Good day, everyone, and welcome to the Copart, Incorporated First Quarter Fiscal 2018 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, Incorporated. Please go ahead, sir.

Thank you, Chantel. Good morning, everyone, and welcome to the first quarter earnings release conference call for 2018. With me in the room today is Jeff Liaw, CFO; and Will Franklin, Executive Vice President for Copart. With that, I will turn it over to Jeff Liaw, who will give you some color commentary and then over to Will Franklin, and then we'll open it up for questions. So it's my pleasure to introduce Jeff Liaw.

Thanks, Jay. 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 includes adjustments to reverse the effect of foreign currency related gains and losses, impairment of long-lived assets, certain income tax benefits, foreign income tax credit limitations and payroll factors related to accounting for stock option exercises. We've provided 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 results on both GAAP and non-GAAP bases described above. In addition, this call may contain forward-looking statements within the meaning of federal securities 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 these risks that could affect our business, please review the management's discussion and analysis portions in 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 turning to the first quarter; we -- Copart enjoyed another record first quarter in unit sales, revenue, gross profit and operating income. As you can see in the press release, we grew global revenue by 21% year-over-year for the first quarter. The underlying factors here are slightly beneficial year-over-year currency effect of $1.7 million on foreign operations, primarily due to relative strength in the British pound after lapping the Brexit event in June of last year, 2016. Excluding the effect of Hurricane…

Thank you, Jeff. Let me add a few comments, provide some color on our performance for the quarter as well as some color on what's going on with the industry. Copart delivered another strong quarter. This quarter, we grew our worldwide revenue and EBIT by $73.2 million and $19.1 million, respectively. Excluding the impact of Hurricane Harvey, our revenue and EBIT growth would have been $54.7 million and $36.5 million, respectively. And the growth rate in revenue and EBIT would have been 15.8% and 34.8%, respectively. In North America, our revenue growth, excluding the impact of Harvey was $49.9 million or 17.3%. In North America, non-Harvey unit volume was up 9.6% and was driven by organic growth and market wins in the insurance car market, the continued growth in our non-insurance business and our recent NPA acquisition. We continue to experience growth in the overall salvage car market despite the introduction of accident avoidance technology and its propagation throughout the car park, accident frequency continues to grow. According to independent fiscal [ph] services, the average quarterly growth in the number of paid solution claims for the last 18 quarters has been 4.7%. And in the last quarter reported, the growth was 0.3%. However, even more impactful than the increase in claims frequency is the increase in the total loss frequency which over the last seven quarters has grown at an average rate of 6.7%. Total loss frequency is the percentage of time that a car involved in a plane is totaled rather than repaired or restored. It is important to note that the growth in total loss frequency has incurred in an environment of increasing used car values. We see nothing in the near future to suggest an abatement in the growth in either claim frequency or total loss frequency.…

Chantel?

[Operator Instructions] Our first question will come from Bob Labick, CJS Securities.

Wanted to start with NPA, the National Powersports. What did you learn since you've had it in the fold? How is it going versus your expectations? And are you looking at additional adjacent growth opportunities? Are there any on the radar now or how should we think about that part of the business?

Thanks, Bob. So the National Powersport acquisition I think you know we completed in June this year, and it has performed according to our expectations. We acquired the business believing, as you may recall from our prior discussion, that it was both an excellent stand-alone investment as a company well positioned in attractive marketplace with room to grow ahead of it and that it was also very strategically relevant to us given our recent focus on the powersports arena with CrashedToys and otherwise that it would ultimately help us serve our existing customers as well. That thesis remains very much intact; the Company is performing well, the team is excited to be part of the Copart family as well, so no surprises there. And then as to your question about other, not particularly -- I think you know we wouldn't speculate on any forward-looking M&A activity. But no, it's not per se a part of the systemic program.

Got it. Okay, great. And then congratulations on the progress in Germany. You answered many of my questions there, so I'll just shift to, I think the other news on the call, which is really interesting was the positive pricing on U.S. insurance cars. Can you talk a little bit about how we should think about how much business, perhaps temporary as a result of used car prices being up because of the hurricane? How much is the structural shift? And what other drivers behind that shift of newer cars being totaled?

I think that's what we're seeing is not a onetime event. I think we're seeing a trend, and I think what's happening is we're seeing the increase in repair costs driven by a number of different factors. And we talked about this very extensively. The complexities of the cars, the exotic metals. We're also seeing consolidation in the repair industry, where it's predicted by the year 2020, 45% of all repairs be handled by MSOs. All of these are leading to an increase in repair costs, which internally are leading to a higher salvage frequency in the newer and more complex cars.

Our next question will come from Craig Kennison, Baird.

Wanted to ask about Harvey, first of all. I think in the last call, you said you were assigned 85,000 vehicles. I'm wondering, how many of those have you actually sold? And how many remain to be sold?

So the sales of the units from this quarter of approximately 12,000 or thereabouts. And the pickup activity still some stragglers, by and large, completed the pickups in this quarter. And just to point out again what Jeff said previously. The majority of expenses associated with processing these cars, the recovery and the storage, the place in the event, it occurs at the very beginning of the process right up to the assignment. And that's why you see the loss generated in this quarter. So you see some choppiness in the impact of the storm on our financial results for the next couple of quarters. But on an overall basis, we expect to have a loss.

Yes, that's very helpful as you frame it. And maybe following up on that, Will, of the $36 million of cost reported associated with Harvey, does that include all the cost to process the cars or just the abnormal cost above and beyond what it would normally take to process a vehicle?

That's just -- that's in the abnormal costs and primarily is due to the extra storage, extra labor costs and primarily the extra towing costs.

And then shifting gears, the incremental margin in the quarter looked to be fantastic. I mean, your EBIT margin on a core basis appear to be up almost 500 basis points based on our math. I mean, how sustainable is that trend? What do you -- what is really driving that incremental profitability? And again, how sustainable is it?

We're not providing forward-looking guidance, as you know, Craig. There's nothing particularly distorting the quarter, I'd say, meaning the size of the CAT, obviously, which we help normalize for you. So you're seeing the benefit, in some cases, of some operating leverage. Strong unit growth leveraging our existing facilities and infrastructure. You're seeing, of course, G&A that's not growing anywhere near the rate that our revenue and gross profit is. So I think it's largely operating leverage on the G&A level. And then, of course, the selling price phenomenon you heard Will and me both talk about.

Our next question will come from John Healy, Northcoast Research.

I wanted to follow-up on the comment you guys made about the cars that you're seeing come through the yards being a little bit younger. Is there any way to think about that by kind of bucketing the age of vehicles? I know a lot of industry data sometimes looks at cars less than 3 years old or 3 to 8 years old and maybe older than 8 years old. Is there a way to think about kind of what you're seeing today in terms of your mix and maybe that 0 to 3 or 3 to 8-year old car population?

John, I think we don't intend to provide any further data publicly, but the logic is what you just described. So we look at it on a histogram basis, how many cars are 0 to 1, 0 to 5, 6 to 10, etcetera, and that's what yielded the commentary you heard today, which is that we are seeing a newer mix of cars in the first quarter this year as compared to the first quarter of last year.

I might add another comment that there's another metric that we look at, and that's the estimated repair value to the ACV of the car. And we're seeing what you hope -- we think is a trend of cars being towed at a lower repair-to-ACV ratio.

Okay. And then I wanted to ask about the costs associated with Harvey event. On the kind of processing side, how much of the processing costs do you think would stay in until those vehicles are absolutely sold? How much of that kind of what I would say variable expense line item should we see in 2Q and 3Q do you think?

John, I think not prepared to be more specific on that front, except to say that, as you heard from Will, a good chunk of the costs for us are the towing expense and then also the flood cleanup. Those expenses largely incurred in the first quarter. That said, there are ongoing period costs, processing costs, as you might call them, including the rent for temporary facilities, including personnel. So we still have a lot of extra folks who are on the ground there in person managing the volume we've got as well as the travel and corresponding expenses that comes from having extra personnel deployed there. So those expenses will continue in subsequent quarters.

Our next question will come from Bret Jordan, Jefferies.

What are you seeing on the title transfer time [indiscernible] Harvey? Is that -- is the product moving pretty quickly? And it seems like you've got is it 70-odd thousand cars left to clear?

No, we don't have 70,000 left to clear. But yes, we have seen a slowdown. And it's just the capacity of the state to process these titles. We're doing everything that we can on our end. And initially, we saw times that were consistent with what we would expect to normal operations. But more recently, we've seen the slowdown.

Okay, okay. I thought you said you had 85,000 assignments on the last quarter conference call, and you said you've done 12,000 on the first quarter. So are there fewer than 70,000 remaining?

No, we've got more. But what we're dealing with right now, Brett, is we've already sold more cars in November than we sold in the last quarter. So trying to do the math when we're selling at such a fast rate. The majority I say two things from listening to the questions. The majority of the vehicles will be sold in this Q. So in Q2, the quarter we're in now, we're going to unload a majority of those vehicles. We'll be selling the remainder in Q3 and Q4, but the majority of Q2. The second thing I would say is because we've incurred what was it, Jeff, $17 million of expense?

$36 million of expense in revenues to $17 million net loss.

$17 million net in the last quarter, it will be profitable going forward, meaning they're going to benefit Q2. They're going to benefit Q3 and benefit Q4. But overall, we will lose, as Will explained earlier.

Okay, great. And I think a couple times in your prepared remarks, you mentioned account wins. Is there anything meaningful shifting and on the insurance side?

Nothing that we would identify specifically. We're always competing for business in such a competitive market. But we're also always trying to prove our service offerings and our products, and I think we're doing a good job in doing that.

Okay, great. And then you said 1,000 acres possible in the balance of fiscal '18. Is that -- would that get us to sort of where you need to from a real estate standpoint or is this -- are we looking to get '19 growing real estate beyond that level?

No. If the trends continue -- we're seeing 10% growth in the just the insurance salvage market, that means we'd have to have 700 or 800 acres a year to keep pace. And in addition to that, we've employed a new approach to CATs to where we want to be able to land bank large-CAT capacity in high-risk areas. And that also is adding to our need for land. So I don't see the need for land abating for the next couple of years.

Our next question will come from Ben Bienvenu, Stephens Inc.

Wanted to start on G&A. So G&A was actually down year-over-year. And Jeff, I think you called out that we were a big driver was lapping over a step-up in payroll taxes from auctions. Going forward, you guys still expect it to grow on a dollar basis but leverage as a percentage of sales? And is there a certain revenue growth that you need to get that leverage?

To answer your question, yes, we expect it to grow. And I don't think there's any way to avoid that with the increase of products and technology and volume and land capacity. But we also don't expect it to grow as fast as our revenue. So we think that's [ph] still leverageable.

Okay. Can you maybe talk about what's driving the improvement in that margin? Are there any big call-outs you guys are doing? Or is it a lot of smaller things that are driving these efficiencies?

For an earlier question, I think our margins are driven by unit volume leverage. So the benefits of selling additional units through fixed facility, so to speak. that will obviously grows over time as well. The selling prices of our vehicles have been strong. You heard commentary on that today as well. And then lastly, I think the point you raised at the outset of your question here, which is G&A, which grows but typically not at rates anywhere close to the kind of revenue growth rates we're experiencing today.

Okay. And then moving over to Europe; I know you guys have commented that the German market is really representative of the EU. You guys talked about the progress in Germany, but are there any specific European countries you guys are looking to expand into in the near or intermediate term?

Well, we're currently in Spain, and we think we have the same opportunity in Spain. We have one existing facility in Madrid, and we're currently looking at expanding into the areas of Barcelona and Magala. So I think that would be the next area that we probably be focusing our efforts.

Our next question will come from Matthew Paige, Gabelli.

Just one question for me today. I know they make of a very small portion of the car park, but do you have any color as to how claim or totaling frequency on electric vehicles compares to their traditional counterparts?

I think your question -- your premise is the right one, which is that the sample size remains so small, but it's -- in most respects, it's too early to tell. The combination of factors here these electric cables are often made out of more complex substrates, so the panels are more difficult to repair. They also often come with additional safety technologies or cameras on the perimeter, which again, also further escalate repair costs and could or should lead to total loss rates being higher. But those are -- it's too early to render a definitive conclusion on that front.

[Operator Instructions] Our next question will come from Gary Prestopino, Barrington Research.

Couple of questions here. Can you maybe just because a lot of these cars that you're getting in Hurricane Harvey are freshwater cars versus saltwater, I know you said you've only auctioned off a couple -- about 12,000 small amount relative to what you've been assigned. But can you give me -- give us some idea relative to other hurricanes where there been saltwater damage? Are you seeing a lift in price of the cars because they're freshwater damaged? Or that doesn't really matter at all?

We are, Gary. And I think it goes beyond the nature of the damage. I think that the interest companies and the repair shops are completely overwhelmed by the monstrous volume in those areas and I think we're getting better cars than you might in a different environment. So the ASPs on the Harvey cars are higher than in other CATs and in overall company averages.

Okay, that's helpful. And then did you guys call out what cycle express added in revenues this quarter or can you do that for us?

We didn't. We just provided the color that the U.S. unit sales would have been 8.3%, excluding NPA.

Okay, all right. So you're not calling that out, that's fine. And then lastly, you mentioned that you're seeing strong growth on the non-insurance vehicles, particularly on the franchise and independent dealer side. Couple of questions here. What is -- has there been any shift in the amount of cars that are non-insurance? I believe it's kind of hovered around 20%. Are you seeing a shift higher now as a percentage of total of...

Yes. Non-insurance cars is growing as a percentage, excluding Harvey, of course. And that's been driven primarily by cars from franchise and independent dealerships but there's other segments that have been growing as well.

I mean, has the shift been -- I mean, if it was 20%, has the shift been now to 22%, 23% or is that something you just don't call out?

Something we haven't called out. We've talked about the growth in that market itself, which was 13% last quarter.

Right, okay. And then in terms of these non-insurance vehicles, do they, on an overall basis, especially the ones that are trade-ins, are they lifting your average -- your cumulative average selling price? Or are you still looking at maybe the 10 to 12-year-old car that's going to get $2,000 at an auction? Getting younger vehicle...

Six quarters ago, where much of our lift in non-insurance cars came from charity. It was actually detrimental to our average ASPs. But that's no longer the case. So we've made some adjustment to our approach to charities, and we've reduced the number of cars coming from that market. At the same time, we've expanded significantly our efforts in the areas the franchise and dealerships. We have new programs in place. We have new resources focused on it. But probably more importantly, we're getting higher returns than we have been in the past on these types of cars. And that's all leading to more volume. Those cars have a higher ASP and create an uplift to our overall ASPs.

Our next question will come from Ryan Brinkman, JP Morgan.

This is Samik on for Brian Brinkman. I just want to get your outlook first on pricing. You had strong momentum when it comes to ASPs this quarter. But I just have go through the processing of the vehicles -- hurricanes in the coming quarters. Do you see it having sort of a more depressing or a bit of pressure on pricing going forward just given the volumes you'll be processing? Or do you think the mix is strong enough here to offset that?

The mix effect of the hurricane would more than offset the supply factors you just described. So the typical hurricane car sales for more than our standard insurance-sourced vehicle.

Okay, got it. Then when I look at the cost headwinds you had of $36 million in the quarter, and when I compare that to the closest competitor, they had roughly $5 million of cost. And I was wondering if you had any cars. I know you've gone sort of -- you don't have visibility the exact nature of their cars, but is there any thoughts you have what's driving that big difference between you and your closest competitor in the abnormal cost rate to the hurricanes?

As you noted, we don't have, of course, have any internal visibility as to how they account for the catastrophic events. I look, of course, that our quarter doesn't end at precisely the same time that theirs does, so that may be a driver. We just know that $36 million is what it took for us to provide excellent service to our customers in connection with these catastrophic events. Hard for me to comment on theirs. Let me just one area, which I think we exceeded, I think, the expectations of our insurance. We actually obtained an extra 800 acres of storage capacity at a cost of about $15 million. And I think those types of efforts generate cost in excess of what otherwise would be expensive and situations.

At this time, we have no further questions in the queue.

Thank you, Chantel. Thank you, everyone, for attending the first quarter call for Copart. Happy Thanksgiving, and we look forward to reporting on Q2 next year.