Copart, Inc.

Good day, everyone, and welcome to the Copart Incorporated third 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 security flaws. 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, 2024. and in 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 will now turn the call over to the company's CEO, Jeff Liao.

Welcome, and thank you for joining us. I'll begin with some remarks on our insurance business. including comments about our preparation for the 2025 CAT season before passing it to Leah to describe the results of our financial performance for the quarter. Starting with our insurance business, our global insurance volume remained relatively flat year over year with a nominal decline of 0.3% globally in unit sales and 0.9% in the United States. Accounting for the extra business day of leap year 2024, global insurance and U.S. insurance units sold grew by 1.3% and 0.6%, respectively. At the same time, total loss frequency continues to rise, as it has throughout the vast majority of the history of our industry. In the United States, total loss frequency reached 22.8% in the first calendar quarter of 2025, up 100 basis points or thereabouts in comparison to last year. And while individual quarters can fluctuate, and from time to time we observe even seasonal effects, the underlying drivers of total loss frequency remain quite consistent over time. First, the economics of vehicle repairs become less economically attractive to our client base, the insurance industry, with increasing vehicle complexity, rising parts prices, rising labor rates, storage fees, rental car expenses as well. At the same time, on the other side of the ledger, the economics of total loss become more attractive over time. For emerging economies around the world, our salvaged vehicles are an essential source of mobility for them, Copart's auction technology and our ecosystem of sellers and members is uniquely well suited to finding the highest and best use for every vehicle we touch. In anticipating a question about why nominal insurance volumes haven't kept pace with what appears to be rising total loss frequency, we'd offer a couple of notes. First, the precision of total loss frequency measures do vary, or does vary. The very nature of the calculation is to assess what portion of the claims in any individual quarter are ultimately resolved to be a total loss in the end, meaning some figures are even revised after the fact for historical periods. And notably, we observe that there are cyclical forces at work as well, including an increase in the rate of uninsured and underinsured drivers. According to the Insurance Research Council, they observed meaningful increases in both over the course of the past four years, and we would note cyclical trends over the decades in terms of the rate of uninsured and underinsured drivers. What that means in practice is that drivers with coverage of that type may never bring their vehicles into the traditional insurance claim settlement pathway in the first place. We would expect over time, as has been proven over the decades, that these typical forces will revert at some point as well. I wanted to turn my attention to the 2025 storm season. Meteorologists and experts have released a number of forecasts for how they expect 2025 storm season to unfold, noting that 2024 was an active season itself. Most would expect, based on above average oceanic temperatures, that this storm season could well be an active one as well, perhaps as active as 2024. In anticipation of these types of events, we continue to invest in real estate, infrastructure, technology, our people, and other aspects of operational readiness. Our preparation is not an ad hoc spring event, but in fact a year-round exercise for us as a company. One tangible example, is our acquisition of Hall Ranch, a property located in South Florida, which offers nearly 400 usable acres of vehicle storage for a storm. With this addition, we now have the physical footprint to handle a storm more than three times the size of the largest Florida storms on record in Copark history. In closing, we are excited to continue to invest our time and resources in growing and enhancing our capabilities, both for storms and for our day-to-day business. We'll invest in our physical storage capacity, our technology platform, our people, and our seller-member ecosystem, each of which is essential to delivering superior auction outcomes to our sellers and a superior purchasing experience for our members. With that, I'll turn it over to our CFO, Leah Stearns, and we'll both take your questions thereafter.

Thank you, Jeff. I'll begin with our third quarter sales trends. During the quarter, our global unit sales increased 1%, which reflects the modest headwind from the prior period being leap year. On a per business day basis, our global unit sales increased over 2%. Consignment or fee units continue to constitute most of our global unit volume. In our U.S. segment, unit sales were flat, reflecting flat fee unit growth and purchase unit growth of nearly 7%. Our U.S. insurance unit volume decreased close to 1% year-over-year and decreased approximately 2%, excluding CAT units. We continue to see non-insurance U.S. unit volume growth outpace that of our U.S. insurance business. Lucar, which services our bank, rental, and fleet partners, continues its strong trend with year-over-year growth of almost 14%. Dealer sales volume consisting of co-part dealer services and national power sports auctions grew over 3% year over year. Low value units increased just over 4%. Turning to our international segment, we saw unit sales growth of 6% in the quarter and about 5%, excluding CAT units, with fee units increasing 9% and purchase units decreasing 13% for the quarter. Our purchase units continued to decline as certain insurance customers shift from purchase contracts to consigning units. On a final note, we have observed softness in the heavy equipment auction space due in part to widespread uncertainty regarding infrastructure spending and tariffs. Our partner in the equipment space, PurpleWave, nevertheless maintained flat GTV year-over-year for the trailing 12 months ending April 30th. Our global ASPs increased by approximately 3% for the quarter compared to the year-ago period. Our U.S. insurance ASPs increased over 2% over the same period, and our international segments Insurance ASPs increased approximately 5%. We believe our auctions are outperforming other platforms on delivered ASPs to our sellers, attributable to the active participation of our global member base as well as our unique digital auction platform. We have not observed any hesitation from our buyers, which we would attribute to proposed or enacted tariffs. Our global inventory decreased nearly 10% from the year-ago period. Overall inventory levels in the U.S. decreased approximately 11%. There are three main drivers of the inventory decline. Lower assignments, faster cycle times, and the reduction in low-value unit-aged inventory. As we've noted previously, year-over-year changes in inventory levels can be a directional indicator of prospective unit sales trends. The trends we are observing in our inventory levels reflect the cyclical impacts associated with an increasing share of uninsured and non-insured motorists and varying growth trajectories amongst insurance carriers. We continue to believe that the secular trends in favor of rising total loss frequency will drive our long-term growth. In addition, our continuous focus on reducing our operational cycle times has reduced inventory levels. For example, deploying our Tidal Express solution to a number of new carriers has reduced in-yard cycle times and physical inventory. Our international business ended the quarter with inventory levels flat from the prior year. Turning to our financial performance, global revenue increased to $1.2 billion. Global service revenue increased nearly $88 million or over 9% from the third quarter of 24 due to increased international volume and overall higher revenue per unit. U.S. service revenue grew by 8% for the quarter and 7% when excluding CAT units, and international service revenue grew by about 18%. Global purchase vehicle sales for the third quarter decreased approximately 2%, while global purchase vehicle gross profit decreased 60% in the third quarter. In the U.S., purchase vehicle revenue was up about $20 million, or 22%, while purchase vehicle gross profit decreased $13 million, or about 187% in the quarter. This includes the impact of a $12 million out-of-period adjustment, which was related to the cost of vehicles sold in Q1 and Q2 of this year. Year-to-date, our U.S. purchase unit margins were just over 6%. Internationally, purchase vehicle revenue decreased by over 23 million, or 25%, and gross profit increased by over 2 million, or about 22%, in the third quarter. The reduction in international purchase vehicle revenue, accompanied by an increase in gross margin, continues to be driven by higher ASP insurance vehicles in Germany, which have transitioned from a purchase contract to a consignment model, as well as stronger purchase unit margins in the UK. Global facility-related costs, which include facility operations, depreciation and amortization, and stock-based compensation, increased $51 million, or about 12%, and about 10% pro forma if you reflect cap costs. In the U.S., facility-related costs increased $43 million, or nearly 12%. During the quarter, we recognized $6 million in incremental costs associated with Hurricanes Helene and Milton. This reflects the recognition of deferred expenses associated with CAT units sold during the period. Excluding the costs associated with the hurricanes, facility-related costs per unit increased about 10% for the prior year. This increase on a per-unit basis reflects our ongoing investments in expanded operational capacity to support our continued growth. International facility-related costs were up almost $8 million, an increase of nearly 11%, or less than 5% on a per-unit basis. During the quarter, global gross profit was approximately $552 million, an increase of $27 million, or about 5%, and our gross margin percentage was 46% for the quarter. In the US, our gross profit was approximately $480 million, an increase of about 3%, and gross margin was about 48% for the quarter. Our international gross profit was approximately $73 million, an increase of about 26%, and our gross margin was about 35% in the quarter. Third quarter gap operating income increased over 3% to approximately $452 million, which reflects the gross and gross profit and our general administrative expenditures of $101 million, which are up about $12 million year over year. Finally, third quarter gap net income increased by over 6% to $407 million, or $0.42 per diluted common share. During the quarter, we benefited from an increase of nearly $7 million from interest income as we have actively invested our cash into Treasury securities. For the quarter, our tax rate was a little over 19%. Turning to our capital structure, as of the end of April, we had over $5.6 billion of liquidity, which is comprised of nearly $4.4 billion in cash and our capacity under a revolving credit facility of approximately $1.3 billion. With that, Jeff and I would be happy to take some questions.