Copart, Inc.

Please stand by. Good day, everyone, and welcome to the Copart Incorporated first quarter fiscal 2022 earnings call. As a reminder, today's conference is being recorded. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

Good morning. During today's call, we'll discuss certain non-GAAP measures, which include adjustments to reverse payroll tax benefits related to accounting for stock option exercises. We provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our investor relations website and in our press release issued yesterday. We believe these non-GAAP measures, together with our corresponding GAAP measures, are relevant in analyzing our results and assessing our business trends and performance. In addition, our 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 our markets, including the COVID-19 pandemic. These forward-looking statements involve substantial risks and uncertainties. For more detail on the risks associated with our business, we refer you to the section titled Risk Factors in your annual report on Form 10-K for the year end of July 31, 2021, and each of our subsequent quarterly reports on Form 10-Q. Any forward-looking statements are made as of today, and we have no obligation to update or revise any forward-looking statements. And with that, I'll turn it over to our President and CEO of North America, Jeff Leal.

Excellent. Thanks, John. Good morning, and thanks for joining us for the first quarter. We're pleased to report a strong first quarter for fiscal 2022. against a backdrop of various extremes, a persistent and evolving pandemic, changing global traffic patterns, supply chain disruptions, a strong used car price environment, and an active storm season, to name a few. We continue to serve our customers successfully to enhance auction liquidity and to continue our long-term trend of profitable growth. I'll elaborate on a handful of key themes for the quarter, and John will provide additional perspective. My comments will center around Hurricane Ida, a brief commentary there, Secondly, the health of our auctions. Third, the implications of the used car price environment. And fourth, our institutional commitment to sustainability. First, on Hurricane Ida. Hurricane Ida struck the Gulf states on August 29th in the Northeast region on September 1st and 2nd. This represents our most substantial storm since Hurricane Harvey in 2017. and our largest storm in the Northeast region since Hurricane Sandy in 2012. Having learned from those experiences and a litany of catastrophic events between then and now, we were better prepared for this event than any in our history due to our very substantial investment over the years in land, in technology, in company-owned trucks, company-employed drivers, heavy equipment, and most importantly, our dedicated CAT team who deployed at a moment's notice. Hundreds of us from around the country spent our Labor Day weekend on the ground and many weeks thereafter, managing the retrieval of vehicles, receiving and imaging them, and navigating the vehicles through the titling process to their eventual sale. As is often the case with major storms, we experienced an operating loss from the event in the quarter of a few million dollars. We view our pre-storm prep and our robust response to catastrophic events as investments in the strong and durable partnerships we have with our insurance sellers. Our storm-related costs, as you know from prior experiences, include lease expense for temporary storage facilities, premiums for towing, labor costs and overtime for our people, travel expenses and lodging, among others. These expenses are, of course, offset by revenue from incremental unit volume. Financially speaking, the impact of the storm in the quarter was approximately 100 to 150 basis points of gross and operating margin rate compression. You'll note we haven't provided further specifics in our press release or included adjustments in our non-GAAP earnings schedule for the catastrophe. We believe that providing excellent service in difficult times is an intrinsic aspect of our value proposition to our customers and that these storms will increase in frequency and severity over time. The second theme I wanted to tackle is our unit volume growth and our auction liquidity. We experienced global unit sales increase of 21% year over year, of which approximately two points was explained by the hurricane itself. A U.S. increase of almost 24%, and again, two or three points of that growth explained by Hurricane Ida. We grew our international unit sales by just shy of 8%. The COVID responses in countries outside the U.S., as a general matter, continues to be more aggressive and more pronounced than what we've experienced here stateside. Our insurance business grew relative to the first quarter of last year at 23%. We are observing certainly continued increases in total loss frequency, I'll comment more about that in a moment, and benefit from share gain as well. Driving activity itself continues to rebound relative to last year very significantly, but still just shy on measures such as gasoline consumption of what we experienced in the year prior. Total loss frequency has increased steadily, including during the pandemic. Though all else equal, as many folks on the phone already know, the strong used car price environment almost certainly is an inhibitor to assignment volume all else equal to co-part auctions. Turning to our non-insurance volume, when we exclude lower value cars such as wholesalers and charities, our non-insurance business grew 7.5% year-over-year, with our dealer unit volume up slightly, approximately 1% versus last year, and strong growth in our Copart direct business. I'll note, and you'll note, that this represents solid absolute performance, but arguably the strongest relative performance in our history to other vehicle marketplaces, given what is the pronounced shortage of available supply in the industry. We think this is a testament to the power of Copart's marketplace, and we've said it before, but it's worth reiterating. The cars we earn the right to sell on behalf of insurance companies, along with rising total loss frequency, enable us to achieve superior returns for progressively more non-insurance cars as well. And it's also true in reverse. The dealer, rental car, fleet, bank, and consumer cars we earn the right to sell drive still more insurance volume and higher total loss frequency as the years go by. The next theme I wanted to address is prices themselves. So we are experiencing, of course, high used vehicle prices across the world and certainly strong ASPs at Copart auctions as well. Our ASPs worldwide grew 11% for the year, year over year, for the quarter, with U.S. ASPs up 10% year over year as well. The Mannheim Index as one industry proxy is at all-time highs, with a November mid-month reading of 234.8. The durability of ASPs is, of course, a natural question. There certainly are longer-term trends in favor of higher ASPs, including our auction liquidity, total loss frequency, and the like, as well as growing demand from emerging economies for wrecked vehicles from our origin countries. We also continue to invest significant resources in member registration, member recruitment, registration, retention, and the like. But, of course, we should acknowledge the technical forces as well. There remains a chip shortage, which is affecting the production of new vehicles and driving higher prices for used vehicles around the world. Our perspective doesn't diverge from the industry consensus, which indicates that this chip shortage will persist well into 2022 and likely into 2023 as well. The important note here is that if and when used car prices do fall, we expect a corresponding increase in assignment volumes. As total loss frequency is negatively correlated with used car prices, the more a car is worth before the accident, the more prone it is to being repaired. The last theme I wanted to tackle before handing it to John is the notion of sustainability. As a long-standing cultural matter, we at Copart have always asked to be judged on our actions and results, not our words or our PowerPoint presentations, but we recognize that we're at a moment in history in which companies are being challenged to articulate their ESG position more clearly, and I'll spend a few minutes on that theme. Copart plays a critical role in the automotive circular economy. enabling the reuse, recycling, and responsible disposal of vehicles around the world. We sell well over 3 million vehicles per year, and by matching those vehicles with our optimal owners, we enable the return to service of automobiles that would otherwise have been scrapped, the reuse of parts that otherwise would have ended up in landfills. As a result, the reuse and recycling that Copart enables displaces what otherwise would have been de novo resource extraction and energy consuming manufacturing as well. As climate events themselves increase in frequency and severity, COPART will play a growing role in assisting communities in recovering from them as we have in our past by removing vehicles from roadways, storage facilities, and repair shops, enabling the free flow of people and goods and services in the economies in which we do business. And finally, because so many of our vehicles are ultimately purchased by buyers outside the U.S., our auctions contribute to the physical and economic mobility of residents and countries of emerging economies, including in Central and South America, the Middle East, Africa, and Eastern Europe. If you haven't read it already, please do see our annual shareholder letter on our investor relations website, where we expound further on these themes, among others including diversity and inclusion. will offer more substance in the coming days in the form of a sustainability report as well. And with that, I'll turn it over to our CFO, John North, to talk about the first quarter's financial results.