the midst of a pandemic when nobody knew for how long driving an economic activity would be shut down. We were able to continue our business as it stands today. We didn't lay off folks. We didn't suspend CapEx, et cetera. Our insurance clients have a long memory, and they know those things. They know that when land is available for us to acquire so that we can preserve it for the industry's use for the next 50 years then we'll do so gladly and proudly despite it, of course, coming with big ticket prices as well. So the point there is that capital allocation is not a subject in isolation. It's also a commercial matter that affects how we interact with our customers as well.

Jeff Liaw:

Yes, I think we were all struck of course, by unusual weather patterns in California relative to, I think, what we would all agree is long-standing history in the state. We are well equipped there with, again, land, trucks, personnel technology, et cetera, to respond to events as they emerge. To date, we haven't yet observed events of anything near the magnitude of Ian, Ida, et cetera, as we experienced in the Northeast in Florida, in Texas, Louisiana, et cetera. We're ready for it and should the weather evolve in a manner that the activity becomes very elevated. And on a sustained basis, you'll see us continue to invest in that as well.

Operator:

Thank you. There are no further questions at this time. I would like to hand the floor back over to Jeff Liaw for closing comments.

Operator:

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Good day, everyone, and welcome to the Copart Incorporated First Quarter Fiscal 2024 Earnings Call. Just a reminder, today's conference is being recorded. Before turning the call over to management, I will share Copart's Safe Harbor Statement. The company's comments today include forward-looking statements within the meaning of Federal Security Laws, including management's current views with respect to trends, opportunities, and uncertainties in the company's markets. These forward-looking statements involve substantial risks and uncertainties. For more detail on the risks associated with the company's business, we refer you to the section titled Risk Factors in the company's annual report on Form 10-K for the year ended July 31, 2023, and each of the company's subsequent quarterly reports on Form 10-Q. Any forward-looking statements are made as of today, and the company has no obligation to update or revise any forward-looking statements. I'll now turn the call over to the company's Co-CEO, Jeff Liaw. Please go ahead, Jeff.

Leah Stearns:

Oh no, they already did that.

Leah Stearns:

Thanks, Jeff. I'll begin with our sales trends for the first quarter. During the quarter, our global unit sales and inventory increased nearly 13% and 3%, respectively. Given the relatively quiet hurricane season in 2023, our inventory growth was a function of a partial recovery in total loss frequency and share gain. During the quarter, we saw global ASPs decline by approximately 1% versus the prior year. Focusing on our U.S. business, we experienced strong unit growth of over 10%, which reflected fee unit growth over 10% and purchase unit growth of 14%. Consignment or fee units continue to generate the vast majority of co-parts volume growth, with our insurance units posting nearly 10%, our dealer units posting 13% growth, and our Blue Car units, which include units from fleet, rental and finance companies posting over 35% growth. This unit growth was modestly offset by a decline in low value units from wholesalers and charities. Inventory levels in the U.S. increased 1% or nearly 12% when excluding low value units and CAD units. In the U.S., ASPs were down 2%, and more specifically, insurance ASPs were down 1.7% compared to the 4% decrease in the Manheim Used Vehicle Price Index. Turning to our international business, we saw unit growth of over 24%, with fee units increasing over 28%, and purchase units increasing by over 4%. Our international business ended the quarter with inventory levels nearly 14% ahead of the prior year. International ASPs were up 7% compared to the prior year period. Our auction returns remain strong as we continue to invest in growing our global buyer base by driving member acquisition, activation, and retention. Copart’s auctions provide our insurance customers with best-in-class liquidity and returns, ultimately providing a more cost-effective way to manage growing claims costs by making it more cost-effective to deem damaged vehicles a total loss. In addition, we continue to invest in expanding our products and services to serve a more diverse mix of sellers and unit types. Examples of this include our national sales, such as our specialty equipment auctions, which primarily sell heavy and medium-duty trucks and agricultural equipment, and our select auction which sells clean title vehicles and now provides buyers with greater transparency in vehicle quality through sale lights and an arbitration policy. Turning to our financial results for the first quarter, global revenue increased $127 million or about 14%, including a 1% tailwind due to currency. Global service revenue increased nearly $133 million or over 18% for the first quarter, primarily due to higher average revenue per unit and increased volume. U.S. service revenue grew by 17%, and international service revenue grew by 29%. Global purchased vehicle sales for the first quarter decreased about $6 million or 3%, with U.S. purchased vehicle revenue for the quarter down 19%, which was primarily due to a mix shift, with the decline in our power sports business and PA being offset by an increase in our Copart direct cash-for-cars purchased vehicle revenue. The U.S. decline was offset by international growth of 19%. Global purchased vehicle gross profit decreased about $2 million for the quarter, with U.S. purchased vehicle gross profit increasing about $2 million and international purchased vehicle gross profit decreasing $4 million, reflecting a 29% increase in cost of vehicle sales. Global gross profit in the first quarter increased over $94 million or about 26%, and our gross margin percentage increased by approximately 400 basis points to 45.5%. This reflects U.S. margins which increased to 49.9%, and international margins decreasing to 24.9%. The year-over-year margin increase on a consolidated basis was driven primarily by a mix shift due to the strong growth in fee units in the U.S., which was partially offset by the impact of inflation and a slight decline in purchase unit margins internationally. On the cost front, during the first quarter of last year, we incurred cap costs, cap expenses specifically related to Hurricane Ian, which did not recur. Operationally, we are focusing on increasingly standardizing processes and leveraging technology and automation to mitigate the inflationary impacts we've experienced across our business. We expect these efforts will drive greater scalability and efficiency across the organization and help mitigate longer-term cost pressures. Turning to general and administrative expenditures, excluding stock-based compensation and depreciation expenses, G&A's spend in the quarter was $58 million, reflecting an increase in $13 million and includes $3 million due to a one-time maintenance project, the financial consolidation of Purple Wave into our results, and the impact of our overall growth in business. Over the long run, we continue to expect operating leverage as we grow. Because of our strong revenue growth and moderate cost increases, GAAP operating income increased by nearly 27% to over $395 million for the quarter. First quarter income tax expense was nearly $91 million, which reflects a 21.4% effective tax rate. And finally, first quarter GAAP net income increased by over 35% to over $332 million or $0.34 per diluted common share. Turning to our liquidity and financial position, liquidity was $3.9 billion as of Q1, which is comprised of $2.6 billion in cash and investments in held to maturity securities and our capacity under our revolving credit facility of over $1.2 billion. For the quarter, we generated operating cash flow of over $375 million, which is an increase of 20% from the prior year period. In addition, during the first quarter, we invested about $162 million in capital expenditures, with nearly 80% of this amount attributable to our physical infrastructure, and more specifically, capacity expansion, which contributes to our ability to serve our customers while simultaneously reducing our transportation costs and corresponding fuel consumption. Finally, for the quarter, if you take operating cash less CapEx, we've generated $213 million of free cash flow. I'll conclude with a few remarks about our capital allocation strategy, focusing on investing in our core business and corporate development. We remain focused on building long-term value for our shareholders and endeavor to continue our strong track record for years to come. To achieve this, we will continue to use our disciplined approach to capital allocation and remain patient, flexible and opportunistic. Our first priority is to deploy capital to grow our core business, where we will continue to invest in our people, operational capabilities, including logistics, technology and real estate, as well as our customer experience. We also focus on opportunities to diversify our business, including expanding our marketplace capabilities into new geographies or to service new asset types. A prime example of this was our investment into Purple Wave, which like NPA, brings a leading marketplace for a specialized used unit type, which in Purple Wave's case, spans construction agate fleet. And further, we seek to partner with leaders in areas of technology and innovation, which expand beyond Copart’s core business, but directly support our customers' needs. This includes in InsureTech, where we recently announced a strategic partnership with Hi Marley to accelerate the total loss process for our customers and their policyholders. This approach provides us ample opportunities to grow our core and drive diversification across our business. And with that, Jeff and I would be happy to take some questions.

Bob Labick :

Good afternoon. Congratulations on continued strong performance.

Leah Stearns:

Thanks Bob.

Jeff Liaw :

Got it. Well Bob, as you know, having followed us for a while, we've talked in the past on multiple occasions about our potential interest in parlaying our expertise in managing high-volume digital auctions, parlaying that expertise into other arenas, including for industrial construction and agricultural equipment. We've actually said that specifically. And as you know, those kinds of expansions have had to clear a very high bar in the past. We invested or acquired National Power Sports Auctions in 2017 and have been very careful or disciplined about extending beyond that before and since. We've known Aaron and Suzy forever, literally before I arrived at Copart myself, and we have tremendous respect for the community and the business that they and their team have built. As you noted, we'll bring capital, expertise and relationships to help grow their business, and they, in turn, provide us with additional expertise in the equipment space, as MPA did in Power Sports as well. So we'll measure growth as we – we’ll measure success or determine success as we do with our own core business. Are we able to grow it profitably to serve more buyers and sellers in a meaningful way over the course of the next five, 10 and 20 years?

Jeff Liaw:

Yeah, I think it's a fair question. And as you know, Bob, we maintain a conservative balance sheet in part so that capital is by and large not the constraint, that when there are opportunities to serve our sellers and buyers better, to grow our platform, to grow our business, that we aren't constrained at the moment, and also so that we can opportunistically acquire real estate and so forth. But the ultimate scarce resource is our own bandwidth, our ability to pursue initiatives successfully. I think you highlighted, really, the priorities for the enterprise, and I don't think we stack rank them necessarily. It's critical to us that we serve our insurance sellers and buyers better over the years to come. We mentioned in passing some of the tools that we're working on to equip them to make better and faster decisions, to yield better economic outcomes. In particular, we've been focused on reducing their advance charges. In many cases insurance companies incur literally thousands of dollars of storage and tear-down costs on cars that any one of us would have known as a total loss at the scene of the accident. And we are committed to developing the tools and processes to enable them to sidestep that entire food chain, just to avoid all those unnecessary costs that ultimately inflate their claims costs as a result. So insurance is critical. The international markets as you noted are critical to us as well. As you know, also, even using one word to capture all of them, it's an oversimplification. Canada and Brazil and Germany and the U.K. and Finland are all radically different from one another, the Middle East and Spain and so forth, but growth there is a priority as well. And then certainly as you know and as you've seen in the unit growth trajectory, the non-insurance domain is important to us, not just in isolation, not just because it is a profitable and growing enterprise, but because we view it as instrumental to serving our insurance companies better as well. The liquidity flywheel is real, and it's our job to make sure that we're spinning it faster with each passing year.

Jeff Liaw:

Thanks Bob.

Craig Kennison:

Hey, good afternoon. Thanks for taking my question as well. I wanted to follow up on Purple Wave. And I'm curious, is there a chance that your real estate footprint brings new value to this platform? It's my understanding they have an on-site auction process, and I'm curious if your real estate is part of the synergy you see.

Craig Kennison:

And are you in a position now to bid on large liquidations? We know there was one, Yellow, for example. Are you able to help them bid on those types of deals? Was that always possible for them, given their footprint?

Craig Kennison:

Thanks. And one for you, Leah, if I could. I think you mentioned incurring some cost as you deployed resources in advance of potential hurricane situations. Even though that didn't produce volume, you still had to incur that cost. Is there a way to quantify the implication there? The impact.

Jeff Liaw:

Craig, I would characterize in the aggregate, it's very substantial, right. Meaning, we could undertake the rigorous accounting exercise of figuring out how much have we spent. Once and on an ongoing basis to maintain ex hundreds of acres of available land in Florida, North Carolina, New Jersey, New York, etcetera. We could quantify the elevated tow expense we pay year round by virtue of operating our own trucks, etcetera, etcetera, and try to capture the full life cycle elevated cost that we incur as a result. But in the end, we just accept that it's a necessary cost of doing business. It helps empower our customers to trust us in a time of need. And if volume suddenly spikes 10x or 20-fold in a given region, that we very much are positioned to handle it.

Jeff Liaw:

Thanks, Craig.

Daniel Imbro :

Yeah. Hey, good afternoon everybody. Thanks for taking our questions.

Daniel Imbro :

Jeff, I wanted to start maybe on the insurance side. Maybe ask another way on the market share, obviously there was a peer talking about some share shifting. I don't think you'll comment on it, but more curious around when you measure success or how you measure your comparative returns to the industry or to peers, are you seeing that gap widen? And if so, is that accelerating with all the investments, the strategic investments you're making?

Daniel Imbro :

Understood. Have to try sometimes. And then maybe a follow-up on the non-insurance side. You've gained, obviously, a lot of market share in the last few years. Into ‘24, obviously that wholesale volume backdrop should improve just as we look across dealer or commercial. I guess, can you talk about incremental cost to serve? Are those vehicles any more cumbersome on the income statement, as you think about any selling costs associated with that volume or would it be a similar kind of incremental flow-through, as we think about just typical insurance volume?

Leah Stearns:

And, Daniel, I would just add that we've spent a lot of time over the last 12 months developing the capabilities across our technology platform to address some of those needs. So the sale as I talked about arbitration policy that is now available at Copart, those are all items that are more familiar to our Blue Car seller – or sorry, the members who are purchasing those Blue Car units. And so we've been forward-thinking about preparing ourselves for that potential future demand.

Jeff Liaw:

Thanks, Daniel.

Bret Jordan :

Hey, good afternoon, guys.

Bret Jordan :

On the international side, could you talk a bit more specifically about what you're seeing in the EU? And obviously Germany, Finland, Spain have been potentially large growth markets. Could you address those?

Bret Jordan :

Okay. And then I guess housekeeping, the non-insurance business, Blue Car is plus 35 and Dealer is plus 13, could you size those two businesses relative to each other within non-insurance?

Bret Jordan :

Right. But relative to each other, is Dealer larger and that's why it grows at a lower rate or are they similarly sized to the unit standpoint?

Bret Jordan :

Okay. I love that you converted the treasury position to cash just on the cash flow statement. Is there anything there?

Bret Jordan :

Okay, great. Thank you.

Operator:

[Operator Instructions]. Our next question is coming from John Healy from Northcoast Research. Your line is now live.

Operator:

John, perhaps your phone is on mute.

Jeff Liaw:

John, I think you're right that the vehicles from financial institutions are in large part repossessions. There are other use cases. And repossessions, of course, in some cases are very straightforward and come straight to us from the financial institution. In other cases, the cars can be trapped at impound facilities. We do think we bring some unique capabilities there in terms of the ability to navigate the vehicle retrieval process. It's both – it’s a combination of technology as well as human expertise. I think we offer both in that regard. Then of course again, the auction platform itself generates strong returns. So in the aggregate that the ability to get the car faster, the ability in some cases to liberate cars that otherwise would be trapped altogether, that may be abandoned, for example, and then to generate good returns on all of the above is what's enabled our growth there.

Jeff Liaw:

Oh, on that, I don't think we would. We would never characterize ourselves as particularly savvy in timing the market. So it's not that we see a rebound or not in the Yellow Iron space. I think Purple Wave is just a company we have profoundly respected and have had a multiple years-long dialogue with how and why deals ultimately come to – by the way, the same was true for NPA. Leading up to June of 2017, we've been in dialogue with them for a decade as well. And what ultimately causes the deal to get over the finish line for two parties to reach that conclusion together is a mix of, of course, objective fact and serendipity and just random timing as well. So it was not our trying to time the market per se. We have acquired a majority stake in the business. But it was important for us and important for Aaron and Suzy that they continue to retain a meaningful economic share as well. And we are committed and they are committed to growing that business profitably for years to come.

Jeff Liaw:

Thanks, John.

Chris Bottiglieri :

Hey, thanks for taking the question. I guess the first one is on the – like where is non-insurance today in mix? I think you've given that a pass. And then two, at the 35% growth in Blue Car sounds really high. Is that just broad-based? I would think a lot of those markets are like cyclically depressed right now. So is it broad-based or did you win like a couple of large accounts that are driving some of that? And then I have a follow-up? Thank you.

Leah Stearns:

The mix.

Chris Bottiglieri :

Yeah, okay. And then the second question is more of a cost question. But when you onboard a larger customer, and this has happened periodically as you've won a lot of accounts over the years, what does this mean for expenses? Do you typically see like an increase in headcount or capacity? Is there anything you’d do differently when you're anticipating a 4% or 5% customer coming on board? How do you handle that? What does that mean for the P&L before that volume arrives?

Chris Bottiglieri :

Yeah, correct, for insurance. If you win a large insurance customer, how does that impact the P&L ahead of time where the volume shows?

Chris Bottiglieri :

Yeah, so I mean that's what I surmised. Okay, thank you so much. I really appreciate it.

Operator:

Thank you. Next question is coming from Ryan Brinkman from JP Morgan. Your line is now live.

Jeff Liaw:

Yeah, the fees, as you know from having followed us for a while, are something we evaluate on an ongoing basis. We don't adhere to a regular schedule, so to speak, because there's not an annual schedule change of any kind. We evaluate the market, we evaluate competitors, and we evaluate our own value proposition and what we think we're bringing to the ecosystem broadly. So we have not in the past commented on this matter specifically. I don't expect that we will any time soon.

Jeff Liaw:

No step function changes. I think it's a matter of further execution on our part. We continue to invest very aggressively in our international buyer base. And there are, as I noted, a host of different competitors that we encounter in this space. We think that our value proposition is principally that we are very efficient at retrieving vehicles, and we are very effective at finding the highest and best use of that vehicle wherever that is in the world. That international buyer base is powerful for that business segment as well. And our online platform, Digital First Sales, I think ultimately identifies the right buyer for that car wherever that person is in the world. So there's no step function change. You'll see, or our sellers will see additional enhancements, additional capabilities, but I wouldn't characterize any of them as being a meaningful step function change.

Jeff Liaw:

Thank you.

Operator:

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Jeff for any further closing comments.

Operator:

Thank you. That does conclude today's teleconference and webcast. Please disconnect your line at this time and have a wonderful day. We thank you for your participation today.

Operator:

Good day, everyone, and welcome to Copart Incorporated Fourth Quarter Fiscal 2023 Earnings Call. Just a reminder, today's conference is being recorded. Before turning call over to management, I will share Copart's statement on Safe Harbor and non-GAAP financial measures. During today's call, the company will discuss certain non-GAAP measures, including discrete income tax items, the effect of extinguished debt and adjustments to income tax benefits related to stock-based compensation. The company has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on its Investor Relations website and in its press release issued at approximately 3:00 PM central time today. The company believes these non-GAAP measures together with the corresponding GAAP measures are relevant in analyzing the company's results and assessing its business trends and performance. In addition, the company's comments today include forward-looking statements within the meaning of the federal securities laws, including management's current views, with respect to trends, opportunities and uncertainties in the company's markets. These forward-looking statements involve substantial risks and uncertainties. For more details on the risks associated with the company's business, we refer you to the section titled Risk Factors in the company's annual report on Form 10-K for the year ended July 31st, 2023, and each of the company's subsequent quarterly reports on Form 10-Q. Any forward-looking statements are made as of today and the company has no obligation to update or revise any forward-looking statements. I'll now turn the call over to the company's Co-CEO, Jeff Liaw.

Leah Stearns:

Thank you, Jeff. Turning to the quarter. Global unit sales increased nearly 10% year-over-year, including an increase of almost 8% in the US and over 22% internationally. For the fiscal year 2023, global unit sales increased over 5%, including an increase of over 4% in the US and over 12% internationally. In the US, our fee units grew about 8% for the quarter and 5% for the year, primarily due to growth across insurance units. Our purchase units declined 3% for the quarter at about 14% for the year. Internationally, our unit growth came from a mix of fee and purchased units, but fee units increasing over 22% in the fourth quarter and over 11% for the year and purchased units increasing nearly 21% for the quarter and 20% for the year. Our US insurance business grew relative to its one and two-year comps of 9% and 19% during the quarter and 7% and 28% for the year, respectively. This is primarily due to the continued recovery in driving activity, increasing frequency -- accident frequency and severity and total loss frequency and share gain. Our auction returns remain strong as we continue to invest in growing our global buyer base by driving member recruitment, registration and activation. As a result, our auctions provide insurance customers with best-in-class liquidity and returns, ultimately providing a more cost-effective way to manage growing claims costs by making it more cost effective to damaged vehicles of the total loss. Turning to our financial results. For the fourth quarter, global revenue increased $114 million or nearly 13%, including a 1% or $6 million tailwind due to currency. For fiscal year '23, global revenue increased $369 million or over 10%, which includes a 1% or $44 million headwind due to currency. Global service revenue increased $126 million or nearly 18% for the fourth quarter and $345 million or 12% for the year, primarily due to higher average revenue per unit and increased volume. US service revenue grew by nearly 16% for the quarter and over 12% for the year, and international service revenue grew over 36% for the quarter and over 11% for the year. ASPs were up slightly year-over-year for the quarter, with U.S. average sales prices up about 2%, and that's compared to an over 11% decrease in the Manheim Index, which ended July at 211.7. Purchased vehicle sales for the fourth quarter decreased $12 million or 7%, with US purchased vehicle revenue for the quarter down 25% and international up 29% for the quarter. For fiscal year 2023, purchased vehicle sales increased $23 million or about 4%, with the US down 15% and international up about 37%. Purchased vehicle cost of sales decreased $12 million or 7.5% for the fourth quarter and purchased vehicle gross profit decreased by about 1%. For the fiscal year, purchased vehicle cost of sales increased $29 million or 5% and purchased vehicle gross profit decreased by $6 million or 9%. Global gross profit for the fourth quarter increased by $76 million or about 20%, and our gross margin percentage increased by approximately 270 basis points to 45.9%. US margins increased to 51.2% and international margins decreased to $21.4. Global gross profit in the fiscal year '23 increased by about $131 million or 8% and our gross margin percentage decreased by approximately 100 basis points to 44.9%. US margins for the year increased to 49.2% and international margins decreased to 24.5%. I'd like to note the decline in our international gross margin reflects approximately $6 million of prior period noncash expenses, which are primarily depreciation and amortization and the effect of marking our acquired inventory to fair market value, which was incurred due to our completion of the final purchase price accounting for Hills acquisition in the UK. The year-over-year margin increase on a consolidated run rate basis was primarily driven by a mix shift in the US, partially offset by inflationary impacts to labor and fuel costs and a slight decline in purchase unit margins internationally. On the cost front, our teams remain focused on optimizing our operational processes by leveraging technology and automation to mitigate the inflationary impacts we've experienced across our labor and transportation costs. In addition, we have recently observed some attenuation in certain expenses, particularly transportation, which was partially driven by reductions in the cost of diesel, which has experienced a 29% decline year-over-year. In addition, we are constantly seeking to optimize our operational processes by leveraging technology and automation, which we continue to expect will drive scalability and efficiency across the organization to continue to help mitigate longer-term cost pressures. Turning to general and administrative expenditures, excluding stock-based compensation and depreciation expenses, G&A spend in the quarter increased $12 million and $23 million for the fiscal year, and G&A as a percentage of revenue was 5.6% in Q4 and 5.1% for the fiscal year 2023. Because of our strong revenue growth and moderate cost increase GAAP operating income increased by more than 20% to over $390 million for the quarter and about 8% to nearly $1.5 billion for the year. Fourth quarter income tax expense was nearly -- was near $72 million, which reflects an 18% effective tax rate. And for the year, income tax expense was nearly $317 million, which reflects effective tax rate of 20%. Finally, fourth quarter GAAP net income increased about 32% to almost $348 million or $0.36 per diluted common share, while GAAP net income for the year increased 13.5% to over $1.2 billion or $1.28 per diluted common share. Our global inventory at the end of July increased 9.5% from last year. And when excluding low-value units like wholesalers and charities, global inventory increased 11%. That is compromised with a year-over-year increase of over 8% for US inventory or over 10% when excluding low-value units and nearly 16% for international inventory. Turning to our liquidity and financial position. Liquidity stood at $3.6 billion as of year-end, which is comprised of $1.4 billion in investments and held-to-maturity securities, $1 billion in cash and cash equivalents and our capacity under our revolving credit facility of over $1.2 billion. For the year, we have generated operating cash flow of nearly $1.4 billion, which is an increase of almost 16% from the prior year. And in addition, during 2023, we invested nearly $517 million in capital expenditures, with over 80% of this amount attributable to our physical infrastructure and more specifically, capacity expansion, which contributes to our ability to serve our customers, while simultaneously reducing our transportation costs and corresponding fuel consumption. Finally, year-to-date, if you take our operating cash flow less CapEx, we've generated over $847 million of free cash flow. Given the strong financial position, we intend to continue to invest in our business to meet our customers' needs. These investments include yard expansion, new yard acquisition, logistics and our technology platform. As Jeff outlined in detail, we believe that these types of historical investments have differentiated Copart as a service provider while ensuring that we have the capacity necessary to serve our industry's future growth. With that, we're concluding our prepared remarks, and we're happy to take some questions.

Bob Labick:

Good afternoon. Congratulations on continued strong performance.

Bob Labick:

First question, I have a related follow-up as well. But could you talk a little bit about the recent announcement of, I guess, a partnership with Hi Marley tech-enabled services in general to help your insurance customers? Maybe talk about what you'll do with that company and if there's other areas of interest where you might be partnering to help your insurance customers?

Bob Labick:

Okay. Super. And then kind of as a related follow-up, we're increasingly seeing AI-based programs just using smartphones for enhanced inspections or valuations of autos, other damage or valuation of the car. Do you see this as an area that you're interested in investing in? And is this a buy, build or potential partnership opportunity for you?

Bob Labick:

Okay. Super. Thanks for that. And then one last one, I'll jump back in queue. You kind of touched on this already, but just -- you mentioned obviously CapEx this year, $500 million, 80% for capacity additions essentially. Where do you stand in terms of your capacity and your yard efficiency based on the capacity in those yards? Obviously, you've had record volumes. You keep increasing that volume. And there's still a lot of room to run with total loss frequency, as you pointed out today as well. So just I know you're investing $400 million in the last year and tons and tons of capital. But how do you see the yards current efficiency? And where do you stand in terms of capacity that you want/need?

Bob Labick:

Okay. Super. Thanks so much.

Daniel Imbro:

Yeah, good evening, everybody. Thanks for taking our questions. Jeff, I want to start on the demand side, maybe the equation. You mentioned these emerging markets need Copart to provide affordable transportation. I'm curious where else can those markets supply vehicles from at scale? There have been some headlines around maybe Asian manufacturers, especially China, exporting more cheap cars. But are you seeing any change in the need for those cars or the availability maybe from outside of your channel that you would compete with in the buyer side?

Daniel Imbro:

Great. And then maybe more near term, looking at the quarter, Leah, I think you mentioned US vehicle sales maybe units were down a few percent, but there was a nice pickup sequentially in the service vehicles. Was that just a customer shifting maybe from principal to agency? And is that still something you see in your new markets? I'm curious, internationally, vehicle sales units were up a lot. Is that just the onboarding of customers that still want you to take principal risk, but the long-term strategy to convert them to agency?

Daniel Imbro:

Just internationally, that continues to grow very quickly. I'm curious if that is more of the long-term strategy? Or if that is a -- helping onboard new customers remove the risk from the seller, but ultimately shift them to agency is the strategy?

Jeff Liaw:

Yes. The purchasing approach is a necessary enabler. I think that was the -- what you were hinting at when it comes to our institutional clients. In the US, a healthy portion of our purchase volume is our direct-to-consumer business, so to speak. This is Cash For Cars in which we buy cars from customers because, to date, it hasn't proven to be a scalable solution to create a consumer-branded Copart. So the better solution for an individual vehicle owner is to buy the car to offer a certain value to them and to sell the car at a profit or so. If we could sell those cars purely on a consignment basis, we probably prefer it. And that certainly holds true for institutional clients as well in the US and elsewhere. In the UK when we entered in 2007, so that's now almost 16, it is 16 years ago when we entered the UK for the first time, the mix there for insurance clients was very heavily principal oriented. Today, we migrated to be a strong majority of those cars being sold on a consignment basis. That is generally our preferred approach, not necessarily because we make more money doing so, but because it is a better alignment of interest with our customers. When we buy cars from them, they want to sell them for the lowest possible value. We want to sell them for the highest possible value, and we're on the opposite side of the trade. When we instead our selling cars on their behalf, we're both rooting for the highest possible outcome and working collaboratively to do so. So it's a better alignment of interest with our institutional clients. It's more conducive to a constructive 20-year relationship than a principal trading counterparty arrangement.

Jeff Liaw:

Thank you.

Craig Kennison:

Hey, good afternoon, and thank you for taking my question. I wanted to circle back on ASPs. I think the surprise for me this year is how strong your ASP has been, despite the drop in used car prices as measured by the Manheim index or other sources. I think you've explained that in part as a function of mix. And I'm wondering if you can help us understand the -- how wide the gap is between your insurance ASPs and your noninsurance ASPs and whether that's the fundamental driver to that outperformance?

Craig Kennison:

And as a follow-up, within your, let's say, dealer service cars or Copart Blue, are you continuing to mix up, in other words, earn the right to sell a more expensive car? And is that in any way a driver to ASP?

Craig Kennison:

Got it. Thank you.

Operator:

[Operator Instructions] Our next question comes from Bret Jordan with Jefferies. Please proceed with your question.

Jeff Liaw:

I think it's similar, Bret. So, yes, they like the arbitrage or repair costs, but and we're going to pull this up and double check at real time. But I think it's directionally similar. Also like these cars, once brought to the marketplace, that's the point we've made in the past about the flywheel of liquidity. We bring buyers -- we bring vehicles to the buyers and therefore, buyers of the vehicles. And those buyers in turn development an interest for the cars we incrementally bring to the auction as well.

Leah Stearns:

That Idalia happened in the first quarter of '24 and so that's not reflected in these numbers.

Leah Stearns:

Yes. Any costs associated with servicing the hurricanes that occurred in this quarter would impact to the quarter.

Jeff Liaw:

It is, but also to what extent that's just the cost of doing business in 2023 and beyond, right? So we'll talk about next quarter next quarter. We definitely incurred some mobilization costs in preparation for a storm that didn't ultimately materialize. Now I think to be fair, if you look back to major storms like, Harvey, let's go all the way back to 2017, a lot of the massive expenses would be towing costs, temporary leases, short-term leases of racetracks and so forth. In this case, we haven't incurred those kinds of costs in part because we deployed the capital to own the land to be ready for it. So we would likely not have entered into meaningful emergency leases in this case, even had the storm arrived. And as for the towing, the towing largely never materialized at all because the cars weren't there.

Leah Stearns:

Sure. With respect to the current investment strategy, given the fact that we are earning in excess of 5.25 on government T-bills that are short duration and tenure, we are currently comfortable using that until we find a higher and better use, and we continue to look at opportunities to invest. Everything across the spectrum of additional technology, land, logistic opportunities to bring down cost and obviously looking at ways to enhance the broader business that we have. So I don't know, Jeff, do you want to add?

Bret Jordan:

Right. Thank you.

Operator:

Thank you. Our next question comes from the line of Ryan Brinkman with JPMorgan. Please proceed with your question.

Jeff Liaw:

Yes, I think that's an appropriate question. And when we consider areas in which we would expand strategically, we certainly always start with the question, what are we good at and where can we deploy those capabilities most profitably? And I think what we know we're good at is managing a high-volume digital auction platform, which we've done now for literally 20 years. So we started that in 2003 and have refined our approach repeatedly over the years and think we have a best-in-class online digital real-time auction platform, part one. Part two, I think we're good at managing the complex physical logistics of moving cars around, literally millions of vehicles that we retrieve from various places, including homeowner premises, dealers, repair shops and the like and deploying all of the employees and subcontractors to retreat them. We think we're good at managing complex regulatory environments as well. So we have 50 different DMVs, a multitude of different countries that we serve that have different title processes and so forth, and we can navigate those universe as well. And so knowing all of that, we consider strategically how do we deploy those capabilities. You know, having followed us for years that we are careful about that. We acquired National Powersport Auctions in 2017, which sells wholesale motorcycles. And we have not expanded beyond the perimeter of Copart except to expand ourselves into new countries very meaningfully since then. So all of those investment opportunities would face a very high bar for us to pursue. In the specific question you raised, there are markets in which we participate today. For example, the US in which the dismantling industry and the use of alternative parts is a well-trodden path already. The insurance industry, the repair industry here is well accustomed to that. And so there are many companies, including public companies that are in that business today, I think it's unlikely we would ever ourselves enter that space in part for the reasons you articulated, which is that we are the neutral intermediary that is optimizing auction proceeds for our customers. And if the best possible economic outcome for that car is dismantled, the dismantle will buy it. If the best possible outcome for that car is that it is driven again in the US or in Poland or in Nigeria, then our auction will find that buyer as well. As you noted, in this case in the UK, perhaps elsewhere in Europe, there has been less -- has been less penetration in alternative parts utilization. And to help turbocharge that some of our customers have made that specific request that they would like us to assist them in that. They don't -- I don't believe they expect us ultimately to dismantle a majority or anywhere close to a majority of the vehicles. The point is that having that capability as well at their request, right, we are very happy, as you know, to be the auction intermediary and to sell the car first and foremost to a third party wherever that third party may be, whether it's in the UK or elsewhere. But in this case, we'll meet our customers where they are and where they were is specifically asking us to take this on, and we're happy to do it.

Jeff Liaw:

It's possible. I misunderstand your question, but we certainly have expanded into and or?

Jeff Liaw:

We do, I mean, in some respects, compete with them as it stands today. We are trying to earn the right to sell those cars from financial institutions, from corporate fleets, rental car fleets and the like. So we compete with many industry participants, including the traditional physical auction houses you have in mind. So that's a reality and has been for a long time, call it 3/4 of our business or thereabouts is insurance and the balance is not. And so if somehow the insurance -- if somehow we were to separate the businesses, which for all the reasons you've heard on this call today, we never would. But our noninsurance business itself would be a large-scale auction house without insurance whatsoever. Now so it turns out that having the two combined massively enhances the value proposition for both sides of it as well.

Operator:

Thank you. Our next question comes from Craig Kennison with Robert W. Baird. Please proceed with your question.

Jeff Liaw:

Well, there's no expectation that we're going to divest it. We don't generally take on initiatives like that intending to -- for them to be temporary. But intellectually, I think the reason you struggle with it, Craig, is you are natively a US analyst and you are accustomed to decades of an industry in which the auction houses and the dismantlers and the repair shops are altogether separate pieces of the value chain, right? You've never seen them intermingled, and that's how we've operated now for 40 years and change. We've always preferred the notion of pure neutrality, and we'll sell the car to whomever values it -- to whoever, pardon me, values the car, the most whatever they're going to do with. In the UK, we've heard loud and clear, and it's not a one-off request, right, it is a near consensus view among the industry that there is value in their salvage auction provider, likewise providing access to dismantle parts. And so we want to address that head on. Ultimately, the customers' preferences prevail. We can certainly articulate to them why we think the circular economy can be equally supported with third parties doing the dismantling, but we are also happy to do it if that's what they would like us to do.

Jeff Liaw:

I think it remains to be same. There are a lot of different forces at work here, including divergent views about alternative parts utilization. So there are some countries you can imagine in which the OEMs are very influential and they're able to preference insurance companies and repair shops to use first fit parts. There are other countries in which the carbon reduction initiative is more critical. And therefore, the use of recycled parts is more important. So I don't think it's the UK alone, but it was certainly the UK most acutely, but this is also a dynamic game, right? There's no question that preferences will change over the course of the next year three and five in many of the countries in which we do business.

Jeff Liaw:

Okay. Thanks, Craig.

Jeff Liaw:

Great. Thanks, everybody, for joining us for the fourth quarter and we'll talk to you after Q1. Thank you.

Operator:

Greetings and welcome to the Copart Incorporated Third Quarter Fiscal 2023 Earnings Call. Just a reminder, today's conference is being recorded. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Before turning call over to management, I will share Copart’s statement on Safe Harbor and non-GAAP financial measures. During today's call, the company will discuss certain non-GAAP measures, including adjustments to income tax benefits related to stock-based compensation. The company has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on its Investor Relations website and in its press release issued at approximately 3:00 p.m. central time today. The company believes these non-GAAP measures together with corresponding GAAP measures are relevant in analyzing the company's results and assessing its business trends and performance. In addition, the company's comments today include forward-looking statements within the meaning of the federal securities laws, including management's current views, with respect to trends, opportunities and uncertainties in the company's markets. These forward-looking statements involve substantial risks and uncertainties. For more details on the risks associated with the company's business, we refer you to the section titled Risk Factors in the company's annual report on Form 10-K for the year ended July 31, 2022, and each of the company's subsequent quarterly reports on Form 10-Q. Any forward-looking statements are made as of today and the company has no obligation to update or revise any forward-looking statements. I'll now turn the call over to the company's Co-CEO, Jeff Liaw.

Leah Stearns:

Thank you, Jeff. Turning to the quarter. Global unit sales [Technical Difficulty] primarily due to growth across our insurance business and our purchase units declined 21%. Internationally, our unit growth came from a mix of fee and purchased unit, which increased over 11% and 14% respectively. During the quarter, our U.S. Insurance business grew relative to its one and two year comps of 6% and 25% respectively. This was primarily due to the continued recovery in driving activity, increasing accident frequency and severity, total loss frequency and share gain. Our auction returns remain strong as we continue to invest in growing our global buyer base by driving member recruitment, registration and retention. As a result, Copart's auctions provide our insurance customers with best-in-class liquidity and returns, ultimately providing a more cost effective way to manage growing claims costs by making it more cost effective to deem damaged vehicles, a total loss. Turning to our financial results. For the third quarter, global revenue increased $82 million or nearly 9%, including a 1% or $11 million headwind due to currency. Global service revenue increased $81 million or nearly 11% for the third quarter, primarily due to higher average revenue per unit and increased volumes. U.S. and international service revenue grew nearly 11% and 9% respectively for the quarter. ASPs were down slightly year-over-year with U.S. average sale prices is down about 1%, compared to over 4% decline in the Manheim index, which ended April at 230.8. Purchase vehicle sales for the third quarter increased $1 million or nearly 1% with U.S. purchased vehicle revenue for the quarter, down 27% and international up 49% for the quarter. During the quarter, our purchased unit activity in the U.S. remained low as we managed our principal unit exposure in a softening vehicle pricing environment. We continue to believe that this portion of our business provides an opportunity for our future growth and is an important enabler for us in new adjacent asset class and geographies. Purchase vehicle cost of sales grew more than $2 million or 1.4% in the third quarter. As a result, purchased vehicle gross profit decreased by $1 million or approximately 8% during the quarter. Global gross profit in the third quarter increased by about $47 million or 11%, while our gross profit margin percentage increased by approximately 100 basis points to 47.3%. U.S. margins increased to 52.2% and international margin decreased to 25.5%. The year-over-year margin increase on a consolidated basis was driven primarily by vehicle mix shifts in the U.S. towards higher margin consignment units and was partially offset by inflationary impacts to labor and fuel costs and vehicle mix shifts internationally where we had a greater percentage of revenue coming from lower margin purchase units. As noted previously, over the last three years, we have seen pressures from inflation primarily across labor and transportation costs. More recently, we have observed some attenuation in these expenses, particularly around transportation, which was partially driven by reductions to the cost of diesel, which has experienced a 20% decline year-over-year. In addition, we are constantly seeking to optimize our operational processes by leveraging technology and automation, which we expect will drive efficiency across the organic and help mitigate longer term cost pressures. Finally, while we experienced increases in labor costs over the last 12 months, we have viewed a significant portion of this as a direct investment in our employees and as an investment to support best-in-class service for our customers. We believe we can continue to increase margins and return on capital over time as we pursue our consistent investment discipline, focusing on our real estate, logistics and technology assets to ensure we are positioned to scale appropriately to meet the demand of our customers. Turning to general and administrative expenses excluding stock-based compensation and depreciation. G&A spend in the quarter increased $2 million. I'd like to highlight that last year we mentioned a non-recurring legal expense in Q3 excluding the impact of this, G&A would have been up $9 million, while G&A can be volatile from period-to-period. The longer term trends show that we are benefiting from the scale of our corporate infrastructure. Its effect can be observed on the downward trend of our G&A as a percent of revenue, which was 5.1% in Q3. The combination of our strong revenue growth and moderate cost increases drove an increase in GAAP operating income by more than 12% to $419 million for the quarter. Third quarter income tax expense was $90 million, which reflects a 20% effective tax rate. Finally, third quarter GAAP net income increased about 26% to $350 million or $0.72 per diluted common share. Our global inventory at the end of April increased 4% from last year and when excluding low value units like wholesalers and charities, global inventory increased by 7%, that is comprised of a year-over-year increase of over 2% per U.S. inventory or 5% when excluding low value units and nearly 15% for international inventory. Turning to our liquidity and financial position. Our liquidity stood at $3.3 billion as of quarter end, which is comprised of $2.1 billion in cash and cash equivalents and our capacity under our revolving credit facility of over $1.2 billion. Year-to-date, we have generated operating cash flow of $1 billion, which is an increase of over 16% from the prior year period. In addition, we have invested nearly $347 million in capital ministers with over 71% of this amount attributable to our physical infrastructure, primarily capacity expansion. Finally, year-to-date, if you take our operating cash flow less CapEx, we've generated nearly $660 million of free cash flow. Given our strong financial position, we intend on continuing to invest in our business for growth and to meet our customers' needs. These investments include yard expansion, new yard acquisition, logistics and our technology platform. And as Jeff outlined in detail, we believe that these types of historical investments have differentiated Copart as a service provider, while ensuring that we have the capacity necessary to serve our industry's future growth. And that concludes our prepared remarks. We'd be happy to take some questions.

Bob Labick:

Good afternoon. Congratulations on another great quarter.

Bob Labick:

I just wanted to start, you touched on this a little bit, but as you successfully keep expanding into whole car, particularly dealer and then the blue car, the commercial areas. Are there like new features or new products that you're focused on adding? And then is there an opportunity there via M&A? Or is this generally something -- generally build these things out organically and how are you thinking about those two things given the cash balance you've touched on and kind of the new a chase an area that you're rapidly expanding into? Are there opportunities for M&A or how are you thinking about it?

Bob Labick:

Okay, great. And then just kind of sticking with this expansion into whole car and whatnot. Are the blue car particular buyer base the same as your core buyers or are they different? And are you marketing to these new buyers or are they finding you? How are you kind of growing the buyer base, which I know obviously benefits everyone as you go, but how is it coming, is it organic? Are you getting them or are they coming to you?

Bob Labick:

Got it. Super. Okay. I'll jump back in queue. Thanks.

Operator:

Thank you. Our next question is from Dan Imbro with Stephens. Please proceed with your question.

Jeff Liaw:

Daniel, I think you mean our members and buyers specifically. And to them, there are, of course, other places to buy vehicles, including some of the other well-known auction platforms. Our liquidity, I think, has grown over time, we've become a more compelling platform for them to enroll in and to pursue vehicles than we were 10 years ago. The one correction or modification I'd make to your comments is it's the expansion into the international arena has not just been in the past couple of years. That's been a decade-long endeavor. It so happens that the evolving mix of vehicles driven in part by total -- rising total loss frequency, which means the cars are better and less damaged as well as our pursuit of cars from noninsurance sellers has naturally grown that buyer base. I'd say in terms of -- in the baseball analogy, we're in the first or second inning because the fastest-growing economies are still -- they will continue to outpace growth in Western Europe, the U.S., Japan, Canada, et cetera, the established economies where people have vehicles will increasingly provide those vehicles perhaps older, perhaps a damage perhaps neither to the economies that demand more mobility. Cars divided by population remains very high in the origin countries where we operate our auctions and remains very low in the destination countries that buy them.

Jeffrey Liaw:

Yes. I draw a distinction there between expanding internationally in the sense that we are operating auctions in a new country. So now 16-years ago, if I have my date straight, we entered the U.K. and our investment there has been very capital intensive in the sense that we've had to acquire land and build systems and hire people and acquire loaders and trucks and so forth to serve that market. That is by its nature, capital-intensive, ultimately rewarding as well the capital intensive at the outset. As far as attracting new buyers and buyers from new countries, that is not per se capital-intensive. It does require meaningful investment in resources in the form of our internal bandwidth, it also requires spending on SEO and SEM and third-party expenditures of that sort, but not capital in the sense that you're describing it.

Leah Stearns:

Yes, that definitely was a benefit on the sequential margin improvement. So I would continue to expect that as diesel prices remain low and then we get the benefit of some of our investments around our logistics and transportation capabilities that we would continue to see that be a benefit. Certainly, the labor and inflationary pressures on towing costs around labor availability. That was a big pressure about a year ago, so we're beginning to see the other elements of the cost of transportation come down, which is nice to see, and that should flow through from a margin perspective.

Dan Imbro:

Appreciate all the color. And guys best of luck [Indiscernible].

Operator:

Thank you. Our next question is from Craig Kennison with Baird. Please proceed with your question.

Leah Stearns:

Yes. No. So we saw ASPs down across the board at about 1.4%. In the U.S., that was down 1.1%. And that was compared to a 4% decline on the Manheim Index. And again, most of that is driven by mix. It's hard to obviously pinpoint the exact drivers of it. But I think what's important to appreciate is that we certainly have an evolving mix of vehicles that are coming through our auctions quarter-to-quarter, and there's a fairly static set of units that are being measured through that Manheim Index. So I do think there is less of a correlation today than what you've historically observed between those two.

Jeff Liaw:

I'd say in terms of the repo question, I think a modest increase, not yet step function changes in that regard. I think though vehicle values in powersports and light vehicles, in general, have softened. I think for the most part, loans remain in the money, though that trend can change over time as well. What was your next question -- the Harley question. The captive marketplace is not having per se affected us. I think the business continues to perform well, and the sources of bikes and other related powersports continues.

Jeff Liaw:

Thanks, Craig.

Chris Bottiglieri:

Hey, thanks for taking the questions. First one, I might kind of follow-up with your comment on the -- from your trade show that you did with the insurers. So I want to think there was the application of the several thousand dollars that are being spent on cars that are totaled anyway, not sure what percentage of time this happens, but it sounds like that's nearly half the proceeds. So I guess that the insurance companies did kind of use your advanced data to make decisions quicker. Like what would the impact on total loss rates be? Like what's the elasticity of getting 50% lower cost on relative to revenue, what would that mean?

Chris Bottiglieri:

Got you. And then I just want to ask about the used car pricing has been volatile more recently. I mean it seems like you got to hit this inflection point where total loss rates were starting to pick back up again as car prices softened. I think we went through like a multi-month period where car prices actually started to appreciate again, now we're depreciating. But what's the net of all that? Like do you think we've just kind of hit a trunk corner now with total loss rates kind of just keep sequentially building? Or is there any risk that you see as like a small air pocket just given the appreciation we saw?

Chris Bottiglieri:

Got it, okay. Thank you.

Bret Jordan:

Hey, good afternoon, guys.

Bret Jordan:

Quick question. I think you guys called out some of your services, including loan payoff. And just on the loan payoff product, I think your peer was having something that's sort of automated and integrated into the insurance and bank systems that didn't involve human interaction. Is that something that is the same as what you're offering? Or is that something you're developing that's automated?

Bret Jordan:

Great. And then a quick question on international. I think you saw 12% unit growth. Could you talk about what markets is Germany gaining traction? Is it the addition of Finland and Spain? Maybe give us some puts and takes on the international volumes.

Bret Jordan:

Okay, great. Thank you.

John Healy:

Thanks for taking my question. Just wanted to talk a little bit about the Blue Car opportunity. As you look at that business, do you see it running complementary kind of side by side with the legacy insurance business? Or do you run it as kind of one business? Just from a technology standpoint or just from a day of auction standpoint, like how are you thinking about the actual auction event with dealers engaging? And is there any sort of thought process about what the incremental spend in terms of technology or platforming that we might think about just kind of over the next few years? Thanks.

John Healy:

Sure. No, that makes sense. And then just one kind of question on whole car as well. We're roughly 12 months out since the ADESA deal with Carvana closed I always thought of those guys as the big repo house in the auction world. Curious to know if you're seeing any, I don't know, RFP upticks or opportunities that could be sizable on that front? Because when I think about where everyone is going with their platforms in real estate, it seems like you guys might be in a position to have a high value-added mousetrap there?

John Healy:

Okay, thank you.

Operator:

Thank you. Our next question is from Gary Prestopino with Barrington Research. Please proceed with your question.

Leah Stearns:

Yes. Units were up 4%, and they were up I believe, 7% excluding low value, and they were up 12% -- or 15% internationally. Sorry, 12% internationally.

Leah Stearns:

Sorry, can you repeat that, Gary?

Leah Stearns:

Combined was up 5%.

Jeff Liaw:

I think it's more evolutionary than not in the sense, Gary, that we talk to our customers literally every day. So there aren't going to be any new bombs dropped an event like that. But I think it's a nice opportunity to crystallize some of that thinking and to gather more consensus views on what the priorities are. And so for sure, cycle times, for sure, salvage returns. And I think as I noted in the introductory remarks, people pressure on their front that leads them to want to lay more of the work on Copart to have us perform more services for them. That's probably the biggest emerging theme we've seen over the past couple of years. So we have virtual inspection services that we've seen a very dramatic uptick in the adoption across many of our customers.

Operator:

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Jeff Liaw to close.

Leah Stearns:

Thank you.

Operator:

Good day, everyone, and welcome to the Copart, Incorporated Second Quarter Fiscal 2023 Earnings Call. Just a reminder, today's conference is being recorded. For opening remarks, I would like to turn the call over to Jeff Liaw, Co-CEO of Copart Incorporated. Please go ahead, sir.

Leah Stearns:

Thank you, Jeff, and good morning, everyone. I'd like to start by saying how excited I am to join Copart. For me, the opportunity was compelling for a number of reasons, including the collaborative and entrepreneurial culture, Copart's enduring focus on delivering best-in-class service to our customers, the business' natural position at the center of the circular economy in automotive, as well as our solid financial foundation. I believe that with these factors, Copart is positioned to deliver exceptional results for our customers and create enduring value for our shareholders over the long term. And I couldn't be more energized to help drive these objectives forward. Turning to the quarter. Global unit sales increased 4.7% year-over-year, including an increase of nearly 4% in the U.S. and over 10% internationally. In the U.S., our fee units grew about 5%, primarily due to growth across our insurance business and our purchased units declined 23%. Internationally, our unit growth came from a mix of fee and purchased units, which increased nearly 9% and over 23%, respectively. During the quarter, our U.S. insurance business grew relative to its one and two-year comp of 9% and 35%, respectively. This was primarily due to the continued recovery in driving activity, increasing accident frequency and severity, total loss frequency and share gains. Our auction returns remain strong as we continue to invest in growing our global buyer base by driving member recruitment, registration and retention. As a result, Copart auctions provide our insurance customers with best-in-class liquidity and returns, ultimately providing a more cost-effective way to manage growing claims costs by making it a more cost-effective way to deem vehicles a total loss. Turning to our financial results. For the second quarter, global revenue increased $89 million or just over 10%, including a nearly 2% or $15 million headwind due to currency. Global service revenue increased 79 million or over 11% for the second quarter, primarily due to a higher average revenue per unit and increased volume. U.S. and international service revenue grew nearly 12% and 5%, respectively, for the quarter. ASPs were flat year-over-year for the quarter, with U.S. ASPs up nearly 1% compared to a nearly 13% decline in the Manheim Index ending January at 224.8. Purchased vehicle sales for the quarter increased $11 million or nearly 7%, with U.S. purchased vehicle revenue for the quarter down 15% and international up 42% for the quarter. Our reduced purchased unit activity in the U.S. during the quarter was a result of a proactive approach to mitigate our principal unit exposure in a softening vehicle pricing environment. We continue to believe that this portion of our business provides an opportunity for future growth and is an important enabler for us in new adjacent asset classes and geographies. Purchased vehicle cost of sales grew more than 14 million or 10% in the second quarter. As a result, purchased vehicle gross profit decreased by 4 million or approximately 24% during the quarter. Global gross profit in the second quarter increased by more than 23 million or 5.7% while our gross margin percentage decreased by approximately 200 basis points to 44.6%. U.S. margins decreased to 48.9% and international margins decreased to 24.3%. The year-over-year margin decline on a consolidated basis was driven primarily by cost inflation and towing and labor of about 200 to 250 basis points. Over the last two years, our direct costs have seen pressures from inflation, primarily related to labor and fuel. We will continue to manage these costs with a long-term perspective. We view the increase in labor costs as a direct investment in our people, which will translate into best-in-class service for our customers. We constantly seek to optimize our operational processes through technology and automation. Finally, we are committed to investing in our real estate, logistics and technology assets to ensure we are positioned to scale appropriately to meet the demand of our customers. We believe with this approach, we can increase margins and returns on capital over time. Turning to general and administrative expenses, excluding stock-based compensation and depreciation. G&A spend in the quarter increased $5 million or 12%. While G&A can be volatile from period to period, over the longer term we anticipate G&A to decline as a percentage of revenue, as we benefit from the scale of our corporate infrastructure. As a result of our strong revenue growth, offset by the cost increases experienced in our business, our GAAP operating income increased by more than 5% to 366 million for the second quarter. Our second quarter income tax expense was 83 million, which reflects a 22.1% effective tax rate. And finally, second quarter GAAP net income increased about 2% to 294 million or $0.61 per diluted common share. Our global inventory at the end of January decreased 1% from last year. And when excluding low value units like wholesalers and charities, global inventory increased by 1%. That is compromised of a year-over-year decrease of 3% for U.S. inventory, which is actually down less than 1% when excluding low value units and an increase of 12% for our international inventory. Turning to our liquidity and financial position. We remain in a solid position with respect to liquidity, which stands at 2.9 billion as of the end of the quarter, which is comprised of 1.7 billion in cash and cash equivalents and an undrawn revolving credit facility with capacity of over 1.2 billion. Year-to-date, we have generated operating cash flow of 500 million which is an increase of nearly 12% from the prior year period. In addition, we have invested nearly 257 million in capital expenditures with over 80% of this amount attributable to our physical infrastructure, primarily capacity expansion. Finally, year-to-date, if you take our operating cash flow less CapEx, we've generated more than 243 million of free cash flow. Given the strong financial position, we intend on continuing to invest in our business to meet our customers' needs. These investments include yard expansion, new yard acquisition, our logistics and technology platform. We believe that these types of historical investments have differentiated Copart as a service provider, while ensuring that we have the capacity necessary to serve our industry's future growth. With that, I've concluded my prepared remarks. And I'll turn the call over to Maria, and we're happy to take your questions.

Stefanos Crist:

Good morning. This is Stefanos Crist calling in for Bob. Thanks for taking our questions.

Stefanos Crist:

You touched on this during the call, but could you provide a little more detail on the cost structure of the yards, how it's changed since pre-COVID and maybe how much of those changes are permanent versus temporary?

Stefanos Crist:

That's great. Thank you. Just a follow up. Can you just talk about what Copart's sweet spot is for non-salvage cars in terms of age and miles driven, and if you see that evolving any direction over the next five years?

Stefanos Crist:

Great. Thanks so much.

Craig Kennison:

Hi. Good morning. Thanks for taking my questions and congratulations Leah. I had a housekeeping question first. Just what was the U.S. insurance volume growth ex-Ian?

Craig Kennison:

I think you mentioned Ian was 70,000 cars, but did you get more cars post the quarter last time?

Craig Kennison:

Post your last conference call when you said you had about 70,000 car assignments.

Craig Kennison:

Perfect. And then sort of a big picture question for you on AI making headlines across many industries. I'm just curious in your world, how you see AI impacting Copart since you guys like to think in decades?

Craig Kennison:

Great. Thank you.

Chris Bottiglieri:

Thanks for taking the questions. First of all, I wanted to follow up on kind of what's the non -- can you maybe bifurcate the non-insurance a little bit further? If I heard you right, you said 20% what you've now defined as Copart Blu, which is a combination of your dealer consignment and the commercial channels. I assume your kind of historical legacy shared municipalities, it sounds like there's a bad actor being price there that might be offsetting some of that growth. Can you just give us a sense for like the bifurcation of the two would be the first question?

Chris Bottiglieri:

Got you. Okay, that's helpful. And then just a bigger picture question. One of your closest peers that's having to merge with an auctioneer of heavy machinery, has this led you to rethink the opportunity at all for TAM expansion in your business? Do you think these businesses are synergistic? Is there a place for Copart in those types of end markets? Just kind of curious how you think about TAM expansion generally speaking?

Chris Bottiglieri:

Okay, very helpful. Thanks, Jeff.

Bret Jordan:

Hi. Good morning, guys.

Bret Jordan:

On that quick discussion of that other company's transaction, the buyer is certainly making a pitch that there are services that could be offered in the salvage space that would sort of add another lever on the revenue side. Do you see that? Is there an opportunity? Obviously, if you're selling scrap cars to LKQ, they don't want them waxed first. But are there things you could be doing as you -- whether it's Blu or Dealer Services where you could attach ancillary services?

Bret Jordan:

Okay. And then a quick question on that. On the supply side, which sellers most dependent upon you being the purchaser as opposed to an agent? Does that most impact -- obviously, Cars Direct is probably the most, but are Blu versus Dealer Services, are those sellers expecting you to own the car as opposed to just consigning?

Bret Jordan:

And Germany is really not -- is Germany still mostly agent or --?

Bret Jordan:

So I guess does the temporary move away from or maybe cutting back on purchased vehicles impact Germany in the short term, or is it not meaningful enough to really move the needle?

Bret Jordan:

Okay, great. Thank you.

Operator:

[Operator Instructions]. Our next question comes from Joseph Enderlin with Stephens Inc. Please proceed with your question.

Jeff Liaw:

No problem.

Jeff Liaw:

From here, yes. Precisely when, I think it's harder to forecast. That's a function of the variables we talked about, which is the value of used cars and therefore ACV or pre-accident value as the European call it, and what the car is worth before it's in an accident, what happens to repair costs and rental car costs and the like. So I think we have total conviction, the total loss frequency revert to historical levels and continue to grow from there. The precise trajectory from today until that point I think is more difficult to forecast. But this is an unabated 40 or 50-year trend with the exception of the past 18 to 24 months. And so I think we do believe that it will revert.

Jeff Liaw:

Do you mean within the quarter?

Jeff Liaw:

I don't even know we know offhand. I think the prices I think remained quite strong at Copart and have meaningfully outperformed at least the headline numbers we're aware of for the Manheim used vehicle value Index. I don't know that there was any meaningful intra-quarter volatility of cohort.

Jeff Liaw:

Thank you.

Gary Prestopino:

Hi. Good morning, everyone. I just want to get a couple of statistics go over correctly. Units processed, Leah, were up 7% globally. Is that correct?

Gary Prestopino:

5%, okay. And then getting back to ASPs, I didn't quite get what you said on ASPs as you went through all these numbers. What were ASPs up year-over-year and sequentially? Do you have that?

Gary Prestopino:

Okay. So we're starting to move down 3%. Okay. And then lastly, with total loss ratios, you said, Jeff, they were 19.7% in Q4?

Gary Prestopino:

Versus 17.4, but a lot of that was flood vehicles, right, that led to that sequential increase?

Gary Prestopino:

Okay. Just for comparative purposes, what were total losses, the ratios running in Q4 of '21? Do you have that handy?

Gary Prestopino:

Okay. And then is there -- with the non-insurance business that you're doing, it's always been kind of at about 19%, 20% percentage of vehicles. How much has that moved up over time as you've grown this business?

Gary Prestopino:

Okay. Thank you.

Operator:

There are no further questions at this time. I would now like to turn the floor back over to Jeff Liaw for closing comments.

Operator:

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Good day everyone, and welcome to the Copart Incorporated First Quarter Fiscal 2023 Earnings Call. Just a reminder, today's conference is being recorded. For opening remarks, I would like to turn the call over to Gavin Renfrew, Vice President of Global Accounting of Copart Incorporated. Please go ahead, sir.

Jeff Liaw:

Thank you, Gavin. Good morning and welcome everybody to our first quarter call. We're pleased to report strong results for the first quarter of fiscal 2023 in the context of a complex global economic backdrop and a significant weather event will describe in more detail today. Many of the unusual conditions that we've described on our previous calls persist today, though with some apparent stabilization, including new vehicle shipments shortages, high used car prices in a broadly inflationary environment. Gavin and I will provide our customary data points throughout our call on these themes and others, but I wanted to start by highlighting our recently published inaugural ESG report. If you haven't read it already, I'd encourage you to do so. In that report, we address the topic of sustainability across a number of different dimensions, environmental sustainability, global economic empowerment, enterprise sustainability, and community sustainability and recovery. Events of the past few weeks have in particular underscored our commitment to the fourth of these pillars. But I'll take a moment to briefly summarize the first three. On the first of these subjects, environmental sustainability. Copart is a keystone enabler of the circular economy. Our business enables the reuse and recycling of vehicles, their components and materials substantially reducing what would otherwise be the carbon footprint of the transportation sector. In fact, upon tabulating our Scope 1 and Scope 2 emissions, as well as the carbon emissions that are averted by our marketplace, we estimate that we save a hundred times as much in carbon dioxide equivalents as we emit in our business. On the second aspect of sustainability, global economic empowerment. Our business is instrumental in improving access to mobility for residents of developing economies. In fiscal 2022 alone, we sold vehicles to members in 160 countries with approximately one quarter of our volume purchased by members in emerging economies as defined by the United Nations. While those of us on this phone call today, like we take physical mobility for granted, it is undoubtedly a critical enabler for access to education, healthcare, economic advancement, and leisure worldwide. And we're proud to play an important role in increasing its availability for people around the world. On the subject of enterprise sustainability, we make strategic decisions with a 20-year horizon. As a result, we own the vast majority of our real estate, ensuring its availability for our business and our customers for generations. We maintain a strong balance sheet to ensure that we have the flexibility to invest in our business and our customers' success regardless of economic conditions at the time. And finally, we are committed to our role in ensuring the sustainability and health of the communities we serve, most notably in our rapid response to major weather events. In late September of this year, Hurricane Ian made landfall in Florida. On a unit volume basis, Ian will be the single largest storm event in Copart's 40-year history. This category for storm included heavy rainfall and winds in excess of 150 miles per hour and cut a path through the heart of the state. Ian proved to be a storm of historic proportions. The robustness of our response was the fruit of seeds we've been planting for years. As you've heard us articulate at length on prior calls in anticipation of increasing storm frequency and severity, we've made proactive investments in land, technology, heavy equipment, trucks, drivers, and personnel in the form of our dedicated cat response team. In this instance, of course, our investments paid off perhaps in economic efficiency, yes, but most importantly, in substantially enhancing the service we can provide our clients and their customers in their most acute times of need. We deployed more than 800 Copart employees from around the country to the affected areas, many while the hurricane still lingered over the state. In just the first 10 days of the event, we retrieved over 15,000 units and unprecedented efforts enabled both by our third-party subhauler network, as well as our company owned tow trucks, transporters, loaders, and Copart employed drivers. From the first day of this event, we leveraged nearly 350 acres of Copart owned dedicated cat only storage capacity within the affected region, allowing us to quickly receive an inventory, nearly 70,000 units through the end of the quarter. In turn, expediting the settlement process for policyholders who are eager for economic relief. To put our catastrophic storage capacity in context, the 1,500 acres of land that we own for the purpose of catastrophic storage alone represents as much land as another major provider of insurance auction services owns in total. As we've noted following major storms in the past, we view our pre-storm preparations and our robust response as investments in the strong and durable partnerships we enjoy with our insurance sellers. We tend to experience operating losses in major weather events. Hurricane Ian in the first quarter is no exception with $25 million in extra cost incurred by our business, offset by $9 million of revenue in the period. Our elevated cat related expenses include premiums paid for towing and transport, logistics, travel and lodging, and increased overtime and labor expenses for our team. As such, in the quarter, the impact of Hurricane Ian was approximately 200 to 250 basis points of gross and operating margin rate compression. Finally, in November we completed a two for one stock split, our six such split since 1999. We view this split as an opportunity to improve the liquidity of our stock, making it more accessible to our employees and retail investors. And with that, I'll turn it over to our VP of Global Accounting, Gavin Renfrew, to walk through some key operating and industry statistics and our fourth quarter financial results.

Operator:

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question will be coming from the line of Bob Labick with CJS Securities. Please proceed with your questions.

Jeff Liaw:

Thanks Bob. Good morning.

Jeff Liaw:

Yeah. And so, excluding the hurricane, Bob, I think in broad terms, certainly costs are elevated relative to a year ago. I think your question specifically on sequential trends, I think we're seeing stabilization in many cases. Of course, gasoline is an easily trackable proxy for some of those underlying costs. Diesel prices remain elevated, certainly relative to a conventional gasoline. But broadly speaking, we've seen stabilization in those underlying variables.

Jeff Liaw:

Yes. So, we are -- we expect to continue investing in land very substantially, both for day to day operations as well as for catastrophic readiness. You've seen that quote elevated investment profile since the spring of 2016. And we continue to aggressively pursue land to support -- to support our core business as well as to address the spikes that, of course, occur in the context of catastrophic events.

Jeff Liaw:

Yeah.

Jeff Liaw:

Got it. Fair question and I'll take a step back and generalize more broadly in Western Europe period. So, , Germany and Spain together, and I'll leave Finland aside, but Finland has an insurance and total loss model that looks a lot more like the US and Canada and the UK. So a gross settlement model. In Spain and in Germany, we continue to grow our volume with insurance sellers very significantly on a year-over-year basis, and certainly a multi-year basis as well. So, the progress is strong. We have traction with a number of different insurance carriers. As we've noted on prior calls, the ultimate objective is to secure nationwide agreements and to default to a gross settlement model across all policyholders in those markets. We continue to advance the ball in that regard. On your question of member crossover and such, we do have crossover marketing efforts. It is perhaps some day an opportunity to consolidate the entire auction platform into one today. The German auctions and even, frankly, yard by yard auctions in the US are still distinct online events. The member bases have overlapped. In some cases, meaningful overlap. There are separate registration and participation channels.

Jeff Liaw:

Thanks Bob.

Craig Kennison:

Hey, good morning and thank you for taking my questions as well. I wanted to follow up on Hurricane Ian. I believe you mentioned 70,000 assignments through the end of October. Do you think that will be the total, or could there be more on the way?

Craig Kennison:

Got it. And then I know in the past, sometimes you take losses overall on catastrophes when they're particularly expensive, like something like this. Is that the expectation this time around? Or could you see kind of revenue offset costs in the coming quarters such that this would be closer to breakeven?

Craig Kennison:

Thank you. And then trying -- we are trying to understand the impact of ASPs as they are correlated with the Manheim Index and used car values. Is there any data you can share with us with respect to ASPs maybe in the month of November, just to get a feel for what the year-over-year declines might look like as it relates to your model?

Craig Kennison:

Thanks. And lastly, I wanted to ask about Europe and your appetite for land there. We've certainly got a strong US dollar today and you have an urgent need to land over the course of decades, I suppose. Would you be inclined to be more aggressive in Europe to acquire that land now that you've got momentum in business and you've got maybe an advantage on currency?

Craig Kennison:

Got it. Thank you.

Operator:

Our next question is from the line of Bret Jordan with Jefferies. Please proceed with your question.

Jeff Liaw:

On the volume question, and there are many different ways to slice this question into its component parts with our insurance sellers. As Gavin noted, in some meaningful detail, we are observing a literally once in a lifetime suppression of total loss frequency, which we believe will eventually abate and reverse very meaningfully. That, I think we would say, has stabilized. Driving activity has picked up. Depending on the country you're talking about, it's picked up a lot in Europe where the driving was more suppressed a year ago than it has been in the US. So driving frequency, times, accident frequency times, total loss frequency is plus or minus the volume equation plus the market share question that you posted a moment ago. So, in the aggregate, I think we're seeing stabilization on total loss frequency but still a year-over-year decline, and we're seeing an increase in driving frequency and accident certainly are picking up as well. On the question of market share, we aren't in a position. In general, we don't comment on individual accounts. If you look at long-term arc of history, I'd say we generally speaking have earned more market share over the years both in insurance and outside of insurance. So, in our non-insurance businesses in which we serve automotive dealers, rental car fleets, financial institutions, among others, we believe we continue to gain share relative to other providers in that space.

Jeff Liaw:

I'd say -- I'll generalize a half step here. We take our competition very seriously, and we view our competitors set expansively. So, in earning the right to sell vehicles on behalf of our clients, we compete against every other path those vehicles can take. So, whether it's hand selling, retailing, repairs and certainly consignment through other wholesale auction platforms, so we are constantly investing and innovating to deliver the highest possible returns so that we win more of those head-to-head comparison against the alternatives and to eclipse the rising standards we set for ourselves as well. But to address your question specifically about another provider of auction services in the insurance space, we don't think a change in corporate ownership particularly affects how each of us competes in the marketplace. So, whether they are controlled by private equity or an activist hedge fund or one corporate holding company or another, we think our stability as a founder led independent company represents a durable and distinctive competitive advantage. In practice, we manage our business with a long-term investment horizon, which in turn creates the accumulating advantage of owning our own land, our technology platform, building a global buyer base in our team.

Jeff Liaw:

Specifically, of course, those questions are better posed to the buyer and seller of that specific transaction.

Operator:

[Operator Instructions] The next question is from [indiscernible] with JPMorgan. Please proceed with your question.

Jeff Liaw:

What rate?

Jeff Liaw:

Do you mind just rephrasing that? I'm not sure I understand your question.

Jeff Liaw:

Retention rate? Got it. So, with -- as used vehicle prices soften, we will see -- we will eventually see perhaps a softening in the selling prices of our cars, which is a self margin dilutive. We will, at the same time, see an increase in volume because a big part of the suppression of total loss volume today is those high used vehicle prices. So, when we see that additional volume flow through the system, that is margin accretive. Beyond that, as for other actions we can take, we certainly have levers in the business available to us which we explore on a recurring basis, including deploying still more technology and automation and so forth in our business, among other things. I think you know we don't comment on our fee schedules and how we manage that long-term. But suffice it to say, the business delivers enough value to our members and sellers to ultimately recover and generate a good return on capital.

Jeff Liaw:

In this, being used car prices?

Jeff Liaw:

Probably nothing insightful. So, we track the Manheim used vehicle index and ADA. We track anecdotally what's happening in the auction space, broadly auto retailers and the like. So, nothing that's not broadly available in what we track.

Operator:

Thank you. The next question is from the line of Ali Faghri with Guggenheim Partners. Please proceed with your question.

Jeff Liaw:

I think, it's an evolution of our capabilities, but we've invested over the years. But certainly, we have in recognition of rising frequency severity of these storms, have invested in that technology. We haven't gotten to the details of what that means. But in the technology platform, in processing titles, in receiving cars, in helping the insurance companies by absorbing much of the physical work that they used to do, there are many different individual levers pulled to collectively expedite the process on behalf of our sellers.

Jeff Liaw:

A difficult forecast, I'll leave because that -- underlying that then is your belief about used vehicle prices, in particular. The other forces, I think we've got a fair bit of conviction in, which is to say that the eventual rising tide is repair costs will rise and will continue to rise because of vehicle complexity. Every car that rolls off the line today is meaningfully more complex than one, five years ago, and probably one a year ago. I saw anecdotally a recent description of a Ford focus having 300 microprocessors in it and a Ford electric vehicle having 3,000 of them for example. And I think that will play itself out over the years and decades to come. So, those forces, I think, are well known. Repair costs will rise. International demand for Copart vehicles will rise. The near-term variable is what happens to the used car prices, and that forecast is difficult to make in isolation. It does appear to be softening somewhat. But as for how that will play out over the next six to 12 months, that's harder for us to say.

Jeff Liaw:

Thanks Ali.

Operator:

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Good day, everyone, and welcome to the Copart, Inc. Fourth Quarter Fiscal 2022 Earnings Call. Just a reminder, today's conference is being recorded. For opening remarks, I would like to turn the call over to Gavin Renfrew, Vice President of Global Accounting of Copart, Inc. Please go ahead, sir.

Jeff Liaw :

Thank you, Gavin, and good morning, everyone. I'll start with some comments about themes in our business. I'll turn it over to Gavin to walk you through some financial highlights, and then we'll take Q&A thereafter. We're pleased to report our results for the fourth quarter of fiscal 2022 and have concluded another strong fiscal year here at Copart. We are celebrating the 40th anniversary of our company's founding by Willis Johnson starting way back when with just a single yard in Vallejo, California. Since our inception, We believe it is our people and our values that have enabled us to build a profitable, sustainable enterprise. We're confident our formula will work for the next 40 years as well. We're well into our third year now of exceptional social and macroeconomic conditions of virus and its attendant mutations, a war and the disruptions on industrial production and supply chains, fuel prices and the like. All businesses, including ours, are affected by these forces. We're happy to take questions on short or medium-term volatility for the various input and output metrics for our business, but we'll focus our prepared remarks on a more durable operating beliefs and principles that guide our decision-making, namely that we will, one, invest in our physical infrastructure, technology platform and customer service offerings to improve auction, liquidity and returns for our sellers. We will collaboratively engage with our sellers, both day-to-day and through catastrophic events to protect them and their policyholder relationships. We will actively expand our addressable market by growing our volume of lesser damaged and whole cars from both insurance and noninsurance sellers. And finally, that will continue our expansion into international markets around the world. In a moment, we'll discuss the quantitative indicators that we customarily provide on these calls, but I wanted to start first by addressing the subject of sustainability. We are increasingly asked by our customers, our employees, our shareholders and other stakeholders about how Copart's business addresses the world's growing focus on sustainability. I want to offer our perspective on what sustainability means to us, how our business contributes to environmental sustainability, how we support and empower local communities, how we enable global economic mobility and development and how we build an enduring enterprise to serve our customers for decades to come. First, on the question of environmental sustainability, conventionally, what folks mean most of the time when they say so. We have the great privilege of operating a business that is at its core breed. We aren't trying to shoehorn an environmental theme into a fundamentally problematic business. Instead, Copart is a keystone enabler of the circular economy in the automotive sector. Our retrievable and storage of vehicles, title processing and online marketplace are essential to the reuse, harvesting and recycling of literally millions of cars per year. We estimate that approximately 2 out of every 5 vehicles we sell are driven again somewhere in the world, the remainder are harvested and recycled for parts or metals reducing the need for de novo mineral extraction and manufacturing emissions. The benefit of the reuse and recycling of cars and their components and the attendant avoidance of carbon emissions dwarfs our actual Scope 1 and Scope 2 emissions. We estimate this benefit to be more than 100x the quantity of our direct emissions. Secondly, we operate our business to enhance the sustainability and well-being of the communities in which we operate. Our business is essential in helping communities recover from acute weather events, which are themselves increasing in frequency as well. We currently operate purpose-built dedicated [indiscernible] yards comprising hundreds of acres of vacant storage capacity, reserves for responding to catastrophic events in storm-prone areas. When major weather events occur, our people and our advanced preparation enable us to clear roads, repair shops in [indiscernible] yards so that communities can quickly recover. Third, we enable global economic mobility and development. Through our unparalleled global member network, we facilitate access to vehicular transportation across the globe. We estimate that approximately 2/3 of the vehicles sold by our U.S. auctions to international members are to developing economies as defined by the UN Department of Economic and Social Affairs. Physical mobility, which most of us on this call have taken for granted is essential for people around the world to access health care, education, leisure and economic advancement. Finally, we operate our business in a manner that ensures enterprise sustainability. We believe that a truly sustainable business makes decisions so that it can serve its customers, not just in the weeks, months and years ahead, but for decades to come. To that end, we have always taken the strategic approach of owning the vast majority of our real estate and storage capacity. We've heard the sometimes persuasive arguments in favor of more "capital-light" approaches, but we're steadfast in our belief that owning our facilities enables us to control our own destiny, ensuring the sustainability of our business for our customers. We are not just participants in our industry, we are stewards of it. Today, we operate on nearly 16,000 acres of land worldwide and own approximately 90% of it, controlling it in perpetuity. Over the last 5 years alone, we've invested nearly $2 billion in land acquisition and development. Similarly, we have maintained a conservative balance sheet since our founding. We recognize the arguments in favor of more financial leverage, but we know that our approach assures our customers that whatever comes our way the 2009 financial crisis, massive storms in Sandy, Harvey, Ida, COVID-19 and all that lies ahead, Copart will stand uncompromised and ready to serve our customers. As noted on our last earnings call, we intend to publish our inaugural ESG report in the next few weeks in which we will, of course, more fully articulate these themes. I'll turn now to the operating statistics that we provide each quarter. Our global unit sales for the fourth quarter increased 5.1% year-over-year, with the U.S. increasing 4% and our international unit volume increasing 12%. Our insurance business was likewise above the fourth quarter of 2021. We grew on both a 1- and 2-year basis due to a combination of share gains and a continued recovery in driving activity and accident frequency and severity. Notably, of course, record high used vehicle prices have, for the past several quarters negatively impacted total loss frequency and have tempered overall insurance volume growth relative to what it otherwise would have been. Driving activity itself, as measured in vehicle miles driven, continues its rebound to pre-pandemic norms in the aggregate. Seasonally adjusted miles traveled for the month of May, for example, in the U.S. is up about 1 percentage point versus last year. Gasoline consumption statistics mirror the same themes as well. Contrary to consistent long-term trends, we have observed declining total loss frequency on a sequential and year-over-year basis. Our selling prices have kept pace or more than kept pace with a strong used car price environment on a percentage basis, but the persistent lack of replacement vehicle availability and record high retail transaction values continue to reduce assignment volume for us relative to what it otherwise would be. Total loss frequency for the second calendar quarter in 2022 was approximately 16.9% in comparison to 19.7% for the same quarter a year ago. If vehicles had been totaled at the same rate as last year, we would have observed insurance industry volumes 15% higher than what we actually experienced. In simple Layman's terms, in a world in which replacement vehicles are harder to come by, total loss settlements are a less attractive resolution to an auto accident claim than they otherwise would be. While total loss frequency has declined over the past 1.5 years or so, the 40-year trend is unambiguous. We believe firmly that the market will revert to the historical norm of steadily rising total loss frequency in the months and years ahead. And in fact, a number of other variables, accident severity, repair duration, repair, labor costs, rental car cost, part costs should contribute to that reversion and long-term trend as well. The history of total loss frequency from 4% in 1980 or so to 20% as of a couple of years ago, has been the product of 2 key factors

Operator:

[Operator Instructions] Our first question is from Bob Labick with CJS Securities.

Jeff Liaw:

Got it. Bob, I think in short, the optimizing the efficiency of our business is a forever initiative regardless. So it's not per se in response to rising fuel prices or labor costs, et cetera. It's that phenomenon inflation, broadly speaking, has always been true. And where we precisely see it in the business at any moment in time can vary sometimes it's fuel, sometimes it's health care, sometimes it's commodities otherwise. But the efficiency initiatives we pursue are self-evident in some regards, but we endeavor to automate much of what we do, including the dispatching of our drivers to retrieve vehicles to optimize the routes to minimize waste in the retrieval of vehicles. For example, we endeavor to automate our interactions with our members and our sellers in ways that make it easier for them and for us to run the business day to day. So the real answer to your question is it's not specifically in response to those catalysts, but those productivity initiatives have been true forever and we are attacking them with the same deal as we always have.

Jeff Liaw:

Yes. That's a fair question, Bob, and I think an astute observation that in general, the early days of the pandemic were such that many companies, insurance companies included, wanted to avoid in-person engagement for themselves and their customers for obvious reasons to avoid the transmission of COVID-19 itself. And then since then, of course, they have faced some of the same hiring and retention challenges that the economy more broadly has as well. And as a result, they are asking us to do more, and we are offering to do more. In some -- to give you specific examples, we have many fewer insurance company employees who are day-to-day visiting our yards to do their work and we've instead virtualized much of that workflow for them, doing it on their behalf and conveying that information digitally so that they can process those vehicles without coming to see us first hand. There are also other further downstream processes involving title and otherwise that we now do on their behalf that perhaps they previously had retained a larger department to do on their own. So I think that's a long-term trend anyway really before the pandemic but certainly accelerated by the pandemic and likely will persist. So we are happy to perform those services on behalf of our insurance companies. We think we can ultimately do so more efficiently and do it well for them on terms that make economic sense for them and for us.

Craig Kennison :

We get a lot of questions on the dynamic with respect to volume and then also just price. You mentioned the Manheim Index being at a record level. If we revert to a scenario in which volume sort of dominates driven by a higher total loss rate, but price comes down. How would you say that will impact your revenue algorithm kind of in the near-term and the long-term? On the long-term side, I'm sure if volume grows, that's great for you. But in the short-term, if you see prices drop while volume recovers, but maybe at a slower rate. Could there be an air pocket there? That's the question we get.

Craig Kennison :

And then with respect to Europe, have you run any game plan scenarios with the energy crisis and potential recession there. I'm curious are you selling partners changing their behavior in any ways based on less volume, if there's less driving, for example. And then on the demand side, with the strong dollar, and potential uncertainty in that market? Are you seeing any behavior changes there?

Operator:

Our next question comes from Daniel Imbro with Stephens Inc.

Jeff Liaw:

I think the pressure is Gavin talked about them to some -- in his prepared remarks. But we're observing the same inflationary forces that the folks are across industries. So whether it is fuel costs, labor costs, both in-house and third party. Those are the same forces, I think, that every business literally worldwide is observing today. So nothing particularly unique in that regard. As for the economics of the business, gross margin, as you know, is a function of both of the cost as well as the revenue. On the revenue side, we continue to benefit, of course, from a robust used car environment, robust selling prices, our auction liquidity is stronger than it ever has been. And so the realized returns we achieved at auction are certainly the offsetting consideration there as well.

Jeff Liaw:

The priority certainly is always to invest in, and this is what any good steward of capital would, I think, is the framework they would approach the question with, which is how do we maximize those returns over 30-, 40-, 50-year horizons. And if that is your framework, we would always elect to invest productively in the business long-term. There is power in the network. There's power in physical capacity. There's power, as you heard me say, in owning it and controlling it in perpetuity. We generate cash, of course, net of those investments as well. As you know, from our history, we buy shares back. We do so aggressively in real volume. We also do so episodically as opposed to via a predictable routine buyback program. So at some point, we don't announce in advance. But at some point, we, of course, will buy shares back that ultimately is the use of residual capital.

ChrisBottiglieri :

Jeff, I think you said 2 out of every 5 cars are put back on the road today. I guess where do the metrics stand before the great financial crisis? And can you give us a sense of how price and volumes change on the financial crisis of these types of vehicles? Just trying to understand if this is becoming more cyclical as you successfully disrupted international markets and traditional wholesale auction model or if like supply is the bigger factor other than demand is my first question.

ChrisBottiglieri :

Yes. So I'm just trying to understand like you have 2 out of every 5 cars are putting back on the road, like where did that metric stand before the great financial crisis, like where are drivable cars before then? Just trying to understand that this is becoming more cyclical as you've just gone more to international markets, you've gone to the Copart Direct, as you've gone through the dealer consignment business.

ChrisBottiglieri :

Got you. Okay. And maybe a bigger picture question longer term, just your ESG report coming out. I wonder like how much work you've done on the impact of electrification, particularly like battery electric vehicles? Like what are you seeing today in terms of -- another obviously a very small population of cars. They're very young on average. There's just not a lot of data yet. We have to hit your sweet spot. But in the early findings of these earliest EVs, what are you seeing in terms of total loss rates? Are these cars more or less likely to be totaled at a given age? And then two, what are you seeing in terms of like the proceeds value as a percentage of, call it, like ACV or something? What are you seeing on the EV side?

Operator:

Our next question is from Ryan Brinkman with JPMorgan.

Jeff Liaw:

Ryan, good to hear from you. And fair questions, probably along the same lines as a few callers ago. On the question of incremental volume versus incremental ASP and how they interact, my answer then is that we are somewhat ambivalent between the two. High used car price environment like the one we're in now means that our unit economics are excellent, but it also means that our volume is compromised relative to where it otherwise would be. As for then how we would feel about movements of x percent versus y percent in each is a question about elasticity and forecasting that in advance is hard to say. We actually don't know precisely which is "better" for the bottom line. Long-term, I think the volume growth will no doubt be positive and meaningful as it has been for the past 40 years. So total loss frequency will be the tailwind behind the business. But as for the near-term, P&L effects of a slight drop in ASPs and a bump in volume precisely how that unfolds, we don't know.

Jeff Liaw:

Sure. As for investing in land, I think you've heard me say this on prior calls, too, that becomes a very specific macroeconomic exercise in which we evaluate metro by metro and even metro areas of the northwest portion of metro x, we analyze our capacity and our expected capacity given growth in total loss frequency given, of course, as you noted, market share aspirations, given growth in our noninsurance business, what storage needs, we anticipate in a given market. So it's not an aggregate corporate decision. We don't wake up in a quarter and say, let's go spend $150 million this quarter. Instead, it's a macroeconomic question that we face market by market. In the aggregate, given that total loss frequency expectation, given our volume growth aspirations, we do expect to continue to invest in that capacity for years to come. So it has been, as you know, turbocharged say, since 2016 or so relative to historical periods before that, but we continue to believe that controlling our own destiny, investing in physical infrastructure is a key enabler in our business, and we'll continue to do that.

Jeff Liaw:

Difficult for us to comment on market share. In the same way that talking about market share in the aggregate is a little bit like answering how much do we want to invest in land in the next quarter. But every customer to us, whether we have all of their business, some of it or none of it is really important to us, and we spend a hell of a lot of our energy serving them and persuading them to do business with us, to do more business with us, to shift the business to us, et cetera. So that is, again, a microeconomic question, not a macroeconomic one. I'd also note that, as you probably remember, 1/4 of our cars today come from noninsurance sources, and we continue to believe that we can grow in that arena as well. So we don't do market share calculations along the lines of what you described. And if we did, we would look at the automotive industry more broadly and look at it worldwide, in which case our market share, of course, is quite a bit less than the range as you were citing and our addressable market quite a bit bigger.

Bret Jordan:

Could you talk a little bit about specifically the German market, what you're seeing as far as traction there with insurance companies?

Bret Jordan:

And then a quick question on noninsurance. You sort of called out rental and fleet and finance costs. But could you talk about what you're seeing in the dealer market now? Obviously, that was something that has shown some potential a year or two ago. And in addition to the dealer, just sort of a follow-up on that same question, what's been the trend of ASPs in the noninsurance units, obviously, dropping charity and picking up some more of these sort of whole car type vehicles might be favorable.

Operator:

Our next question is from Ali Faghri with Guggenheim.

Jeff Liaw:

I think the transparency, all these, we don't know precisely. Total loss frequency itself, as you probably appreciate, is a lagging indicator because the accidents happen. It takes x weeks for the cars claim to be resolved via a written estimate being provided to the insurance carrier in some cases, discussions or negotiations with the policyholder and owner of the car; in some cases, subrogation from one insurance carrier to another. So by the time the car is totaled, you are weeks after the accident itself occurred and the economic decisions are themselves made on a huge basket of inputs, including what the cars worth intact for the ACV to use a U.S. expression or PAV, pre-accident value to use a worldwide expression instead. The repair estimates, as you note, are increasing in price, rental car costs remain elevated as well. And so that basket of inputs is plugged into a formulaic position plus policyholder considerations and whether the insurance carrier perceives that is a desirable outcome from the policyholders perspective or not. So that's all to say that is complex enough that you couldn't look at any single variable if you had theoretical access to every data point inside of Copart. It's not clear what individual metric you look for to see a "turn" in total loss frequency. We're confident that will happen as for the horizon and when exactly it reaches then 19%, again, 20% again or 24% someday. It's harder for us to forecast.

Jeff Liaw:

I think that's a reasonable observation that the fuel is a part of it, diesel is a part of it. Gasoline prices have softened very meaningfully from the peaks near the beginning of the war. Diesel has moderated less than conventional gasoline but also has moderated as well. So that will ultimately be realized in the form of our towing costs.

Jeff Liaw :

Great. Thank you, everyone, for joining our fourth quarter call, and we'll talk to you after the first quarter. Thank you.

Operator:

Please standby. Good day, everyone, and welcome to the Copart Incorporated Third Quarter Fiscal 2022 Earnings Call. Just a reminder, today’s conference is being recorded. For opening remarks, I would like to turn the call over to Mr. John North, Chief Financial Officer of Copart Incorporated. Please go ahead, sir.

Jeff Liaw:

Great. Thank you. Good morning, everyone. We’re pleased to report our results for the third quarter of fiscal 2022 as you are all, no doubt, well aware our industry and the global economy in general are experiencing a number of variables at unusual levels. New and used vehicle shortages, evolving workplace practices and traffic patterns, volatile and elevated fuel and commodity prices and the global instability. Against that backdrop, we continue to perform well for our customers and therefore by extension for our business as well. Our long-term core operating beliefs and principles remain unchanged. Above all else, we will invest in our physical infrastructure, our technology platform, our people and our customer service offerings to improve auction liquidity and returns for our sellers in our more mature markets. We’ll continue to collaboratively engage with our sellers both day-to-day and through catastrophic events, including what appears to be an active storm season ahead to protect them and their policyholder relationships. We will actively expand our addressable markets by growing our volume of lesser damaged and whole cars from both insurance and non-insurance sellers, and we’ll continue our expansion into international markets in Western Europe and beyond including Germany and Spain. Let’s turn into the events of the quarter. Our – starting with unit volume trends in our auction performance. Our global unit sales increased 12% year-over-year for the quarter with a U.S. increase of 11% and an international increase of 18%. Our insurance business itself grew relative to the third quarters of both last year and the year prior on a two-year basis due to a continued recovery in overall driving activity and accident frequency and severity. We’d also note, however, the record high used vehicle prices have, for the past few quarters, negatively impacted total loss frequency and had tempered overall insurance volume growth relative to what it otherwise would have been. On the notion of driving activity, at least as measured in vehicle miles driven as tracked by the U.S. Department of Transportation, for example, we’ve seen a rebound in driving activity now to levels similar to pre-pandemic levels, including as measured by gasoline consumption and the like. The character of driving has evolved with less of course, workplace commuting, more leisure travel as a substitute. On the question of total loss frequency, contrary to very consistent long-term trends, total loss frequency has declined sequentially over the past few quarters and year-over-year with a strong used car price environment and vehicle availability reducing its time and volume relative to what it otherwise would be. While our auction returns themselves are at all-time highs and have kept pace with the used car market in general, higher pre-accident values do reduce volume relative to what it otherwise would be. In layman’s terms, in a world in which replacement vehicles are hard to come by, total loss settlements are less compelling than they otherwise would be. While total loss frequency has declined over the course of the past twelve months or so, the 40-year trend is nonetheless clear. We believe the market will ultimately revert to the historical norm of steadily rising total loss frequencies and in fact the number of other variables increasing accident severity, repair duration, repair labor cost, rental car cost and the like should contribute to that reversion, as well. The history of total loss frequency is quite clear. It was 4% or thereabouts in 1980 and is approximately 20% today and it in turn has been a product of two key factors. Vehicle complexity and composition have made cars more expensive to repair over time, while our auction liquidity and global buyer base have made them ever more efficient to total instead. As used vehicle values eventually moderate and potentially trend back to lower levels in the future, we may see a moderation in our average selling prices as well. In that scenario, however, we believe we will benefit from volume increases perhaps substantially so. We continue to grow our business as well in noninsurance vehicles, including – excluding, pardon me, cars and sources like wholesalers and charities. Our U.S. non-insurance business grew approximately 3% in unit volume year-over-year, driven in part by growth in our consumer-based Cash For Cars business as well as growth in non-salvaged sources of volumes, such as rental car fleets, corporate fleets and financial institutions. Overall, our growth across a full spectrum of vehicles generates improved auction liquidity, auction attendance and returns for our sellers as well. The greater number of non-insurance cars we sell, whether they are from dealers or rental car companies, fleet managers, lenders or from consumers, ultimately contributes to auction liquidity and generating better returns for our insurance sellers in turn. I wanted to provide a few comments on environmental sustainability and governance matters before turning it over to John. We play a meaningful role in the global circular economy. We sold more than 3 million vehicles in our last fiscal year and estimate that 40% to 50% of those vehicles are ultimately returned to drivable services somewhere on the planet, and of course, the balance are subsequently harvested for parts and raw materials. In both cases, we provide meaningful benefits to the world environmentally through the avoidance of manufacturing of vehicles and of replacement parts. According to recent research from Argonne National Laboratory, a science and engineering research house operated by the University of Chicago on behalf of the U.S. Department of Energy, the vehicle manufacturing process produces nearly 2 metric tons of CO2 per new vehicle manufactured. We estimate, therefore, that our business facilitates the avoidance of literally millions of carbon dioxide – millions of tons of carbon dioxide per year. Our business, especially given our emphasis on providing access to international buyers, also contributes to the advancement of other important societal objectives, including the reduction of global poverty with affordable transportation as a crucial lever and improved outcomes for people around the world and commuting to work, advancing their education or accessing medical care and the like. In the weeks ahead, we intend to publish our inaugural ESG report in which we'll provide additional disclosure about our role and impact in the circular economy. And with that, I'll turn it over to John North, our CFO, to walk through the third quarter financial results.

Operator:

Thank you. [Operator Instructions] Our first question comes from Bob Labick with CJS. Please proceed.

Jeff Liaw:

In short, the capacity efforts -- I appreciate the question, Pete, our capacity expansion efforts have been ongoing for years. You first heard about the 20/20/20 initiative in the spring of 2016. So that's six years ago and our land acquisition, as you know, during that period of time has been elevated even relative to our history, during which we bought lands almost as much as we could find. Nowadays, those land purchases continue and we do believe we're well equipped to handle a cyclical rebound as used car prices decline. So we can handle that volume as it comes, but we are still purchasing land in anticipation of future growth as well, both in the day-to-day business, as well as our catastrophic readiness in light of increased volatility. It's not just the need for more land overall. It's also to accommodate greater volume. It's also an increased ability to handle spikes that are attributable to storm activity as well.

Jeff Liaw:

I appreciate the question. No structural changes per se. I think, like many businesses or perhaps most businesses in this global economy, the inflationary forces – and we've always faced inflation in past quarters and past years, perhaps we'll be talking more about healthcare expenditures in some instances. In some cases, we talk about fuel and the like. Today, those key drivers, of course, are fuel, to the extent that we use our own fleet to pickup trucks, certainly, there are increased costs for vehicles and loaders and the like. And to the extent that we use third parties to manage our logistics or to retrieve vehicles for us, they in turn are facing elevated fuel, labor, vehicle costs and the like. So nothing unusual. So I wouldn't characterize it as a structural change or a structural shift, just the same underlying variables that most businesses are facing today.

Jeff Liaw:

Thanks, Pete.

Daniel Imbro :

Yes. Hey, good morning, everybody, and congrats on the quarter.

Daniel Imbro :

Jeff, I had a question on the total loss rate dynamics. I think it makes a lot of sense, obviously, with prices high, what's going on there. But for that to revert and for total loss rates start increasing, do we need prices to move absolutely lower? Or do they just need to stop increasing at these elevated rates? Or said another way, if prices were to stay higher for longer or maybe just slowly moderate from here, would that be enough to call a total loss rate to start increasing? Or do we really need to see a pretty steep move lower in pricing you think, before that reverts to the long-term trend?

Daniel Imbro :

Got it. That's helpful. And then just moving to the non-insurance piece, obviously, a lot of change in the wholesale market now. I am curious with the sale of ADESA, how do you think that creates opportunities for Copart's non-insurance business, specifically thinking about things like repossessed vehicles, which need to be stored on land? And obviously, you guys have a huge advantage there. Just curious how you view the wholesale market as a potentially growth opportunity and how that changes with what's going on with the sale of ADESA.

Daniel Imbro :

Perfect. And then last one, just kind of a modeling question, John, just following up. We've seen another step-up in the mix of vehicle sales for service. It looks like it's happening both in the U.S. and internationally. Is there any change on what insurance carriers provide there? Or can you provide some color maybe on why that step-up keeps continuing on the purchased vehicle side other than just used vehicle prices?

Daniel Imbro :

Great. It makes a lot of sense. Thanks so much, guys, and best of luck.

Operator:

Our next question comes from Craig Kennison with Baird. Please proceed.

Jeff Liaw:

I think, Copart, as you know, I think, has long been – has long had a very collaborative culture to begin with. So we make decisions based on the data and debating the merits of tabs X, Y, Z. So I think in many respects, business continued as it did before. I was President of the business before and worked closely with our international teams in our U.S. functions and our customers to drive excellent outcomes for them. So I think from your perspective and for most of the outside world, not a radical change from the day before.

Jeff Liaw:

A recession, which, of course is top of mind for everyone. I think the – historically, I would have told you that it can lead to higher unemployment. We are, of course, today at nearly all-time low unemployment levels, but it can lead to elevated unemployment and therefore a reduction in commuting for work and otherwise. And of course, over the course of the past two years, we've seen a decline in that commuting traffic anyway even as the economies – the global economy has boomed. So I think it's difficult to prepare for it. I think our assumption is that we will have to continue growing our capacity and serving our customers with greater volumes tomorrow than today. And so, I think preparation - we are ready for it if it comes, but I don't know that it changes the trajectory of how we manage the business day-to-day.

Jeff Liaw:

If so, modestly. I think it's – we've been on a many year run of very low repossessions and certainly over the course of the past few years, because there is so much equity value in any loan outstanding that wasn't issued very, very recently. Those are almost always in the money. So the repo volumes remain low even if you're struggling to make your payments, you can likely cash in your asset, whether that's a car or a bike for that matter for positive equity not negative.

Jeff Liaw:

Thanks, Craig.

John Healy :

Thank you. I wanted to ask a big-picture question. Obviously, land has been the right move for you guys for a long period of time. But Jeff, you made a comment about investing in the infrastructure at Copart. As I think about the needs of the business going forward and you talk about more volumes coming to you guys at some point with the total BOSS rate getting back on that long-term trajectory, how do you think about the towing capacity in the business? And if volumes do pick up from here, are the pressures in towing only going to get worse? And is there any thought to potentially internalizing the logistics or towing side of the business? Obviously, the balance sheet is a fortress. And it would seem like you'd have the ability to maybe pivot to making towing an internal competency rather than an outsourced item and I would love to kind of hear your thoughts on the pluses and minuses of that.

John Healy :

Great. Thank you.

Operator:

Our next question comes from Chris Bottiglieri with BNP Paribas Exane. Please proceed.

John North :

Yeah, I think we called it out specifically in the U.S., Chris, because that's been a significant driver of the purchased vehicle volume in the U.S. market. And certainly, it's – we've seen just overall vehicle inflation, which has driven the number higher as well, as I am sure you can appreciate. So whatever business we had a year ago is certainly up dramatically when you just think about the change in the Manheim Index year-over-year. So those are the two big factors there. In terms of the specific vehicle, I mean, go check out the website, it's cashforcars.com. Historically, we used to call it Copart Direct internally, but we have been branding it as Cash For Cars, and we put pretty dramatic resources into that business over the last couple of years and have seen pretty significant growth. So the average car is obviously significantly lower than our overall ASP. Think of these as the cars that would be a direct-to-wholesale piece. If you took into a CarMax or a Carvana, never a car that they are going to retail it’s to the tune of $1,500 or $1,000 or something like that.

Chris Bottiglieri :

Got you. Okay. So then, just a related question, is the gross margins have been, I guess, under pressure for like six, seven quarters now? Can you kind of speak what's causing that? Like, what has the gross profit per purchased vehicle done over that same period? And one of it may be more stable in that metric. Can you just give us a sense for kind of how to think about the gross margins, the gross profit per vehicle in the purchase side?

Chris Bottiglieri :

Got you. Okay. All right. Thank you.

Operator:

[Operator Instructions] And our next question comes from Bret Jordan with Jefferies. Please proceed.

Jeff Liaw:

Bret.

Jeff Liaw:

Yes. Dealer volume is incredibly important to us and has been for years. In this environment, as you are well aware of both the dealers, in particular, used car dealers are struggling for volume themselves. That remains a meaningful and profitable business for us and a huge long-term priority for us as well. We didn't call it out specifically in this quarter it was not a meaningful driver of growth for us for the quarter year-over-year.

Jeff Liaw:

So run and drive is a kind of a specific technical term. But to the – I made the comment actually in the ESG section. If you wanted to guess how many of our cars are ultimately driven as cars again as opposed to harvested for parts, metals and the like, we think it's approximately half. Between 40% and 50% of the cars ultimately are used as cars, either in the U.S. or in the native market from which it originates or elsewhere in a developing economy where the cars are wrecked cars or incredibly desirable, drivable cars to them.

Jeff Liaw:

The unit volume trends in Germany are very encouraging. I think I mentioned on the last call, we are selling cars on a consignment basis for the majority of the Top-10 carriers in Germany, none yet with the nationwide all-in deal but certainly doing so at volume for a good number of insurance carriers today. They are, as you noted, affected more so even in the U.S. by the instability – the regional instability, let's call it, as a good number of their buyers come from countries affected by the recent conflict. So they will feel that to some extent. But nevertheless, earning good consignment volume on behalf of insurance carriers making good forward progress there.

Jeff Liaw:

Thanks, Bret.

Ryan Brinkman :

Hi. I appreciate the comments on ADESA, thank you, and agree there is a clear market share opportunity for you in the physical or on-premise whole car auctions market including as ADESA's physical auctions business is sold to Carvana, which dealers regardless of their competitor. Beyond ADESA losing market share though, another potential outcome of that transaction is, I think, an acceleration toward the app-based, online-only, dealer-to-dealer business or even the online off-premise commercial consignor business. I believe that you don't participate in these parts of the whole car market today because you take possession of all the vehicles you sell, I think. So I just wanted to check in on that with you if you have any updated thoughts on the online-only portion of the whole car market as you increasingly expand into whole cars. Would it be relatively difficult or easy do you think for you to transition your whole car offering to online only, which I think there has been some speculation could over time have attractively high margins and returns when at scale?

Ryan Brinkman :

Okay. That's helpful. Thanks. And then, I think that there is obviously a number of macro factors helping you, including the rebound of miles driven, some of the increase in commodity prices since the conflict in Ukraine. But also isn't a lower dollar generally better for Copart given a greater translation of EBITDA and pounds back into dollars and because of the greater purchasing power of overseas customers in dollar terms? So, the dollar has been arguably surprisingly stronger and so I am just curious if you could maybe dimension that stronger dollar headwind, if you see that, how large or forceful is that relative to some of these other macro tailwinds? And have you seen any impact yet on overseas demand from a stronger dollar?

Ryan Brinkman :

Okay. Thanks. And then just lastly, could you – did you say or could you say what percentage of your buyers have historically been in Russia or Ukraine or what percent of your U.S. volume those countries might represent?

Ryan Brinkman :

Okay. Great. Thank you very much.

Operator:

Thank you. This concludes our question-and-answer session. I would like to turn the call back to Jeff Liaw for any closing remarks.

Operator:

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Greetings. Please standby. Good day, everyone, and welcome to the Copart, Inc. Second Quarter Fiscal 2022 Earnings Call. Just a reminder, today’s conference is being recorded. For opening remarks, I would like to turn the call over to Mr. John North, Chief Financial Officer of Copart, Inc. Please go ahead, sir.

Jeff Liaw:

Thanks, John. Good morning, everyone. We’re pleased to report a strong second quarter for fiscal 2022. I know that over the course of our discussion today, we’ll naturally migrate to a discussion of near-term trends, such as driving patterns, new vehicle production, total loss frequency, cost inflation, market share trends and the like. But I’ll start by observing that the long-term fundamentals of our business are as strong as they’ve ever been. Auction liquidity and returns, member recruitment and participation, our collaborative engagement with our clients day to day and in catastrophic situations. And certainly, our aggressive reinvestment in capacity, technology and people that make all of the above a reality. A quick thank you to the Copart team worldwide for their efforts in making these true. Our results in the second quarter financially were largely a continuation of what we experienced in the first quarter as we observe commerce and mobility continuing to trend back to the quote to new normal, which we’ll elaborate on in greater detail. Accident and assignment volumes beginning and continuing to recover and ASPs remaining elevated as well. As I’ve done previously, I’ll elaborate on a handful of key themes for the quarter, and John will provide additional detail and perspective as well. Starting with our unit trends for the quarter, our unit sales globally increased 19% year-over-year, with a U.S. increase of 21% and an international increase of 9%. Our insurance business in the U.S., in particular, grew over the second quarter of 2021 by 21.5% and was also up on a two-year comparison versus fiscal 2020 due to the recovery I described a moment ago as well as share gains. Notably, our unit volume has been reduced by increasing used car prices, which I’ll describe in greater detail momentarily. As we noted a moment ago, driving activity continues to rebound as measured across a number of different dimensions, including simply vehicle miles driven as measured by the U.S. Department of Transportation and the UK Department of Transport Statistics and gasoline consumption and a host of other statistics as well. We note, however, that the character of driving has evolved as well. With downtown office occupancy remaining quite low, driving is less focused at rush hour and more distributed over the course of the day. There are a number of other phenomenon that have emerged with COVID-19 with nuanced outcomes like that one. The next theme I’d tackle is total loss frequency, which for the first time in our memory, we have noted has declined sequentially from the third quarter – calendar quarter of 2021 to the fourth quarter from 19.3% to 19%. That’s, of course, a very fine measure in that case. But in any case, it’s the first time we have seen a decline as opposed to the long-standing increases we’ve observed over the course of our 40-year history. This is a reflection of the very strong used car price environment and vehicle availability, used car availability, reducing assignment volume relative to what it otherwise would be. As most of you already well know, insurance companies typically compare the cost to repair a vehicle to the difference between the pre-accident value and what they can recover at an auction through Copart for the damaged vehicle. While our auction returns are at or near all-time highs and have kept pace with used car appreciation on a percentage basis, higher pre-accident values certainly do reduce our volume relative to what they otherwise would have been. As those who are following us in the industry in general would well know, there are a host of countervailing forces also working in our favor, which have been incorporated into our clients’ total loss decision process to varying degrees, accident severity and repair costs are up. We are facing, and our clients are facing larger repair supplements, repair cycle times are up, parts are delayed and rentals are both longer and at higher rates than they ever have been. We certainly look to the 40-year trend in the 40-year history of total loss frequency as the right long-term perspective. Total loss frequency as a reminder, was 4% in 1980 and effectively 20% today, a fivefold increase over the company’s history. We take that to mean that we’re likely experiencing a temporary dislocation as a function of used car prices. The secular trends we have discussed previously remain true. Vehicle complexity rises, vehicle composition becomes less repairable substrates like composites and aluminum, making cars more expensive to repair. And our auction liquidity and international member base make them ever more efficient to total instead. We believe that as used vehicle values potentially peak and trend back to historical norms in the future, we may see some moderation in our ASPs will certainly benefit from volume increases as well. Moving to our non-insurance business. We’ve continued to expand our market share there. Excluding cars as we customarily do, from sources such as wholesalers and charities, our U.S. non-insurance business grew on a unit basis by 4.5%, driven in part by growth in our Copart Direct business as well as consignments from rental fleets and financial institutions. Across our various non-insurance channels, we believe our growth is a reflection of market share capture as a function in turn of our auction liquidity and returns combined with our own proactive selling efforts. The cars we earn the right to sell on behalf of insurance companies through our online auction platform, no doubt, enables to – enable us to achieve superior returns for progressively more non-insurance cars as well. And in turn, these dealer, rental, bank and consumer cars further contribute to our auction liquidity, spinning the flywheel to benefit our insurance sellers as well. Turning then to our average selling prices. We continue to experience ASP strength as previously noted. Worldwide, our selling prices grew 20% year-over-year for the quarter. The Manheim used car vehicle index is currently at record levels in January at 236.3, an increase of 45% year-over-year. Since the beginning of the pandemic, our selling prices, frankly, increased earlier, but have kept pace in the aggregate with the Manheim used car index. When we look forward prospectively, we note that a variety of industry sources indicate that chip shortages will persist for 2022 and potentially well into 2023. We’ve seen a variety of forecasts. We are, from a business perspective, certainly prepared for the influx of volume that may come with softening in used car prices. With that, I will hand the call to John North.

Operator:

[Operator Instructions] Our first question comes from the line of Bob Labick with CJS Securities. Please proceed with your questions.

Jeff Liaw:

Got it. Thanks, Bob, I think you may be astute preamble there that like all enterprises, frankly, across all industries, we experience inflation, we consume a mix of third-party goods and services and certainly employ a large number of team members worldwide. And so we’ve always been subject to inflationary pressures. I’d say, historically, on a more selective basis, whether it’s health care or commodity cycles and the like. Today, there is more widespread inflation across our cost base overall. I think you are already aware of the major costs in our business, but they do include the towing, the personnel, certainly, our technology platform as well. We have some structural protection in that, as you know, we own the vast majority of our land. And so that cost is -- we already own the land outright and therefore, don’t face the inflationary pressures when it comes to rental expense to the extent that we otherwise might. Historically speaking, over any intermediate term, Bob, we’ve always demonstrated the ability to recover or more than recover inflation in the marketplace. And I don’t think the expectation in this case would be any different long term. Now most importantly, we also strive for productivity enhancements and improvements over time to help absorb those same inflationary pressures, both before this wave courtesy of COVID-19 and otherwise.

Jeff Liaw:

I think it’s tough to provide a sweeping answer that covers all such non-insurance categories. It’s a little bit of a contrived catch all basket for us. There are certainly groups of those sellers, as you noted a moment ago, for whom the average selling price is higher than our typical insurance car. And therefore, the contribution may be higher as well. There are other categories included in that non-insurance portion that are lower average selling price than our typical insurance car. So on a tough to answer so on a blended basis, probably on average, higher, but distributed.

Jeff Liaw:

Bob, you’re always observant. On Copart Select, it is, as with many things we do at our action, we are innovating and experimenting and attempting new ways to position our auctions and the product that our sellers can sign through us. We think this kind of offering holds real promise. So, we’re not yet ready to share substantive results, but it’s the -- in keeping with the themes we’ve addressed in the past through you and I have been talking about these kinds of pursuing this market in these kinds of cars for years now, and this is one more arrow in the quiver to tackle that marketplace.

Jeff Liaw:

Thanks Bob.

Daniel Imbro:

Yes. Hey, good morning guys. Thanks for taking my questions. I wanted to ask one on the pricing backdrop. Maybe first, Jeff, you made the comment the salvage market moved faster, but in aggregate, has kind of kept up with Manheim. Are you still as confident, now that we have the benefit of hindsight, that some of the more secular drivers, less damaged total loss vehicles, more improved auction liquidity were as big of ARPU drivers as we thought at the time? Or has hindsight proven that maybe that was more used car price driven than you initially thought? Just trying to understand that comment.

Daniel Imbro:

Yes, I feel like during 2020, some of the comments on the earnings calls discussed that you guys thought a lot of the maybe company-specific drivers, auction liquidity, things like that, were a larger contributor than used car pricing. The used car pricing was one of the inputs. Just trying to understand as we move further from it and gotten more data points, if your understanding is the same or if it’s changed at all?

Daniel Imbro:

That’s helpful. I wanted to ask one on the business mix. You’ve always been growing revenue much faster into purchased vehicles, but part of that is just the way you reflect revenue. Has the unit -- have units also been shifting towards the purchase side in a similar way to the revenue we’re seeing? And if so, why would that be? Is that a change in the U.S. insurance market? Or is there something else going on there?

Daniel Imbro:

Perfect. And then maybe last one for me. Thinking about ancillary services, periods [ph] last week talked more about maybe offering transportation. I’m just curious if you guys have looked at that. I think you guys connect your buyers with transportation partners, but don’t actually provide that service. Have you looked at that? Would it be ROIC accretive for you guys? And maybe anywhere else you see an opportunity to add ancillary services for either buyers or sellers to your platform today?

Daniel Imbro:

Got it. That’s it from me guys. Thanks so much and best of luck.

Operator:

Our next question comes from the line of Ryan Brinkman with JPMorgan. Please proceed with your question.

Jeff Liaw:

Got it. And as you might imagine, Ryan, I probably can’t answer the first half of your question at all, and we don’t discuss individual accounts, but certainly happy to comment on the second half of your question, which is, what is it that has driven our market share capture as a general theme, which I would say has been true for the past 40 years, not just the past few. And as for why we would win an individual account, I think the answer is often unsatisfying, we have a variety of things. It’s not one singular theme, which I think our brains would prefer. But certainly, to articulate a few. Our auction returns are critical, and that is literally how much money we put in the pockets of our sellers after we auction the cars, which is a function of our DB3 online auction technology, which we believe is the best in the industry. It’s a function of our ability to recruit new members and to engage them. It’s a function of how quickly we can pick up cars and reduce the advanced charges experienced by our insurance company sellers. It is a function of our streamlining the purchase experience and making it ever easier for third parties to buy cars at Copart. It’s also a function of the auction liquidity we’ve talked about a few times on this call, which is that the growth of our insurance business has helped to affect the further growth of our insurance business did own non-insurance and vice versa. The second thing I’d touch on is our approach to customer service, and we think a long-term horizon, take a long-term approach to problem solving on behalf of our customers. We believe that we re-earn the right to sell cars for our customers with every assignment that we get and that mindset starts with our founder, Willis Johnson and Jay Adair and to me and to the new hire, starts in New York well tomorrow morning. And that sounds like a throwaway cultural comment, but I think it absolutely rings true to us day-to-day here. And you would see it perhaps most pronounced in a catastrophic event when it is all hands on deck. And literally, all of us are physically or many even the executive leadership are on the ground, making sure that our teams are serving our clients capably. As one other example, we have acquired our physical land, nonstop in every instance we can for the past 40 years to ensure that we have the long-term ability to serve our customers that were never prisoners of – to third-parties who may prefer to do something else with the facility or otherwise. So it is a combination of those two. It is auction returns and the customer service mindset and having a long-term horizon, which we think has yielded those benefits over the long haul.

Jeff Liaw:

We don’t comment on our fee structures, unfortunately, but I would direct you back to the overall comment that over the – any intermediate horizon, we’ve shown the ability to recover and more than recover inflation via both productivity and other measures we might take in the marketplace overall. So the – and the second point I’d add is that if and when we see a moderation in used car prices, we’ll almost certainly see a rebound or an increase in volume relative to where it otherwise would be as well.

Operator:

Our next question comes from the line of Chris Bottiglieri with BNP Paribas. Please proceed with your question.

Jeff Liaw:

Healthy? Less than that and healthy.

Jeff Liaw:

We haven’t shared those rules of thumb, Chris, in the past. We certainly do have a publicly published fee schedule for our members. So some of that math you can literally do by hand based on our – based on what’s publicly available but we don’t elaborate on fees.

Operator:

Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Jeff Liaw:

Over the – I think it’ll be tough – I think over the long haul, our ASPs have outpaced the Manheim. Let’s stop the clock, March 2020. Our growth in ASPs have generally outpaced the Manheim used vehicle index, which is not a surprise given total lost frequency because lesser damaged cars and newer cars are totaled. So our mix naturally evolves over time. Manheim’s mix naturally does not evolve over time. So, I would say that is – that has been true for many years pre-pandemic. During the pandemic for – as you heard us describe today, our growth in the quarter on ASPs was a little north of 20% while Manheim, I think for the quarter, is up 40%, 45% or thereabouts. And I think that reflects a lag in their index, I suppose the best way to describe it because from, say, pre-pandemic levels to today, both they and we have experienced the percentage increases in our selling prices that are plus or minus comparable. And therefore, I’d argue that our prices increased earlier and today we are a plus or minus at parity relative to pre-pandemic levels. Over the long haul, I continue to believe we’ll – our ASP growth will outpace theirs by virtue of the mix shift in total loss frequency before accounting for non-insurance business.

Jeff Liaw:

Yes, I think it’s – our non-insurance business, I think, Bret, is a mix of dealer cars, rental car companies, financial institutions, our Copart Direct business in which we buy cars directly from consumers, and all of the above. And all of the above are experiencing some of the same disruptions that we just talked about for the purposes of Manheim and our insurance cars as well, meaning there is use – there are used car availability challenges there. There’s ample demand for cars, automotive dealers literally putting up billboards to buy cars, not to sell them. So, we’re experiencing an unusual dislocation in that regard, but have nonetheless grown our non-insurance business year-over-year for the quarter by 4.5%. But individually, I think there’s good traction there, which is a function again of returns and liquidity.

Jeff Liaw:

Thanks, Bret.

John Healy:

Thank you and thanks for taking my question. I wanted to ask about that tick down in total loss rates. When you look at that and see that, where do you see the total loss rate changing within your own business? Is it at lower dollar value cars or is it the middle or is it the high end? And how do you think that change in total loss rate actually impacted your ASPs this year? Was it helpful? Or was it hurting you guys depending on where it fell?

John Healy:

Understood. And then I might have missed it, but did you guys quantify what volumes were for the U.S. and the international business in the quarter in terms of just how those occurred?

John North:

Yes. Global unit sales are up 19%, U.S. is up 20.8%, International was up 9.3%.

Jeff Liaw:

Thanks, John.

Gary Prestopino:

Hey, John. Hi, Jeff. Could you just – I didn’t quite get the growth in U.S. purchase and international purchase sales for the quarter. Could you just give me that, please?

Gary Prestopino:

What about sales? Did you give that number?

Gary Prestopino:

Okay. That’s fine. Jeff, just kind of a little rhetorical question here. As used car prices come down, which they are going to eventually, is there a pretty much a quick correlation with total loss ratios going up because these prices are going down?

Gary Prestopino:

Okay. And then lastly, I don’t know if you make this public, but could you give us an idea of what percentage of your cars are processed on a non-insurance basis this quarter versus, say, a year ago?

Gary Prestopino:

Thank you.

Operator:

Our next question comes from the line of Stephanie Moore with Truist Securities. Please proceed with your question.

Jeff Liaw:

Hi, Stephanie.

Jeff Liaw:

Got it. Thanks, Stephanie. Pricing is, as I’m sure you can tell from this call and a couple of occasions, is a delicate subject for us that we tend not to discuss on earnings calls, public forums like this. Suffice it to say that our agreements with our sellers tend to run multiple years at a time because we make long-term commitments to them in the form of our land and technology and people and so forth, and they do in turn with us. So we take those commitments to certainly very seriously, and the contracts are where they are. It’s our responsibility to manage our costs. And as I noted a moment ago, over any intermediate period of time, we have been able to recover and more than recover the inflation in the marketplace and through productivity enhancements. So unfortunately, we can’t say much more about the pricing on either the seller or buyer side.

Jeff Liaw:

Got it. You mean the inbound retrieval of the cars that were part of it.

Jeff Liaw:

So we use a mix of third parties as well as our own trucks, with a strong majority being the former, not the latter. We have the latter in terms of our own captive fleet, which has grown meaningfully over the past few years and will likely do so in the future as well to have additional capacity in the event of catastrophic events, for example. But we largely rely on third-party stockholders, who we dispatch directly so we don’t use intermediaries by and large in our local markets circuit to put them across the U.S. We know the local companies and local towers and build long standing relationships with them so that they can effectively retrieve cars for us on a near-daily basis once they’re on board.