Good day, everyone and welcome to the Copart Incorporated Third 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. Jeff Liaw, Chief Financial Officer of Copart Incorporated. Please go ahead, sir.

Thank you, Cathy. Good morning, everyone and welcome to our third quarter fiscal 2018 earnings call. I will start with the Safe Harbor in a moment. I am joined today by Executive Vice President, Will Franklin, who will also provide additional commentary on the business. First, the Safe Harbor, during today’s call, we will 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, 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 the 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 basis described above. In addition, this call contains 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 maybe made from time-to-time on our behalf. Now, I will transition to a review of Copart’s third quarter. We are pleased to report all-time highs for Copart’s in unit sales, revenue, gross profits and operating income. We experienced global revenue growth of 27.9%, including a beneficial year-over-year…

Thank you, Jeff. Let me provide some operational narrative around Copart performance for the quarter. Some of my comments may seem familiar. However, they remain appropriate as we have not seen a meaningful change in the market dynamics for the direction of our efforts. In the U.S., our tremendous growth in revenue was primarily driven by increased volume, which on a year-over-year basis was 12.7%. Excluding Harvey, it was 11.9% and was driven once again by organic growth and wins within the insurance market and continued growth in most of our non-insurance segments and acquisitions. Total volume from non-insurance sellers, which include franchise and independent dealers, finance companies who give us the repossessions in off-lease vehicles, charities, municipalities, equipment dealers and brokers, grew by almost 38%. Within the non-insurance market, we are seeing a shift in mix as growth in volume from dealers and financial institutions was up almost 83%, while volume from municipalities and other low margin sellers declined as we continue to dedicate our limited land capacity to the more profitable segments. Volume from dealers and financial institutions are typically run and drive vehicles that yield an average ASP and an average gross margin significantly greater in insurance cars, while at the same time having a shorter cycle time. In total, non-insurance cars represented almost 21% of total car volume in the U.S. We believe growth in these non-insurance markets is attributable to the introduction of new programs, services and brands targeting each segments’ specific needs as well as our ability to deliver outstanding auction results. In the U.S., our service revenue per car on a quarter-over-quarter basis is up approximately 9%. The increase in revenue per car was due primarily to higher ASPs. As Jeff has said and I will illustrate a little further the increase in…

Our first question comes from Bob Labick of CJS Securities.

It’s a great quarter.

Thanks Bob.

Couple of questions. One to start with cycle times, volumes remain very strong inventory growth is as strong as well but volumes continue to exceed that. Can you talk a little bit about the drivers behind that if you are seeing changes in cycle times, and if so, how you are achieving that or how you are getting the throughput that you are getting?

Not sure I understand your question, Bob. Do you mind elaborate and give me?

Sure. Inventories update and volumes in the subsequent quarter are up 12 and typically maybe it would have been I know it’s never the same every quarter, but they usually will line up over a number of quarters. We have been seeing trends of multiple quarters with the volumes exceeding the inventory, which could imply increased cycle times or I guess decreased cycle times on the lot. And so I was just trying to see if you could talk a little bit about the flow-through of cars and perhaps it’s related to the shift to non-insurance that Will talked about on the run and drive cars or any explanation or helpful color behind that would be great?

Sure. I’d say, broadly speaking, Bob there hasn’t been any systemic shift in cycle time in terms of what it takes for us to process a car through the Copart system. I think as you note that Will did provide the additional color today that the growth in our non-insurance business, it ebbs and flows relative to the insurance business in the past quarter plus the growth has substantially outpaced our insurance growth. Therefore, the cycle times on those cars are certainly shorter and that has helped to drive some of the outperformance of unit sales, but no, not an underlying systematic shift in the business.

Got it. Okay, helpful. Thanks. And then maybe just a little more color regarding that shift to non-insurance, is it a quarterly ebb and flow, is it a longer term shift we could expect to see in the future or how are you thinking about the shift to non-insurance and then the shift within non-insurance?

So, when I said – and I misspoke and so when I say ebb and flow I certainly don’t mean the growth in the business, the growth has been consistent. I just mean that we have had calls in the past few years, for example, in which the insurance growth outpaced the non-insurance group. The non-insurance business has grown consistently. We think it’s a reflection in part of our excellent auction results, our member recruitment, which is a virtuous cycle. So, the dealers and the like are achieving excellent results and therefore are more inclined still to consign cars through Copart. As for the shift among non-insurance, we tend to talk about it as one chunk of business. As Will noted, the business is very different. There are dealer cars certainly financial institutions as well and charity volumes as well recognizing we have scarce resources. We of course wanted to deliver, first and foremost, excellent results and excellent service to our insurance carriers, but also to our non-insurance providers. We have to prioritize accordingly within that segment. That’s why you heard Will described growth in the dealer segment, for example, outpacing growth in our charities volumes.

Got it. Okay, great and thank you for the color on Germany. It sounds like things are going really well. So I won’t ask questions on that, but I will ask – you mentioned Brazil, it was exciting topic a couple of years ago and kind of got superseded so to speak by Europe. Can you just give us a little update on the market in Brazil and how that is progressing and maturing?

Sure. I will provide some comments and Will can jump in as well. I think the Brazilian investment at the outset we made is a long-term strategic play for Copart. We were temporarily affected of course by Brazilian macroeconomic and social issues that caused, for example, the currency to create relative to the dollar. In and of itself, the Brazilian business has performed quite well. And we, as you heard today, we believe our growth prospects there remain quite promising. So, the business is doing well. Absent the currency and macro issues about that that economy has faced over the past few years, I would say the trajectory has been very strong for us.

Okay, great. And then last one, I will jump back in. The G&A, you noted, Jim, from the acquisition and other growth, is there kind of a quarterly run-rate? Is this the right run rate or that we should be thinking about on a go-forward basis?

As you know, Bob, we don’t provide any forward guidance. I think we have been consistent in saying that always taking a multiple quarter view on things like G&A and it is the right analytical approach. So, I wouldn’t take one low quarter or one high quarter and necessarily extrapolate forever off of that basis alone. So the acquisitions that you heard us describe were NPA and the Finland business, AVK, which we acquired as well. NPA, I think you know heard almost a year ago. AVK is smaller in comparison. I would take a multiple quarter view as opposed to extrapolating solely from the third quarter, the second quarter, or the first quarter alone.

Great. Thanks so much.

Thanks Bob.

[Operator Instructions] Our next question comes from Ben Bienvenu from Stephens Inc.

Hi, good morning guys. Nice quarter.

Thank you.

I wanted to ask about the cash generation of the business. It is significant you have shown at least episodically a willingness to acquire. I know Europe is kind of the next frontier of growth for you guys. To what extent are there incremental acquisition opportunities like AVK versus just building that out organically and how do you envision deploying cash and prioritizing your cash flows deployment over the next several years?

Sure. Thanks, Ben. We always remain open of course to strategic investments that help to enhance our core business and/or themselves financially attractive. So we of course wouldn’t rule anything out in that regard. That said, the major European markets that we are pursuing in earnest is Germany most prominently among them don’t have like-for-like Copart auction model businesses in them. So, we are developing the business for the first time in those countries as opposed to acquiring existing enterprises. So if they happen, they won’t be substantial acquisitions in the core markets in which we are participating today.

Understood. And then just a clarifier follow-up on the whole car non-insurance business is that flowing both through the service and vehicle sales revenue and I have one quick clarifier on the vehicle sales revenue as well?

In short, yes both, but not disproportionately one way or the other.

Okay, great. And then on the vehicle sales revenue, I think last quarter you had said that’s predominantly being driven by ASP growth. Is that still the case today? And as you think about the growth within that business, do you expect to devote a similar amount of your own capital to sustaining volume growth there and if so why or why not?

You are talking specifically about our purchased car revenue, Ben?

That’s right, exactly.

No, so the ASPs would have a modest effect there, meaning for the same volume in this quarter versus a year ago, yes, selling prices are higher and so that has caused some of the lift. I think there is a tendency to overweight the vehicle sales revenue, because it is a much bigger portion of the revenue, of course, than it is of our actual contribution, because in effect, the gross merchandise value, the GMV, is in the revenue number as opposed to the rest of our business. So, it’s still small on balance. We don’t view it as contributing or consuming a meaningful portion of Copart’s capital base, I think its more noise than substance frankly in the P&L.

Understood. Thanks a lot, Jeff. Best of luck.

Thank you.

Our next question comes from Ryan Brinkman of JPMorgan.

My question, just relative to the non-insurance business, how high do you think that your non-insurance mix could get over the next few years and what might mean for your profitability or margin? And then maybe just more generally, how would you sort of subdivide the opportunity between those kind of nontraditional salvage cars sold by non-insurers versus more whole car type of cars sold by dealers, etcetera, more similar to like Adesa and Manheim today?

Hey, Ryan. Thanks for the question. We are not prepared to comment on the forward market size or revenue size for Copart. I think it’s fair to say that the growth potential for us remains substantial for those cars as we have demonstrated in this quarter and in recent quarters as well.

Okay, great. And then just lastly, go ahead, please, yes.

Yes. We are not looking to change our model to go to live auction or to change the operational structure in our facilities. We are reaching out and trying to enhance and add volume that this flow within our model and if we can do so by introducing new brands or back office programs then we are very attracted to those opportunities.

That’s helpful. Thanks. And then just lastly for me, I appreciate the color and the materially higher volume in Germany. I am curious if your experience there so far suggest that other continental European markets might be attractive for you to expand into with physical locations. Have you done any work on that potential opportunity and then when IAA as an independent company, do you think that they might represent more competition for you in international markets anything to think about there?

Yes. All of Europe is attractive market to us. Our focus right now is Germany. And if we are successful in Germany, we think that the rest of Europe will follow suit just by virtue of the fact that many insurance companies are pan-European and understanding the effort it takes to expand internationally, which is tremendous and it’s just not a matter of learning the losses, developing the systems and buying and developing the facilities, which require not only time, but a lot of capital. It would take years for anyone to enter the market and compete against us at this point.

Yes, I think it’s worth noting here that Copart extended internationally or overseas more than a decade ago into the United Kingdom and the capital, the management bandwidth, the expertise, the technology it takes to pursue opportunities like that is substantial. So not commenting per se on what any competitors might do. We recognize the investment is substantial and that we control our own destiny. So, we intend to invest thoughtfully and aggressively to expand those markets and believe that it’s largely in our control.

Very helpful. Thanks a lot.

Our next question comes from Gary Prestopino of Barrington.

Good morning.

Good morning, Gary.

I wanted to touch on these non-insurance cars. Could you – non-insurance was about 21% of your volume this quarter. Do you have the number of what it was last year at this time on a percentage basis?

No, but we can get that for you.

Okay. And then with this mix shift to dealer cars was up you said the units were up about 83%, are they starting to become more of a contributor to your non-insurance cars? I mean, relative to the charity cars or whatever how has that mix evolved over the last on a year-over-year basis, is it more than 50% dealer cars now?

In our non-insurance business, no, it’s not. And let me give that, we were 16.1% in North America third quarter of last year for non-insurance.

Okay. So that’s still pretty good.

Yes. And most of the growth, like we have said, has been with the higher end cars from dealers and financial institutions and these are really nice cars. They bring a high ASP. And we wouldn’t be getting these cars if we weren’t develop – returning a nice return to these suppliers. They can remarket these cars any place and they are selling to us. So, we are very happy with the returns that we are providing. We are very happy with some of these programs that we have put in place to help reduce friction at any point in the process for both the buyers and the sellers with respect to buying these cars. And we don’t – while we don’t make any predictions, we think the dynamics we are currently experiencing should continue.

Well, that’s what I guess I am just trying to get at here to get an understanding and this is great that you are doing this, but whereas maybe a year or two ago, most of your account base may have been independent dealers with this product. It sounds like it’s moving more towards franchise and maybe towards commercial consignors. Is that a correct assessment?

No, we really don’t do much with franchise dealerships. It’s just an expansion of our independent leadership program.

Okay, so alright, alright. Okay. So you are just getting – because of what you are doing and you are doing it well, you are just getting a more higher quality car from the independent dealers?

Yes, both in volume and in quality of their cars.

Okay, thank you.

You’re welcome, Gary.

[Operator Instructions] Our next question comes from Craig Kennison of Baird.

Good morning and thanks for taking my question as well. This is on the German market again I think in the U.S., you have said that approximately 35% of your bidders are coming from outside the United States. I am wondering what that metric looks like in Germany and really to what extent you are able to leverage an existing buyer base that you have cultivated while those bidders were looking at U.S. cars maybe several years ago, but now can look at German cars today?

I don’t think there has been an extensive utilization of U.S. buyers on the German market. I think they developed their own market, their own buyer base. I can tell you that in terms of the number or the volume of cars that are going outside of Germany is very, very high, approaching 80%, mostly the Eastern Europe and Poland.

I guess that was my question. It was my understanding that many of those Eastern European buyers were one-time bidders at U.S. auctions and maybe you have been able to leverage that customer base to buy cars that are located in Germany?

No, we really haven’t seen that. We did have a technical one and that remarketed cars under the old convention or I guess the existing convention for establishing residual values on salvage cars and many of those buyers are transitioning to the Copart platform, but we really haven’t seen many of the U.S. buyers transitioning.

And Craig, further to that point as for the international activity on U.S. cars, that continues to rise year-over-year in terms of the number of bidders and the number of bids, the number of cars that go internationally, that trend for U.S. supplied cars continues to shift internationally.

Thanks. And then as it relates to your Finnish acquisition, to what extent does it bring new insurance customers or a new buyer base that you could leverage beyond what you are doing in Finland, but even with respect to other aspirations in Europe?

Well, actually, the acquisition was from an insurance consortium that owned this salvage enterprise. So, we feel very comfortable that we will retain that business. Frankly, there aren’t many other options. One of the things that was attractive about it was the fact of enhancing our buyer base in Germany and other European locations.

Great. Thanks and congratulations.

Thanks, Craig.

Our next question comes from Chris Bottiglieri of Wolfe Research.

Hi, thanks for taking the questions. So if we hit back on the I guess non-salvage vehicles for a second. Could you tell us like who are the primary buyers of these vehicles are that you are sourcing from the dealers from the same coast, is an off-lease vehicle is pretty, typically where you sold to an independent dealer? So I guess my question is, are you finding that you are actually, I guess, one selling to like other dealers now that are transacting in their platform? And then two, are you running these like non-salvage vehicles on your existing auctions that would be the same ones that run the salvage vehicles or are you running like actual separate auctions for these vehicles?

Currently, we are running them on our existing auction platform under the Copart brand. And I would tell you that the buyers are primarily dealers and exporters. So, if you recall the comments I made earlier, our international buyers besides Mexico which you would expect as this proximity are the UAE, Nigeria and now Jordan, people buying these cars, taking them to those locations and then redistributing throughout the region in those areas.

Got it, okay. And then it sounds like online – this drive online platform that you have. Can you talk a little bit about this? I would think that’s a whole car initiative that sounds maybe similar to other trade driver ACV does, but maybe just provide some context for that?

Sure. It’s a new brand that we have got it to our portfolio. We have CrashedToys and NPA and Copart and it’s a brand targeted at the whole car buyer providing them information and assurances that don’t normally exist on the Copart auction. For example, we are providing condition report and in certain situation, we will provide a vehicle grade based on the Manheim metrics. We are just being with the very initial phases of rolling this out.

Got it, okay. And maybe unrelated or related, so I am trying to figure out, your purchase vehicle mix really spiked this quarter. Would you say this is all coming from international growth or could some of this be tied to some of your initiatives on the whole car side of the U.S.?

Per the other commentary, I think there is a lot of noise, because it’s just not that substantial portion of our business overall. The international business is one factor. I don’t think the non-insurance business per se affects this mix one way or the other.

Got it. Okay. I am going to be a little greedy here. Just one quick question on the currencies, it’s getting more important now. Can you just maybe give us a refresher on how do we think about the impacts of kind of a weakening dollar right now across your business like to what extent that like the sensitivity is for international buyers? And then two, is the UK business, does that – is that just translational accounting impacts or something else to tape out there? And I will hop off. Thank you.

Sure. So in the near-term, we are generally speaking sure with the dollar. A stronger dollar makes our cars more expensive for international buyers. I am talking first about our U.S. auctions. So a weaker dollar enhances the purchasing power of international buyers and we would therefore see lists in our selling prices accordingly. So for the purposes of U.S. auctions, we are short at the dollar. When it comes to the UK earnings, as you note, there is first the effects of converting or translating. Those are our front words in GAAP territory, but nonetheless, the point is that our British pound earnings are worth more in U.S. dollars when the dollar is weaker and not when it’s stronger. Then, of course, within the UK itself, there is that similar effect that the stronger the pound, the less that non-UK buyers can afford to pay for cars and the opposite is true as well, that the weaker the pound is relative to the currencies of the buyers for UK cars, the higher the selling prices would be for those cars in the UK. But if you had to put just a five-word explanation, you would conclude that we, generally speaking, favor a weaker U.S. dollar.

Impressive explanation. Thank you. Thanks for the help.

And the final question comes from Stephanie Benjamin of SunTrust.

Hi, thanks for the question. I guess I will not ask a non-salvage question here. My first one is just on just like UK clarification question and I am sorry if I missed this, but did you give what the UK profitability improved year-over-year, I know that’s an initiative that you have been working on? So, just a clarification there would be great.

No, we didn’t. We didn’t really provide that metric.

Okay. And then just moving onto the U.S. service revenue per car and higher ASPs, obviously, the used car index and crushed body index we can all monitor, but I was wondering if you comment just on the increased bidding activity you are seeing, so what could possibly be driving this? Is this a function of a changing dynamic or we are lapping lower activity last year? Any color there would be helpful. Thanks.

Sure. I’d start first we are certainly lapping a soft quarter last year or a soft quarter even in terms of bidding activity. We think the increased bidding, number of bidders and bidding activity is a reflection in part of our own investments in marketing in member recruitment here in the U.S. and internationally. So we have invested meaningful resources in expanding that buyer base over time and that is of course reflected in the bidding activity as well. To a lesser extent perhaps, but also relevant is that currency matter we just talked about that the dollar is weaker again year-over-year relative to some relevant currencies and that has enhanced the buying power of non-U.S. buyers within our U.S. auctions.

Great. I appreciate it. Thanks.

Thanks, Stephanie.

We have no further questions in queue.

Terrific. Well, thanks for joining us for the third quarter fiscal ‘18 earnings call. We look forward to talking to you next quarter. Thank you.