Copart, Inc.

Please stand by. Good day, everyone, and welcome to the Copart Incorporated second quarter fiscal 2026 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 the federal securities laws, including management's current views with respect to trends, opportunities, and uncertainties in the company's industry. 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, 2025 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 will now turn the call over to the company's CEO, Jeff Liao. Thank you, Owen.

Welcome and thank you for joining our second quarter fiscal year 2026 earnings call. I'll begin with some brief remarks on trends in our insurance business before passing the call to Leah to provide a summary of our financial results. We'll then be happy to take your questions. On our insurance business, for the second quarter, our global insurance units declined 9% or 4%, excluding the effect of catastrophic units from a year ago. Our US insurance units declined 10.7% for the same period or 4.8% excluding those catastrophic units. The underlying drivers of these changes remain consistent with what we've discussed on our prior calls. First, shifts in policies and force and exposure levels across insurance carriers who themselves are experiencing differential growth rates. softer overall claims activity driven by a consumer pullback in auto insurance coverage, all partially offset by continuing increases in total loss frequency. On the latter point, total loss frequency continues its inexorable rise, consistent with the long-term historical trends we've observed and discussed at great length. In the United States, total loss frequency was 24.2% in the fourth quarter of calendar year 2025, a slight 10 basis point uptick from a year ago. The year ago period, of course, does include the effects of hurricanes Helene and Milton. It's notable that total loss frequency has increased over that period nonetheless. Then when you step back a bit over a multi-year horizon, the upward trajectory becomes clearer still. Total loss frequency in calendar year 2015 was 15.6% in comparison to 23.1% in calendar year 2025. Against that backdrop, our focus remains on delivering superior long-term economic and service outcomes to our insurance clients. First and foremost, we maximize returns for our insurance partners. We believe our auction returns continue to reflect structural advantages of our marketplace and recent account wins for which we have empirical before and after returns data validates that position. As you know, industry-wide vehicle values have normalized somewhat from the elevated levels we observed during supply chain constrained period of 2021 and 2022. as evidenced by Mannheim indices and otherwise. We are nevertheless generating record average selling prices for our U.S. insurance consignors. As we discussed at great length on our first quarter call, we attribute this performance to the scale and diversity of our global buyer network, rising international participation, enhanced data-driven merchandising, and the liquidity that comes from consistently finding for each vehicle we auction its highest and best use globally. The critical driver of long-term competitive advantage for Copart is that liquidity. We migrated first to an online-only auction in 2003 and have benefited from an almost two-decade head start in comparison to the rest of the industry. In short, then, we benefit from a growing base of bidders, as evidenced in bidders per auction, bidders per lot, watch list additions per lot, and so on. our selling customers have also voted with their pocketbooks, entrusting us with more pure sale units than they ever have before, knowing our auction will achieve a full and fair market value. The ancillary benefit from that change and that evolution is that our sellers can themselves reduce their own internal administrative burdens by extension. As evidenced by marketplaces across a multitude of industries, liquidity begets liquidity, the fact that our auctions continue to drive strong returns and price discovery yields further growth by bringing new sellers to our platform. And frankly, by enhancing the economic attractiveness of the total loss pathway for our insurance clients as well. Our strong returns are literally one of the critical drivers of rising total loss frequency in the industry. To that point, our U.S. insurance ASPs for the quarter increased 6% year over year. Excluding the effect of the catastrophic events from a year ago, our average selling prices for the US insurance sector grew by 9% year over year, yet again outpacing industry trends. The second important element from our insurance carrier's perspective is cycle times, both from assignment to vehicle retrieval and from vehicle retrieval to vehicle sale. These are critical drivers of economic value and policyholder satisfaction for our insurance clients. To deliver excellent pickup times, we operate the largest tow network in the industry, by a long shot. A unique combination of third-party subcontractors, owned trucks and employed drivers, and what we call truck-in-a-box operators, who are independent third-party drivers who leverage Copart's purchasing and financing scale for their vehicles. All of these service providers benefit from Copart's best-in-class route density to optimize performance and cost. Finally, our Title Express offering, the process by which we obtain loan payoff balances and accelerate the retrieval of original titles, whether held by the banks or by individual policyholders, is by a factor of 5x or more the largest such platform in our industry. In many cases, we deliver cycle times 10 days better or more than the insurance clients can deliver on their own. because we benefit from unmatched scale and the purpose-built technology platform that that scale enables. On the specific question of claims activities, we talked at length on our last two calls about trends we've observed in the insurance industry, including consumers paring back their coverage by foregoing collision coverage, raising their deductibles, or both. These trends have continued in our most recent quarter, Historical data does indicate over the long haul that these are more cyclical forces than they are secular. The last point I wanted to make was to shed some light on artificial intelligence and what it means as a critical tool for COPAR specifically. We have deployed artificial intelligence at scale along multiple dimensions across our enterprise, including my own significant personal engagement in Cloud Code and other such platforms. We've observed, not surprisingly, an exponential monthly increase in use by our own in-house team of engineers. With approximately 1,000 full-time engineers across North America, Europe, and Asia, we have by a healthy margin the most robust and experienced bench of technology talent in the industry and the tech platform to show for it. Artificial intelligence is turbocharging their productivity day to day. We have also deployed our artificial intelligence in business analytics, document processing, our call for release processes, driver dispatch, and so on and so forth. As one commercial example, two full years ago, we launched a total loss decision tool to the industry, which assists insurance carriers in making expedited total loss decisions with limited information, including, for example, a small sample of photos and otherwise. In every case, as we deploy this critical technology, we are appropriately respectful of the critical privacy and reliability considerations that our sellers will have, as well as the business practices, legal and regulatory considerations of our insurance business partners specifically. We have already seen AI substantially increase our productivity across functions, and we will continue to deploy it to continue doing so. We also know that artificial intelligence will enhance the value proposition we can deliver to sellers and buyers at our marketplace over the long haul. With that, I'll turn the call over to our CFO, Leah, to discuss our second quarter financial results.

Thank you, Jeff, and good afternoon to everyone on the call. I'll begin by walking through our financial results for the quarter, beginning with our consolidated performance, followed by review of our U.S. and international segments. For the second quarter, consolidated revenue declined 3.6% year over year to $1.12 billion. The prior year included revenue from over 49,000 CAT-related vehicles. Excluding CAT, consolidated revenue increased 1.3%. Service revenue declined 4%, and purchase vehicle sales decreased 1.4%. Revenue performance was driven by higher ASPs, which were up 6% on a reported basis and 7.1% excluding CAT, which were offset by lower unit volumes, which declined 8% globally and down 3.6%, excluding CAT. Global insurance units declined 9.3% or 4.1% adjusted for CAT, while global non-insurance units decreased 2.7%. Global inventory declined 7% from the prior year, while global assignment volume declined low single digit, Global gross profit decreased 6.2% to $492.8 million. The prior year included profit from the CAT units, and this quarter included a $6.8 million one-time expense accrual related to international VAT. Adjusting for these items, global gross profit increased 0.4%, and global gross margin increased 178 basis points to 45%. Operating income. declined 8.8% to $388.7 million, while net income was $350.7 million, down 9.5% from last year. And earnings per diluted share decreased 9.2% to $0.36. Turning to our U.S. segment, total units declined 9.5% or 4.5%, excluding CAT and direct buy. Insurance volumes decreased 10.7% or 4.8%, excluding CAT, which are consistent with the claims frequency trends Jeff described a few moments ago. Dealer services unit growth was 5%, while commercial consignment units, which are marketed through our blue car channel, declined 11.8%, reflecting higher repair activity among our rental customers, while fleet and bank finance seller volume continues to grow at a healthy double-digit pace. In addition, as we continue to shift lower value units to our direct buy channel, reported US purchase units declined 23.6%, or just 8% on a normalized basis. As of the end of the quarter, our US inventory had declined 8.1% from the year ago period. During the quarter, US assignments declined low single digit from the prior year. Purple waves gross transaction value growth of more than 17% over the last 12 months continues to significantly outperform the broader industry and reflects our strong performance in our expansion markets as well as growth in our enterprise accounts. U.S. total revenue declined 5.5% but was flat excluding prior year CAT events. Fee revenue declined 5.6% and was also flat excluding CAT. As lower unit volume was offset by an increase in revenue per unit. U.S. insurance ASPs increased 6%, or 9%, excluding CAT, and non-insurance ASPs increased 2%. U.S. gross profit decreased 7.2% to $430 million, or 1.6%, excluding CAT, and gross margin was 46.6%. Operating income was $341.5 million, down 9.2% year over year, or 2.3%, excluding CAT, and U.S. segment operating margin was 37.1%. Turning to our international segment, international units declined less than 1%, or grew 1%, excluding prior year CAT events. Insurance units decreased 2.6%, or 1%, excluding CAT, and international non-insurance units increased 9.1%. We continue to see strong non-insurance growth across our diversified international footprint, including in the UK and Canada. Revenue increased 6.1% or 7.7% excluding CAT to $200 million, including a $13.4 million favorable FX impact. Service revenues increased 7.7% or 9.4% excluding CAT, which was driven by a 7.6% increase in fee revenue per unit. International insurance ASPs rose 9%. Gross profit grew 0.9% and operating income was 47.2 million or a 23.6% operating margin. Finally, turning to our capital structure and liquidity. Copart remains in an exceptionally strong position. We ended the quarter with liquidity of approximately 6.4 billion, including cash and cash equivalents of 5.1 billion and no debt. We continue to generate robust free cash flow, which has increased 58% year to date. This is supported by disciplined capital allocation into assets, which position us to efficiently support our growth to serve both insurance and non-insurance clients while also delivering strong operational efficiency. In addition, during the second quarter, we began to repurchase shares of our common stock through open market purchases. and have subsequently repurchased shares under a 10 plan through the month of February. Fiscal year to date, we have repurchased over 13 million shares for an aggregate amount of over 500 million. And with that, I'd like to thank you for joining the call, and we'll open it up for questions.