Copart, Inc.

Good day, everyone, and welcome to the Copart Incorporated first quarter fiscal 2025 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 and the company's annual report on Form 10-K for the year ended July 31st, 2024, 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 everyone for joining the earnings call for our first quarter for fiscal 2025. On our recent calls, we've been talking about some important themes about our business, including our recent growth with bank rental and fleet sellers. We talked about Title Express, a new offering we're offering the insurance industry. We've talked about sustainability and we've talked about growth in our international businesses, as well as in the heavy equipment space as well. Today, with the first quarter past us for this next fiscal year, we thought it would be a good opportunity to reflect specifically about our insurance business specifically. There are two themes I wanted to draw upon today. First is our response to the recent hurricane activity in the southeastern United States, and the second is the longer-term trends that we observe in the insurance industry more broadly. First, regarding the recent flurry of hurricane activity. In late September of this year, Category 4 Hurricane Helene made landfall in Florida. Severe flooding, of course, struck the Tampa-St. Petersburg area and eventually caused significant damage elsewhere in Florida, Georgia, and North and South Carolina, including areas not accustomed to dealing with storms of this magnitude. Then, less than two weeks later, Category 3 Hurricane Milton struck Florida again. The back-to-back nature of the storms added a level of complexity to our storm response that we hadn't previously experienced, including a brief evacuation of our own people in certain most dangerous areas. In comparison to Hurricane Ian, a similarly scaled and located storm from just two years ago Our advanced preparation and our team's execution this time around yielded still better results with approximately twice as many vehicles picked up in the first 10 days of these 2024 storms in comparison to Ian in 2022. As always, our emphasis is on retrieving, processing and selling vehicles as quickly as we can to help restore the communities in which we do business back to their prior state and to assist our clients, the major insurance companies, in resolving their claims with policyholders as quickly as they can. To that end, by the end of October, just three weeks after landfall for Milton, we had sold approximately a quarter of all of the assigned vehicles we would ultimately receive from both Helene and Milton. In fact, according to one third party source, three out of every four catastrophic units sold in Florida during the month of October were sold on Copart's auction platform, a reflection both of our presence as well as the speed of our execution. This go around our proactive storm preparation was marked by three pillars. First, the dedicated owned storage capacity that we hold in reserve for storms of this nature. representing nearly 2,000 acres nationwide and approximately 1,000 acres specifically for the Helene and Milton areas alone. Second, our technology and logistics teams have deployed real-time tools that serve both our own people as well as our third-party towing network as well as our own employed drivers in optimizing routing and optimizing dispatch for the rapid retrieval and movement of vehicles through our network. And finally, our industry-leading contracted and full-time towing and transport network, which we have steadily built up over the years, was able to respond with unprecedented speed in this instance. I've already had an opportunity to do so face-to-face with many of the Coparks employees, but we again wanted to extend our heartfelt gratitude to the more than 1,200 folks and their families who sacrificed for days, in some cases weeks and months at a time, to work in challenging conditions, to work long hours, to assist, again, our clients, our people, and our communities. Turning our attention to our insurance business more broadly. Our insurance business grew approximately 13% for the quarter in unit volume. When excluding the effect of catastrophic events, we grew 9% year over year for the quarter. Total loss frequency was certainly one of the major catalysts we experienced with the total loss frequency for the calendar quarter ending September 30th reported by CCC of 21.7%, an increase of almost 2% year over year. More broadly, though, we wanted to pause for a moment to reflect on longer term industry trends. There, as you know, has been a steady drumbeat in the news media and in various company announcements on accident avoidance technologies and autonomous driving rollouts over the past decade plus. And in addition, we've encountered a number of inquiries in recent days from investors, investors and other interested parties on this subject as well. Our answer here will be especially us centric. But the takeaways I think are broadly applicable to the markets in which we do business. We all, of course, draw inferences from our own empirical experience. The cars we drive, we now experience more of the safety technologies in the form of lane departure warning systems that buzz our steering wheels, rear cameras that we probably all use when we back up our cars nowadays. And many of us have also taken rides in autonomous taxis within the geofence areas in which they're operating today. We think there's also insight to be derived, however, from multiple decade trends that we can absorb that we can observe in actual data. There are four factors, I wanted to draw out today and then a secondary consideration, I wanted to offer that inform our perspective on the long term organic growth trends in our business. The first is simply population growth. Since 1960, population in the United States has grown at 1% compounded, which sounds like a fairly modest growth rate, but over a time horizon of that scale, our population has almost doubled in the United States. The second consideration is vehicle miles traveled, which over that same horizon, plus or minus, has grown at 2%. As a result, vehicle miles traveled over that horizon has quadrupled from 1960 to today, which is to say that ultimately vehicle miles traveled as the country grows more populous and more prosperous, as the United States has done, generally outpaces population growth alone. We're all aware, of course, of the anomalous, very well documented steep decline in vehicle miles traveled in 2020, courtesy of COVID-19. We are now above pre-pandemic peaks on this specific metric. If you were to look at a visual chart showing vehicle miles traveled over this 60 plus year period, I think you'd likely also conclude that we still have several years of return to work tailwinds ahead of us as more and more businesses implement those policies. The third phenomenon I want to comment on specifically is accident rates and their long term trends downwards. So over the past 30 years, The Department of Transportation has published data on police reported crashes. There is one anomalous trend from the 2014 to 2018 period, I think marked likely by the proliferation of smartphones and the addictive apps that certainly afflict us all that caused accident rates actually to increase in certain years during that period. But nonetheless, over the decades long horizon, We've seen a steady decline in accidents per miles driven. And in fact, today versus 1990, there are approximately one third fewer crashes and fatalities per million miles driven. But in absolute terms, that decline has only been 8% because of the offsetting effects of the growth in population and vehicle miles traveled. Safety technologies penetrate gradually into new vehicle shipments and still more gradually into the installed base of drivable vehicles, and it is that fleet effect which causes the gradual decline in accidents relative to the perhaps more innovative technology deployments exhibited or implemented by OEMs today. And then the fourth and most important driver of our business is total loss frequency itself. It has been the key catalyst in our growth now for decades and has grown more than fourfold since 1990. This, again, is a phenomenon that has exhibited a nearly monotonic increase over that period. But for an anomaly in late 2021 and early 2022, when the pop in used car prices made total loss a relatively expensive settlement procedure for insurance companies, briefly suppressing total loss frequency. We are yet again above pre-pandemic highs on this specific metric. The long-term catalyst here is that vehicles become ever more complex, including for reasons of the safety technologies we've already talked about today, and therefore more expensive to repair, rendering the repair path less attractive while also the intrinsic value of these vehicles rise via our marketplace. We find still more buyers in places like Eastern Europe, Central and South America, Africa and elsewhere, where their mobility needs are ultimately satisfied by our wrecked cars. The proliferation of safety technologies that drive accident frequency down, and by the way, there have been multiple rounds of these technologies over the decades, from anti-lock brakes in the 70s and 80s to the more sensor-driven technologies of today. But the proliferation of these technologies is not incidental to total loss frequency, but in fact, directly causal. These technologies tend to be enabled by sensors and chips often configured on the perimeter of vehicles, in raising the cost of repair as a result. Those cars in turn are still quite valuable to our destination markets as drivable contributors to the mobility in those markets. One additional secondary driver I thought was worth mentioning today is the phenomenon of uninsured, underinsured, and undercapitalized motorists specifically. On the point of uninsured or liability-only drivers, there is a very clear 30-year-plus trend downward, meaning over time in a market like the United States, insurance coverage generally becomes more robust. We do, however, observe cyclicality within that longer-term secular trend, driven in part by insurance premiums, the economic health of the country, and so forth. In the past year or two, in particular, the insurance premiums have generally increased at a rate outpacing other components of the consumer experience, in part because of the natural regulatory lag in raising insurance rates. As a result, then, the liability only plus uninsured motorists combined are a greater share of the drivable fleet than they had been in prior years. Again, the long-term trend here appears to be a secular trend downwards in any case. The upshot of all of the above for us is that as we look forward on a 5-, 10-, and 20-year horizon, Our baseline expectation continues to be of ongoing organic industry growth as population and vehicle miles traveled trends, plus total loss frequency, most importantly of all, more than offset declining accident frequency as safety technologies penetrate new vehicle shipments and eventually the drivable fleet. We do expect perhaps more volatility from contributors such as used car prices, from severe weather events and the like. On both fronts, then, we're investing accordingly to ensure that we have the physical technology and people capacity to serve our insurance clients under any conditions. With that, I'll hand it over to our CFO, Leah Stearns.

Thank you, Jeff. I'll begin with our first quarter sales trends. During the quarter, our global unit sales and inventory increased 12% and 6%, respectively, from the year-ago period, and was a function of growth and total loss frequency and share gains. Focusing on our U.S. business, unit growth was about 11%, which reflects fee unit growth of 11% and purchase unit growth of nearly 6%. Consignment or fee units continue to constitute the vast majority of our U.S. unit volumes. Our U.S. insurance unit volume increased about 12% year over year and approximately 9% excluding CAT units. We continue to grow our volume with non-insurance sellers by leveraging our core capabilities in outdoor storage via our real estate portfolio, a strong network of logistics solutions, and a global liquid buyer base. We are also seeking to optimize the mix of non-insurance units from a profitability perspective as we continue to prune the low-value unit volumes. During the quarter, our blue car business, which serves our bank and finance, fleet, and rental segment partners, continued its strong trend of year-over-year growth of over 20%. Our dealer sales volume, a combination of our co-part dealer services division and national power sports auctions, increased sales volumes by over 2% year-over-year, with CDS declining less than 1% and NPA increasing nearly 14%. and low-value units, including charities and municipalities, declining 4%. On a final note, our partner in the specialty equipment space, PurpleWave, has driven double-digit gross transaction value growth year-over-year for the trailing 12 months period ending October 31st, which significantly outpaces industry growth in the equipment auction marketplaces they serve. This impressive growth demonstrates the value of our partnership and what it brings to the market. Overall inventory levels in the US increased over 5% and decreased by about 1% when excluding low value and cat units. In turning to our international business. We saw unit growth of nearly 16% in the quarter, including about 6% from cat units due to severe floods in the UAE and Brazil, with fee units increasing about 16% in Q1 and purchase units increasing by just over 14% for the quarter. Our international business ended the quarter with inventory levels over 10% ahead of prior year. Global ASPs declined by less than 1% for the quarter relative to the year-ago period. Our U.S. ASPs continue to show resilience and are significantly outperforming the used vehicle market more broadly. While the Mannheim used vehicle price index declined by about 4% year-over-year, our U.S. insurance ASPs declined by only 1%. over the same time period and had a slight increase of about 1% sequentially. Internationally, ASPs increased nearly 7%. Turning to our financial performance, global revenue in the quarter increased to $1.15 billion, representing growth of over $126 million or about 12%. Global service revenue increased nearly $127 million or about 15% for the first quarter, primarily due to increased volume. U.S. service revenue grew by about 13% for the quarter, which included 2% attributable to CAT units, and international service revenue grew by about 30%. Global purchase vehicle sales for the first quarter decreased less than 1 million, or approximately 20 basis points, while global purchase vehicle gross profit increased by about 72% in the first quarter. In the U.S., purchase vehicle revenue was up about 9 million, or about 12%, while purchase vehicle gross profit increased nearly $5 million, or about 77% for the quarter. Internationally, purchase vehicle revenue decreased by nearly $10 million, or nearly 12%, and gross profit increased by $4 million, or about 67% in the first quarter. The reduction in international purchase vehicle revenue, accompanied by an increase in gross margin, was primarily driven by higher ASP insurance vehicles in Germany, which transitioned from purchase contract to a consignment model, coupled with stronger purchase unit margins in the UK. Global facility-related costs, which include facility operations, depreciation, amortization, and stock-based compensation, increased $88 million, or about 22%. In the U.S., facility-related costs increased $74 million, or nearly 22%. During the quarter, we recognized $29 million in incremental costs associated with hurricanes Helene and Milton. This reflects non-capitalized costs associated with units sold in the quarter, which is a change from our past CAT financial disclosures. There remain $18 million in costs, which were incurred and are currently capitalized on the balance sheets. These will be recognized as the remaining CAT units are sold. Excluding the costs associated with the hurricanes, facility-related costs per unit increased about 4% from the prior year period. This normalized increase in per unit costs reflects our ongoing investments in expanded operational capacity to support our continued growth. International facility-related costs were up $14 million, an increase of nearly 24%, or approximately 7% on a per unit basis. The increase in per unit costs was primarily due to growth in headcount to support our business in the UK. During the quarter, global gross profit was approximately $512 million, representing an increase of $48 million, or about 10%. And our gross margin percent decreased by approximately 82 basis points to 44.7% in the quarter. In the US, our gross profit increased to $448 million, which was an increase of over 28 million, or about 7%, and gross margin decreased 260 basis points to 47.2%. Our international gross profit increased to 65 million, about 20 million of an increase, or 44%, and gross margin increased over 740 basis points to 32.3% in the quarter. Turning to our general and administrative expenditures, which were 106 million in the quarter. This increase of 37 million reflects growth across the investments we have made into growing our specialty equipment sales team, which covers both a geographic and sector-specific coverage perspective. We expect to generate meaningful growth in specialty equipment growth transaction value over the next 12 to 24 months as a direct result of this investment. In addition, the investments we're making in our platform services teams and systems, which include our legal, compliance, technology, and our finance and people and culture teams have continued with support from third parties. We would expect these expenses to partially recede over the next 12 months and believe the business will be well positioned to generate strong operating leverage in the future. As a result, first quarter gap operating income increased by about 3% to over $406 million, which includes a modest headwind from the impact of hurricanes Helene and Milton. And finally, first quarter gap net income increased by about 9% to over $362 million, or $0.37 per diluted common share. During the quarter, we did benefit from over $13 million of incremental interest income, as we have actively invested our cash into Treasury securities. And for the quarter, our tax rate was 20%. To our capital structure, as of the end of October, we had over $4.9 billion of liquidity, which is compromised of nearly $3.7 billion in cash and our capacity under a revolving credit facility. For the quarter, we generated free cash flow of about $246 million, reflecting operating cash flow generation of $482 million and capital investments of about $237 million. Our strong performance in responding to the hurricanes during the quarter was directly attributable to the investments we've made in our teams, CatLand portfolio, logistics solutions, and technology platforms. We expect to prioritize the deployment of capital into these areas as we strive to continuously improve upon our service levels on behalf of our customers. And with that, Jeff and I would be happy to take some questions.