Copart, Inc.

Good day everyone and welcome to Copart's Incorporated fourth quarter fiscal 2023 earnings call. Just a reminder, today's conference is being recorded. Before turning the 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 p.m. 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 to you to the section titled Risks Factors in the Company's Annual Report on Form 10-K for the year ending July 31, 2023, and each of the company's subsequent quarterly results 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 Liao.

Great. Thank you, and good evening, and thank you everyone for joining us today. We're pleased to report our results for the fourth quarter of fiscal 2023 and the conclusion of a strong fiscal year. We continue our trend of generating excellent results for new and existing customers, of growing our business profitably and of reinvesting in the future prosperity of our customers and ourselves. Today, I'll keep my comments brief, focusing on some of the recurring themes that are most relevant to our business and to our customers. A year ago on this same call, we talked about the various dimensions of enterprise sustainability that we consider here at Copart, including environmental sustainability, given our critical role in the circular automotive economy, our financial sustainability in the form of our conservative capitalization, operational sustainability through our land stewardship and ownership strategy, and global socioeconomic sustainability in our providing mobility to developing economies around the world. Today I'll spend just a few minutes elaborating on a fifth dimension, which is the proactive role COPARC plays in assisting communities in their recovery from catastrophic weather events. The 2023 hurricane season has been forecast to be, quote, above normal, according to the National Oceanic and Atmospheric Administration, a division of the Department of Commerce. That forecast feels evergreen now, year to year. So far in 2023, we've experienced 12 named storms, more than double the number we encountered last year. Thankfully for our insurance clients and their policyholders, the insurance lost impacts of the first hurricane to make landfall this year. Hurricane Adalia, were relatively modest in comparison to major storms in prior years. The threat of a more substantial event nonetheless remains in 2023, as many of the most significant storms in the past 20 years have occurred late in the season. Hurricane Ian, for example, the largest ever catastrophic event in our history, as measured by unit volume, did not itself make landfall until the 23rd of September last year. For any substantial storm likely to affect our insurance clients and their policyholders, we don't have the luxury of perfect visibility before we deploy resources, both in the moment and in the years prior. Our response to Hurricane Adelia illustrates this reality. Though the landfall of the hurricane's eye was projected to be in the Big Bend area of Florida, prevailing weather models showed a wide range of possible outcomes. including a potential initial landfall in the Tampa area and eastward progression thereafter through Florida, Georgia, and Carolinas. Well before landfall, we deployed hundreds of team members, co-part-owned and third-party-owned tow trucks, and co-part-owned loaders, telecommunications equipment, and generators from around the country to the region. We were prepared to immediately retrieve inventories, store process titles for, and sell many thousands of vehicles in the affected areas. And of course, our real estate investment and planning had begun years in advance, yielding more than 600 available acres of dedicated cat storage in Florida alone. For a given storm quarter or year, our investment in catastrophic readiness may appear to be overkill, but we recognize the responsibility we have to our customers and to the communities we serve together to optimize our readiness for such severe weather events. I'll touch on a few additional themes for both our insurance and non-insurance businesses, but first in the insurance universe. According to CCC, total loss frequency troughed at 17.1% in the second calendar quarter of 2022 and has subsequently rebounded to 18.8% in the second calendar quarter of 2023. This is down a bit sequentially from calendar quarter one into calendar quarter two. Though this is the result of seasonality, we've observed that same modest reduction in total loss frequency from the first quarter to the second quarter in each of the past eight years of CCC's data. Our expectation is that new and used vehicle prices are likely to stabilize or decrease more swiftly than repair costs will. We believe this in turn should lead to a recovery in total loss frequency, eventually surpassing pre-COVID levels as well. In March 2023, Kelly Blue Book data indicated that average retail transaction values for new vehicles were below MSRP for the first time in nearly two years. In April 2023, this average transaction price was nearly $400 below MSRP compared to being $600 above just one year prior. The long-term drivers of total loss frequency, of course, remain unchanged. First, repairs are more expensive and less attractive due to increasing accident severity, vehicle complexity, labor costs, and rental car costs. And two, salvage economics are more attractive because the growing economies in Central and South America, Africa, and Eastern Europe depend on our damaged vehicles to provide the mobility they need. Although our US insurance volumes continue to increase, up some 9% year over year, we estimate the total loss volumes continue to be relatively suppressed when compared to historical total loss frequency norms. As this inflationary environment persists, our insurance clients continue to experience hiring and retention challenges, and we therefore believe they'll lean still more heavily on trusted partners like Copart to provide additional services, including virtual inspection, loan payoff, and title procurement services, among many others. Our insurance company clients continue to leverage and incorporate our image recognition tools and machine learning algorithms to enable better decision-making on total losses and, importantly, faster decision-making. As we've noted in the past, for a vehicle that will ultimately be totaled, insurance companies often nevertheless incur literally thousands of dollars in towing, storage, estimating teardown costs, and appraiser labor. much of which could have been mitigated with streamlined decision-making. Our insurance companies continue to benefit from and appreciate the importance of our global marketplace in providing superior salvage returns to the insurance industry and minimizing their claims expense as a result. Finally, a few comments on the non-insurance world as well. In the fourth quarter, we observed year-over-year growth of 13.8% in our blue card division, underscoring the realization of the benefits of our auction platform and our global member base as we serve the bank and finance fleet and rental segments as well. We likewise increased our dealer volume year over year by 5%. These dealers are unique as they serve in some cases as both sellers and buyers on our platform. In both cases for the blue car and dealer sources of vehicles for Copart, we believe we are outperforming other wholesale channels for vehicles. Lastly, in July of 2023, we received approval from the competition authorities in the UK to complete the merger of our acquisition of Hills Motor Company, which we had completed in financial terms a year ago prior. Hills Motor Company is a leading vehicle dismantling business in the UK. Our insurance customers in the region have made clear to us that they prefer us to be partially vertically integrated. in auctioning vehicles on their behalf while also directly satisfying some of their needs for recycled parts. With that, I'll turn it over to our CFO, Leah Stearns, to provide additional commentary to walk through some key statistics in our fourth quarter financial results before we open it up for questions. Leah.

Thank you, Jeff. Turning to the quarter, global unit sales increased nearly 10% year-over-year, including an increase of almost 8% in the U.S. 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 and about 14% for the year. Internationally, our unit growth came from a mix of fee and purchased units, with 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 U.S. 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 was primarily due to the continued recovery and driving activity increasing 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 deem damaged vehicles a 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. U.S. 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 Mannheim Index, which ended July at 211.7. Purchase vehicle sales for the fourth quarter decreased 12 million, or 7%, with U.S. purchase vehicle revenue for the quarter down 25%, and international up 29% for the quarter. For fiscal year 2023, purchase vehicle sales increased 23 million, or about 4%, with the U.S. 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%. U.S. margins increased to 51.2%, and international margins decreased to 21.4%. Global gross profit in fiscal year 23 increased by about 131 million, or 8%, and our gross margin percentage decreased by approximately 100 basis points, to 44.9%. U.S. margins for the year increased to 49.2% and international margins decreased 24.5%. I'd like to note the decline in our international gross margin reflects approximately 6 million of prior period non-cash 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 a HILS acquisition in the U.K. The year-over-year margin increase on a consolidated run rate basis was primarily driven by a mixed shift in the US, partially upset 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 increases, GAAP operating income increased by more than 20% to over $390 million for the quarter and about 8% to nearly $1.5 billion this year. Fourth quarter income tax expense was near $72 million, which reflects an 18% effective tax rate. And for the year, income tax expense was nearly $317 million, which reflects an 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 U.S. inventory, or over 10% when excluding low-value units, 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 a 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 this 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.