Copart, Inc.

Please stand by. 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 Liao.

Thank you. Good evening, and welcome, everyone, and thank you for joining us this evening. We're pleased to report our results for the third quarter of fiscal 2024. I'll provide some brief comments about the business before handing the call to Leah to review our financial results, and then she and I will take your questions. First, turning to our insurance business, we recently concluded our 24th annual U.S. Insurance Advisory Board meeting in New York City. Every year we gather in person to solicit feedback from our clients about the opportunities and challenges they face. which in turn inform our service offerings, tech deployments, and capital investment programs. Some of the priorities we addressed this year included a range of levers available to them to address escalating claims, cycle times, and advance charges in particular. We discussed at length our best-in-class auction liquidity fueled by our exclusively online marketplace, which itself has been refined repeatedly since its launch in 2003. our uniquely global buyer base, and the auction intelligence that results from the application of machine learning tools to the data from literally billions of interactions with sellers and members that correspond with tens of millions of vehicles sold. And in the spirit of our shared success, we hosted this event to coincide with a celebration of our 30th anniversary as a public company. And together with our clients, we rang the NASDAQ opening bell. We continue to grow our business with our insurance clients. As anticipated, new and used vehicle prices have decreased somewhat steeply in recent days, while repair costs remain elevated, driving a strong and continued recovery and total loss frequency. During our third fiscal quarter, we observed a 14% year-over-year decline in the Mannheim Used Vehicle Value Index. And though ISS Fast Track reported a slight softening in accident severity of 1.3% or so for the fourth calendar quarter of 2023, accident severity is still up almost 9% when compared to the same quarter two years prior. The combination of these two forces, decreasing used vehicle values and elevated repair costs due to vehicle complexity and labor challenges in the repair industry, has driven a recovery in total loss frequency back to pre-pandemic levels. Per CCC, total loss frequency for the first calendar quarter of 2024 was 21.1% across all loss categories, up approximately 150 basis points versus the same time a year ago. We believe that long-run trends continue to make repairing vehicles less economically attractive to insurance carriers, and totaling vehicles more economically attractive to them, and the total loss frequency will continue its steady long-term path upwards. Our US insurance volumes increased 6.8% year-over-year as we have lapped the effects of units from Hurricane Ian a year ago. Given the increasing frequency and magnitude of storm-related activity, we're somewhat hesitant to provide, quote, normalized growth trends that exclude the effect of storms, but it was a modest reduction in year-over-year growth as a result of the Ian vehicles sold a year ago. And then to the theme more generally of our response to catastrophic events, we responded to multiple smaller weather events so far this year and last. They did not in the aggregate approach the magnitude of major catastrophic events like Hurricanes Ian, Ida, and Harvey. Nonetheless, these comparatively smaller storms affect communities across the United States, including floods in the Houston area and tornado outbreaks in the Central Plains. Our investments into our catastrophic team and infrastructure have allowed us to respond efficiently to our customers' needs throughout these events and underscore our contributions to promoting resilience for the communities we serve in the face of evolving climate change trends. We note also that major research groups are predicting a serious storm season ahead, predicting as many as 31 named storms in 2024, and an increase of over 50% year over year. As a result, our focus remains on our proactive preparedness, investing in our teams on the ground, our logistics technology, our fleet of vehicles, and of course, our dedicated acreage reserved for handling the peak capacity needs that come with major events. On a similar note, outside the United States, we're leveraging our catastrophic response capabilities to support our clients in southern Brazil and in the Persian Gulf, who continue to experience the effects of ongoing historical flooding. I'll pause for a minute on our non-insurance business as well. We continue to grow our blue car business, which serves our bank and finance fleet and rental segment partners. In the third fiscal quarter, we observed year-over-year growth of 23%, almost 24%. Likewise, our dealer sales volume, a combination of our Copart dealer services business unit and NPA, our power sports auction platform, increased unit volume sold by almost 18%. All told, our U.S. non-insurance automotive and dealer volume, excluding low value and wholesale units, increased 19% year over year. Our growth is the result of our commitment to customer service and our auction liquidity. With each additional vehicle we earn the right to sell, we increase the attractiveness of our auction platform to the world's automotive buyers, drawing still more members to our auctions and to the benefit of all of our sellers, new and old. I'll conclude with a brief reflection on our first 30 years as a publicly traded company. Perhaps the single most distinctive characteristic of Copart today is our investment horizons. Even as we celebrate our 30th anniversary, our minds quickly shift to the work ahead of us to ensure a prosperous celebration with our clients of our 40th, 50th, and 60th as well. We'll continue to invest as we always have in our people, our technology, and our real estate to deliver excellent results to our clients worldwide. And with that, I'll turn it over to Leah, our CFO.

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 PurpleWave, while inventory increased 4% from the year-ago period. This growth was a function of a partial recovery in 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 that of our insurance business. This volume growth substantially came from dealer units, which increased nearly 18%, and fleet rental and finance units, which increased over 23%. Inventory levels in the U.S. increased over 3% in the quarter and over 5% when exceeding 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 Mannheim 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 increased 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 COPARs 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. And with that, Jeff and I would be happy to take questions.