Good day, everyone, and welcome to the Copart, Inc. Fourth Quarter Fiscal 2017 Earnings Call. Just a reminder, today's conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Jay Adair, Chief Executive Officer of Copart, Inc. Please go ahead, sir.

Thank you, Travis. Good morning, everyone, and welcome to the fourth quarter earnings call for Copart. We'll also report on the fiscal year 2017. I'm going to pass it over to Jeff Liaw, our Chief Financial Officer. After a financial update, he'll give it to Will Franklin, our Executive Vice President, who will give you an update on operations. And then finally, I'll talk on the superstorm taking place in Houston and the work taking place in Houston and Florida. With that, I'll turn it over to Jeff Liaw.

Terrific. Thanks, Jay. And first, our apologies to folks listening into the call for the technical difficulty that caused us to delay the call until 10:15 Central or 11:15 Eastern. I'll start with the safe harbor. During today's call, we'll discuss certain non-GAAP measures, including non-GAAP net income per diluted share, which include adjustments to reverse the effect of foreign currency-related gains; impairment of long-lived assets; acquisition-related fees; certain income tax benefits, foreign income tax credit limitations, and payroll taxes related to accounting for stock option exercises. We have provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our website under the Investor Relations link and in our press release issued yesterday. We believe the presentation of these non-GAAP measures, together with our corresponding GAAP measures, is relevant in assessing Copart's business trends and financial performance. We analyze our result on both GAAP and non-GAAP bases described above. In addition, this call may contain forward-looking statements within the meaning of federal security laws, which are subject to substantial risks and uncertainties that could cause actual results to differ materially from those projected or implied by our statements and comments. For a more complete discussion of the risks that could affect our business, please review the Management's Discussion and Analysis portion of our related periodic reports filed with the SEC. We do not undertake to update any forward-looking statements that may be made from time to time on our behalf. Now to the fourth quarter. It was a record fourth quarter for Copart in terms of unit sales, revenue, gross profit and non-GAAP adjusted operating income. We experienced global revenue growth, as you've noted in the press release, of 13.8%. This is despite a detrimental year-over-year currency effect on revenue of $4.1 million from…

Thank you, Jeff. I'll provide a little color on our operational assets, our business last quarter before I then turn it back over to Jay for final comments. Copart delivered another strong quarter. In our fourth quarter of fiscal 2017, we grew our worldwide revenue by $45.9 million or 13.8%, yet our gross margin increased by 18.4%. And excluding the impact of the impairment, our EBIT increased by 22.6%, illustrating the operational leverage endemic in our business. Our consolidated growth in revenue was driven primarily by an 11.2% increase in worldwide volume. In North America, unit volume was up 12.5% and was driven by organic growth and market wins in the insurance market, with continued growth in our noninsurance business and our recent NPA acquisition. On a same store sales basis, which excludes the NPA acquisition, North America volume grew by 10.9%. While we continue to see growth in volume from our insurance suppliers, driven primarily by the elevated level of total loss frequency, we are also seeing significant growth in our noninsurance business. Excluding NPA, which in the current quarter grew by almost 11%, noninsurance suppliers are composed of several sellers from various sectors from the vehicle redistribution ecosystem and includes franchise and independent dealers, finance companies that give us the repossessions and off-lease vehicles, charities, municipalities, equipment dealers and brokers. In addition to the increased overall volume from noninsurance suppliers, we are also seeing a beneficial change in the mix as charity cars, which typically have the lowest gross margin per car, declined in both total units and as a percentage of total units. At the same time, volume from franchise and independent dealers, which typically yield one of the highest gross margins per car, grew by almost 20%. In North America, we also saw an increase in…

Thank you, Will. Thank you, Jeff. I want to start by talking about Hurricane Harvey. What we're seeing in that market is a superstorm that is up there with the likes of Katrina in 2005 and Hurricane Sandy in 2012. I'm going to start by saying, I can't say enough about our special ops teams and the operations team, in general. I've been referring to them lately as the Army Corps of Engineers for Copart. Just the mobilization, what takes place in a superstorm like this is phenomenal. I'd like to quantify that a little bit for you. We got our first assignments on August 26. The first day, it was less than 20 assignments. Within a matter of a few days, we were receiving over 5,000 assignments a day. So far, we've taken in over 65,000 assignments. We predict in that market that we will end up taking something north of 85,000 assignments. And we are already -- we have already picked up over 40,000 units or over half of what has been assigned so far. So we are seeing an event that has just such huge magnitude, and I want to give you some more examples of that. We're still seeing over 1,000 assignments a day. We flew in and surveyed the area. Literally, one day after the storm took place, we were operating, up and running the day after the storm took place. And our surveillance told us that there was a lot of standing water. And when you got that kind of standing water and you see that the dams are full, the lakes are full and it's going to take a while for the water to recede, you know that the call-in volume is going to take weeks. So here we are today, more than…

[Operator Instructions] Our first question comes from Bob Labick with CJS Securities.

This is actually Robert on for Bob this morning. On the National Powersport Auction acquisition, you had touched on it in your prepared remark. But can you just talk a little bit more about the business model, the growth potential there and the purchase multiple you paid?

I can address 2 of those. So the business model is that they are a -- they historically have been a wholesale-only auction platform for motorcycles. The business actually was born -- is largely serving first lenders for repossessed bikes. Over the years, they have diversified their source of powersports vehicle and diversified beyond motorcycles as well. But today, they, and now we, source vehicles both from lenders for repossessions as well as from dealers. The buyers are largely dealers themselves who in turn would sell through their own retail channels. That's been the business model. They've got 5 locations today across the country. We believe there is potential for growth, as I noted earlier, both in terms of geographic expansion as well as further market penetration. The powersports arena is less intermediated than, for example, the car or the automotive universe, and so there's potential in both regard. As for the purchase multiple, historically, as you know, from Universal Salvage in '07, QCSA in '13, we tend not to elaborate meaningfully on those front. This is a compelling acquisition to us financially as well as strategically. We believe it's accretive to us on an operating income basis. And I think that should be illustrative. That's how we think about businesses in terms of the actual cash flow and operating income delivered. We believe it makes good sense for Copart in those regard.

And earlier in the year, you had purchased additional land in Florida for use as standby in catastrophic event. If I understood your earlier comments correctly, it was not used for Hurricane Irma?

It's not used materially. I think we're storing 400 or 500 cars there that hit the Punta Gorda area because that yard actually did sustain some damage. That facility that we have there did get flooded. So as a way to switch that one out, we moved those vehicles into Okeechobee there. Okeechobee got room for ...

Another comment on our capacity in Florida. One of the reasons that we're not in need of additional sublots is because previously we had purchased a 51-acre site in Jacksonville, which we had not announced, but which we are able to utilize in this situation.

And just lastly for me on Germany and Spain. Anything new in the last 3 months since we had last talked that would suggest faster or slower traction than your original time frame expectations there for the greater rollout?

No, I think all indications are very positive. I think a [ gating ] issue in further expansion will be our acquisition of real estate. We're very optimistic about the potential of that market. And as we've said before, when we talk about Germany, we're really talking about all of Europe and the EU.

Our next question comes from John Healy with Northcoast Research.

I wanted to follow up on the storm question. I don't think you guys directly said, but I believe in Sandy, you guys lost about $10 million or so, maybe even a little bit more than that when all was kind of washed out. Do you expect to lose money on these storms that we saw this storm season? Or do you think it's more of a neutral or maybe even a potentially profitable event given that you guys have been so thoughtful in terms of how you improved your planning for these items?

So John, I think that's a fair question, and we weren't -- we're not purposefully being evasive. This is something we'll talk about at the end of Q1. As you know, there are offsetting considerations here. On the one hand, we do run additional unit volume through our fixed infrastructure, so in that regard it is helpful. But as you also know, we face elevated cost, both in terms of the towing expenses, personnel expenses as well and of course, through catastrophic leases. So there are -- those are the offsetting considerations. And again, we'll provide the color. I know that what you're looking for, the directional answer, but we'll have to wait for Q1 and we'll elaborate much further then.

Well, let me add one more point. The expenses and the revenues in these kind of situations are very choppy. We tend to recognize the expenses upfront. So while we'll have well over $10 million on lease expenses at least in the current commitment, the revenue generated from the car that -- in which those cars are -- reside won't come until they're sold, most likely that will be in Q3 and Q4. So you're going to see the revenues recognized upfront and the revenues recognized in subsequent quarters.

That makes sense. I wanted to shift gears a little bit. Something I haven't heard you guys bring up yet, but I wanted to ask about the U.K. business. I've seen a number of press reports that at least probably 6 or 7 of the manufacturers have rolled out kind of cash for diesel type incentive programs to get some of the older engines off the road. Is that something that you think you'll be able to talk about at the end of fiscal '18 and say, hey, it was a big deal for us, and it was a boost to the U.K. business. Are you expecting kind of a big lift over the next 3 or 4 months from that kind of program?

We're very aware of the program. We're just too early in the process to figure out the impact this ultimately will have on our financial results.

Okay. And then just one final question for me. Any thoughts as you go into fiscal '18 just in terms of how you're thinking about capital allocation? You guys have kind of grown into the leverage that you've added a couple of years ago and was just kind of curious if you see yourself more weighted toward buybacks this year or continue on maybe with some opportunistic acquisition?

John, I think that's a decision and a process that we undertake on an ongoing basis sort of with among ourselves as well as with our Board of Directors as to the appropriate places to allocate capital. Over the long haul, you noted exactly how we do deploy capital, both through acquisitions as well as through share buyback to return capital to the shareholder. There are no imminent expectations of us taking potential action on any of those fronts. But certainly, over time, those will be the 2 paths. And we will -- I should -- also organic investments in our own business. As you well know, capital expenditures for the past couple of years have trended meaningfully above our historical rate. So it's really that first, reinvestment in the business, one, strategic tuck-in acquisitions and share buyback.

Our next question comes from Bret Jordan, Jefferies.

One quick storm question just to try to get the scale. You said you expect 85,000 total assignments. How does that compare to what you think might be the total assignments that come out of Harvey? And then as you bring these vehicles in, could you sort of talk about the quality of the vehicle maybe compared to Sandy, and then obviously talk of more truck and SUV mix down there and it's mostly freshwater damage. When you ultimately auction these, how do you think they will stack up from a ASP versus prior catastrophic experience?

Sure. So assuming that you try to base it on what you think your competitor process is and then you try to figure out how many vehicles are uninsured, meaning liability-only coverage, no cost, no collision coverage, so we would never see those vehicles. You're probably looking -- I know there was some numbers out there of 1 million units. You're probably looking at about 0.25 million units would be our guess that were damaged in the storm based on what we picked up, what our competitors are going to process and based on what we believe the market to be, the liability-only coverage vehicles. So Bret, I think that was your question, I understand, how big the actual event is, okay. As far as the types of damage, Sandy was a saltwater damage. This is more fresh water. And Katrina vehicles sat in the water for up to 7 days, 10 days. I mean, it would be -- it took a long time to get the water off during Katrina. And this is much less than that, freshwater damage. And in many cases, a lot of the vehicles I've looked at, clearly, some of the vehicles went completely underwater, but a lot of the vehicles I looked at have only had light damage. So my guess is, that these will fare a little better than the vehicles that we sold in Sandy and significantly better than the vehicles we sold in Katrina. I mean, if you're going to try and grade flood vehicles these would be better flood vehicles than normal.

Okay. And then follow-up question then, to skip to the international. I think you commented that Germany and Spain is more of an EU concept as opposed to specific countries. And you said your number of bidders, I think, was exceeding the U.S. number maybe per auction. How much of what you're doing in Germany is being sold in Germany versus traffic that you're seeing on those auctions from other markets in the EU?

It's about 25% international, about 25% of the product going outside of Germany and about 75% is within Germany.

Okay. And when it goes outside of Germany, does it go in the EU or are these still sort of further afield buyers, like you're seeing shipments from the U.S. to Asia?

Typically, the EU. Typically, Eastern Europe actually, predominantly Eastern Europe.

Our next question comes from Ben Bienvenu, Stephens Inc.

This is Daniel Imbro on for Ben. I want to start on NPA. Sounds like a strategically beneficial relationship. Was this acquisition more one-off or does it signal you guys would be willing to look at more nonsalvage acquisitions in the future?

I think as you already know, nonsalvage is a meaningful part of Copart's business today. I think we've shared some rough rules of thumb in the past and said that 80-20 would be about the right ratio for insurance and the noninsurance-related. So this doesn't signal anything new. It's a continuation of our strategy in general. And it's also an important enhancement into our powersports capabilities in particular. You've heard us talk about CrashedToys and how important that is for us to differentiate ourselves within this portion of the marketplace. And the reason that it is of strategic value to us is in large part because the National Powersport team brings particular expertise in that regard.

And then maybe from a profitability perspective, how does that business compare to your like, say, salvaged business on a gross profit percentage?

It won't meaningfully change the profile of the company overall, both because of the size as well as the nature of the economics. It's much more similar than it is different.

Great. Great. Great. And then shifting gears a little bit, last one for me. Thanks for the color earlier on the expansion plan. Do you have any sense how far into this investment cycle we are? Or maybe another way, how many more yards do you guys think you would need to deal with the projected industry growth as well as the excess capacity you're building out for CAT event?

We think we need significant growth in our capacity. I mean, if you look at our average quarterly growth over the last 12 quarters, it's over 10%. If you look over the last 8 quarters, it's over 13% in a very stable used car pricing environment. So if you look at the future and you see off-lease vehicles that could approach 4.5 million units a year at the same time you're going to see new car SAAR numbers in the 15 million. I've seen projections as low as the 13 million level. There's been a real tight correlation between the percentage of off-lease vehicles to new car sales and the movement of used car pricing. And when that percentage exceeds 20%, we've seen a meaningful decline in used car pricing. So if that's the case, and we do expect used car pricing to decline, then just based on the math, we expect total loss frequency to continue to increase.

I can provide some broader color on that for you. We, including based on results over the past many years as well as the past few years, view this as a growth business fundamentally. And so the last time, I think, we shared a good concrete number was the fiscal '15 annual report [indiscernible]. We said we had plus or minus 8,000 acres systemwide. So if the business is growing 5% to 10% and you want to maintain capacity utilization at levels where you've been before, which generally speaking you could do, it does require a substantial investment year-to-year. So you shouldn't expect the investments to just fall off a cliff overnight, one day, so long as the underlying trend in our business is driving activity, accident rates, total loss ratios. For that matter, catastrophic event continue to yield favorable or increase the salvage result, you should expect additional land investments. That's been the story for Copart for decades. Certainly, for the past few quarters as well and for the future as well.

And that gives rise to a couple other thoughts I'd like to share. One is, we have a fundamental change in our approach to our business. So in the past, there was far less volatility in the number of units that we process at a car -- at a yard. And now we're seeing wild swings, not only due to CAT event, but for other reasons. And so it was easier to operate closer to the edge, closer to 100%, 105% capacity when we knew that our yard capacity would peak the last week in January, the first week in February and then stay there for 6 weeks. Now we can't service our insurance customers with that model. So in non-CAT areas, we look at an 85% capacity threshold. In CAT areas, we're going to go 70% capacity threshold. So that requires us to expand even further than the growth in the market would indicate. And finally, as we've talked about, we are building our business more and more around our ability to address CAT situation. That's evidenced by our yard that we opened in Okeechobee. We actually purchased a site in Houston that's about 240 acres. We just purchased it so recently we're not able to use it in this storm, but would be available to us next year. So along with the growth in the market, along with our change in our business model, along with our focus on being able to service our customers in a CAT situation, our need for land will continue to grow for the next few years.

Our next question comes from Craig Kennison, Baird.

Jeff, I had a question in terms of the cost of the Harvey event, any guidance as to what kind of costs you're incurring in the current quarter?

Pardon me, in our first quarter or in our fourth quarter?

The costs you're absorbing related to Harvey that is in the current quarter that we're in today.

In Q1?

Q1? Substantial. Well, we can't really provide much more color than that. We are incurring a meaningful proportion of the costs. You've now heard Jay and Will kind of separately describe the mismatch in timing in that you'll see meaningful costs in Q1 and Q2. You will really start to see meaningful sales in Q2 and Q3. And as Jay noted, tripling [ in Q4 ] as well. So it will be a meaningful part of the conversation end of Q1.

Okay. And then as it relates to NPA, can you talk about the international opportunity you have there? And then secondly, to what extent can you use VB2 and some of the technology that Copart brings to bear?

The international opportunity is real. I would say the domestic opportunity is probably still a higher priority given there are only -- they only have 5 locations today. We only have 5 locations in NPA: in San Diego, in Texas, Cincinnati, Philadelphia, Atlanta. So we believe that geographic penetration is very relevant. We've done analysis to figure out for their consignment volume how much comes within sort of X miles of a geographic radius. And we think that having a broader footprint in the United States is of a real value to us first. Internationally, I think that's down the road and a real possibility as well. As for the technology question, they have run stand-alone company very capably and thoughtfully for many years. They've got a stable auction platform as well. As for future integration, I think that remains a discussion for future periods.

And lastly, any update on total loss trends in the salvage market?

As [ the fleet ] continue to grow, the most recent report was the first quarter of this calendar year by ISS and I think it was up 2%. Carpark is growing at less than 1% and -- but total loss frequency, which is more difficult to get industry information on, appears to be at -- remaining at an elevated level. So we don't see anything that in the near horizon that's going to change the dynamics that are driving the growth.

The next question comes from Ryan Brinkman, JPMorgan.

This is Samik on behalf of Ryan. I wanted to start with a storm-related question. So the 85,000 assignments that you're sort of predicting related to Harvey, I just want to see -- and maybe you mentioned this already and I missed it, what were the total assignments during Hurricane Sandy that you received? Because I thought I went back and look and I believe you had called out $20 million of abnormal costs or extraordinary costs during the time of Hurricane Sandy. So just trying to ballpark what the current numbers would look like for this coming -- for this current quarter.

That's a fair question, Samik, and we appreciate it. The reason I even paused for a second is, there's always math to be done in terms of "incremental units," right? You would have picked up steady-state units in a given market and how many do you actually pick up over that time. In a time period, how much is attributable to the natural disaster itself and how much would you have gotten otherwise? Directionally speaking, I think in our annual report, at the time, we had indicated that we picked up, plus or minus, 85,000 vehicles. So I think what you've heard from Jay is directionally this is just similar. The dust will settle and we'll be more precise about it. But in terms of the rough scale of the unit volume, I think it's -- probably think of it as directionally similar to Sandy.

And I -- just a little bit to add. And that is, that the cost on this will be higher. The cost associated with Sandy, while high, will not -- I would argue not as high as what we're seeing in the Houston market. So we'll have more -- as Jeff said, we'll have more color on it when we disclose Q1. But just so you're aware, the actual rent per car is, is turning out to be higher than we paid in the past.

Okay. Okay. Got it. All right. And just a quick follow-up, can you sort of give us some color in terms of what your market share is in like Texas and Florida versus the national average because you just mentioned 85,000 assignments out of sort of 0.25 million vehicles being impacted, which is sort of north of [ 33 ]. So I'm just wondering if you have any difference versus the national average in terms of market share in those impacted regions?

We don't comment about market share globally, nationally or regionally. I'd look to the analysts for assistance on that. I think they broadly have a reasonable picture of the marketplace.

I think our competitor may have actually disclosed the amount of units that they thought they were going to handle in their call. And you might be able to look at that.

Our next question comes from Matthew Paige, Gabelli & Company.

Talking about the storms again, while it doesn't sound like it's the case now, but is it possible for the market to become oversaturated with scrap cars if too many CAT events occur closely together?

I mean, that's an easy answer, [ no ]. I mean, these fleet vehicles are not like typical salvage because they're not damaged, and they represent a small number. We're selling over 2 million cars a year, [ 1,000 additional in a ] well over a 4 million car market, it's a small number overall.

Got it. Understood. And then lastly for me, historically speaking, you've been at the forefront of technological advances in this industry. I guess, is there any particular function that you're interested in either expanding or adding to your portfolio moving forward?

Yes, we're always looking at technology to make us operationally more efficient. And I think that's a -- I think that's been our focus in the near term. And we're rolling out a number of different features that make our yard operations operate paperless and transfer them to a more seamlessly way that allows us to serve both our buyers and our sellers better.

Our next question comes from Gary Prestopino, Barrington.

Jay, you mentioned that the cost of -- relative to what you're doing in Houston are going to be more than they were for Superstorm Sandy. And I just wanted to get back to that. I mean, in Superstorm Sandy, you were dealing in a highly congested area where land was expensive. So what actually is driving the cost up in Houston beyond what you experienced in Sandy?

Sure. It's primarily real estate. I mean, the personnel and selling costs are relatively the same. Relatively the same, meaning adjusting for inflation since the storm. Katrina was 12 years ago and Sandy was 5 years ago. But it's mainly leasing cost. We had property lined up and long story short, we were put in a position, had to pay a little more for the property than we had originally thought we were going to pay for it. So that caused us to -- it's going to cause us to have a higher lease or rent per car expense than we expected, and that we've had in prior storms.

Would your towing cost in Houston be more than they were in with Sandy?

Not materially, no. I mean, again, adjusted for inflation, they may be a little higher, but other than that, towing, personnel cost and all other associated costs are roughly the same with prior storms, but costs will be higher in this event due to lease expense.

Okay. And refresh my memory, you guys expense the towing initially on these cars, right? You don't book it and then release it when you sell the cars, all expense upfront?

No, the towing, in particular, is the portion of the expense for ordinary course cars, Gary. And this catastrophic event leads to additional accounting questions on precisely how much to capitalize and how much not to. But for the typical car with Copart, that is the one portion of the cost that is notably capitalized and deferred into the period in which it's sold.

Okay. So you capitalize the costs is what you're saying?

Hang on one second there, Gary. Great, Gary, clarifying question. A clarifying point here as the guys were reminding me. Revenue recognition, by the way, is a topic that you've heard a lot of companies talk about. It continues to evolve. But today at Copart, the way we account for the tow cost and the associated revenue is to book those things when they occur. So we book the revenue and we book the tow cost in the period in which we pick up the car. And so it is a catastrophic event, historically, the way we have accounted for it is to book the extraordinary expenses in the period immediately. We do not [indiscernible].

Okay. That's what I was trying to get at. Okay.

Yes. And we provide that color on the next call.

We have no further questions in the queue, sir.

All right. Thank you, Travis. Thank you, everyone, for attending our fourth quarter call. And we look forward to reporting on Q1 on the next call. Thanks so much. Bye.