Good day, everyone. And welcome to the Copart Incorporated Fourth Quarter Fiscal 2018 Earnings Call. Just as a reminder, today’s conference is being recorded. For opening remarks and introductions, I would now like to turn the call over to Mr. Jay Adair, Chief Executive Officer of Copart Incorporated. Sir, please go ahead.

Thank you, Katy. Good morning, everyone and welcome to the Q4 and year-end call for Copart. I'm going to turn it over to Jeff Liaw, who will give you an update on finance and then Will Franklin, who will give you an update on the operations in the business, and then we will open it up for questions. With that, it's my pleasure to turn it over to Jeff Liaw, CFO.

Thank you, 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 income taxes on the deemed repatriation of foreign earnings net of deferred tax changes, disposals of non-operating assets, impairment of long-lived assets, acquisition related fees and integration charges, reserves for legacy sales tax liabilities, foreign currency related gains and losses, certain income tax benefits and payroll taxes related to accounting for stock option exercises. We've provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our Web site under the Investor Relations link and in our press release issued this morning. 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 the 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 the 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 our attention to the fourth quarter of fiscal 2018. We achieved a record fourth quarter and unit sales revenue, gross profits and operating income. We're quite pleased by what we believe is strong underlying operational and financial performance, but it was of course a complex quarter given certain non-recurring, non-cash charges, which I'll elaborate…

Thank you, Jeff. First, let me provide some updates on hurricane Florence. As we have stated previously, our goal is to be in the constant state of readiness for these cats. That requires us to have permanent cat storage capacity. Relative to Florence, in the region, we have recently added a 90-acre facility near Raleigh and a 96-acre facility located in Spartanburg, South Carolina. In addition, we have available new facilities near Charleston, Winston-Salem, Atlanta and Fredericksburg, which are near completion, yet currently available to store cars. To supplement these new facilities and our 11 existing facilities in the cat region, days before the storm hit, we secured 17 temporary storage locations. We also mobilized almost 100 loaders, hundreds of tow trucks, our dedicated cat teams and we staged in the region our six mobile command centers. In total, we estimate that we have spent nearly $1.7 million in preparation for Florence, prior to the landing of the storm. Our response to hurricane Florence demonstrates our unmatched cat capabilities and our commitment and ability to execute during these events. In a cat, we don’t have the luxury of waiting for the storm to clear and then assess our needs. We have to be on the ground days, even weeks beforehand, preparing for the worst outcome. Florence was a category four hurricane, the same as Harvey, while out in the Atlantic. It landed as one and quickly dissipated into a tropical storm. While it's too early in the claims cycle to know with certainty, we believe volumes generated in Florence will require only a limited use of our cat resources. Now, let me provide some commentary on our fourth quarter's operational results. In the U.S., our volume grew by 9.8% for the quarter and 12.9% for the year. When adjusted for…

Thank you sir [Operator Instructions]. Our first question will come from Bob Labick with CJS Securities.

I wanted to just take a step back on G&A. You gave us a lot of detail there, and I'll certainly go back through the transcript and stuff. But just I know you won't guide to numbers specifically. Could you talk a little bit about the profile as a percent of sales? Has anything materially changed? Whereas you know there'd be negative operating leverage going forward. Do you still expect to get operating leverage on that line? And how should we think about G&A going forward given the significant volatility over the last few quarters?

In short, yes. We do expect to achieve, as we have very consistently in history, our operating leverage on G&A. This quarter, as you know, we -- on the non-stock comp, non-G&A line item, the $13 million increase included $7 million itself just on the payroll taxes and the legacy sales tax liabilities. So those are true non-occurring, not in the baseline so to speak. Then there was about $3 million that we picked up from the acquisitions of our businesses in Finland and in NPA. And the balance is the actual growth in G&A for the quarter. So yes, we do expect to achieve leverage, so there will be some inflation as we add complexity in the business as we expand into Germany and the rest of Western Europe initiators of that sort. There can be modest increases, but still on balance, we will achieve better growth in operating income than we do in gross profit and revenue.

And then, I think Will touched on this in the end and on last call. You have something like 11% or close CAGR in volume over the last four years in the U.S. car volume. Have you kept up with that in land? I know you've reported lots of land acquisitions, but you haven't given us a sense of how much you picked up. And so, I guess the question is have you kept up with the volume with land, and if not, what have you done to maintain the efficiencies in the yards as utilization rate seemingly creeps up?

We have kept up, Bob. I can't say this, though that whatever excess capacity we had three years ago is dissipated. But our procurement, our acquisition, and our development activity is one of our primary focuses here as across the world. We employ, I think, a very aggressive and when I say aggressive, I mean high assumption in terms of growth rate when we plan our expansion and our capacity needs. So, I think we're developing to that number. So, when you look at those elevated growth rates, we're anticipating an additional permanent CAT capacity that we're pursuing, it's a big job. But to answer your question, we think we've got it covered. I'd like to say we've got 28 projects in construction. I think you'll see a number of those being announced in the next two quarters, and if you are looking at the targets that we're pursuing and I would say contracts that we have entered into, there’s about another 45 of those. So, I think we're well situated to accommodate the growth in the market as well as any CAT needs.

And last one from me, just on Germany. Can you give us some updates in terms of the number of either insurance companies or rental car companies that are participating in those auctions, and other milestones we should look for there as you build that? I think you mentioned there's another yard to come there as well.

We've changed some of our approach and strategy in the German market, and we're going to give you an update on that in the next quarter. So where we've got two locations today, we're going to be opening a significant number of locations in this quarter. I don’t like to talk about what we're going to do. I would like to talk about what we've done. So in the next Q, we'll be reporting on how many new locations we've opened, and we're clearly looking at the market as we’ve got to have the logistics and facilities in place to service the insurance industry. With that said, we are handling some insurance volume in that market, but primarily the majority of the volume that we're handling right now is noninsurance, and that allows us to build their salvage vehicles. They’re just not procured directly from the insurance. They’re procured directly from owners of vehicles. These are owner retentions where the insurance company has had the insured retain the vehicle and we’ve reached out to the insurers and acquired the vehicle from them to flip it through auction. And in that environment, what we're doing is, we’re creating a marketplace where today we’re the largest auction house in the country that you can come. I’ll give you a great example, today we had 150 cars on auction in Hanover. All those vehicles, if you bid, you own them. And that is the only auction environment I know of in Germany where you have 100% chance to getting the car if you bid on it. Everything else is, in the country, is contingent auction environment where you may not end up getting the vehicle, so we’re selling -- you can go online, I can tell you we’re selling over 400 cars a month right now, but you can go online, look at the auctions, I’d encourage everyone to do that. And then let's wait until next quarter when we report on a much bigger update on our strategy and our approach in that market. But I'll finish by saying it’s taking up a significant amount of my time now. I'm spending a fair amount of my own time on Germany, and we are very committed to the market and succeeding before the end of the calendar year in terms of large locations and large volume.

And Bob, just to elaborate briefly on that point. So the sourcing car is from some policyholders directly, bars the function of the way the German insurance markets and its indemnification provisions have evolved over the years. However, then sales to Copart Germany that’s what lead me to the statement that we clearly are achieving better returns. So our conviction that the Copart’s model is the right one for the German insurance market long-term remains as true as ever, and the evolution Jay described is merely how we achieve that outcome.

Thank you. Our next question will come from Stephanie Benjamin with SunTrust.

I just wanted to go back and follow-up on the G&A, or I am sorry, overall operating income and the one-time expenses. And happy to do this offline if that’s easier. But I think you mentioned that there’s about $20 million in non-recurring in the quarter. Of that, what was broken out in the non-GAAP adjustment schedule in the press release? I just want to make sure I'm getting it correct based on that.

In the non-GAAP schedule, you have everything but the $10.5 million of depreciation and amortization that burdened gross profit for the quarter. Otherwise, in the non-GAAP reconciliation, you see on a post tax basis, the pretax numbers that I just walked through.

So really -- and you said the operating income had $20 million of one time that we would not expect to occur, going forward…

Correct.

My next question is actually is just on Brazil. I think that very positive there, and almost seems like -- and I think the comment that it’s going to be a more meaningful contributor. Is there something that has materially changed just in the last couple of months in that market, either on your end or from just the market standpoint to cause this to be a larger contributor? Or just more color there would be really helpful? Thanks.

There’s a change, it just wasn’t recent. It’s take -- we entered the market in, I think 2012 and it takes a while to build out not only your team but your processes, and to gain the kind of reputation that you need to grow the business, kind of reputation, the kind of brand that we have here in the United States. And in Brazil, we're starting to gain that brand recognition, especially with the insurance companies. And you saw that we have expanded north in Betim. Recently, we added a new yard south in Curitiba. And we think there's opportunity to grow, simply because we operate better than everyone we think and we provide the highest returns through our re-marketing efforts. And we just think it's the byproduct of that will be growth in our volume and our presence in the market.

And will you be able to provide the percent, or the percent contribution Brazil had in the quarter? Or by top -- or should I wait until the 10-K? Or how should we go around that?

We haven't sized in that respect and we probably won't until it becomes a material number with respect to the total.

Thank you. Our next question comes from Craig Kennison with Baird.

Jeff, I think you mentioned a small issue but a change in lives of the fixed assets and some change in assumption there. Can you shed more light on that decision?

Yes. So in short, I was commenting in total on the $10.5 million non-recurring depreciation charge that burdened yard expenses and shows up in gross profit. And the two drivers there are, one, assets newly placed in service with a substantial depreciation charge associated with that, as well as change in certain useful lives, and this is based on a change in management estimates. We have a number of facilities with different useful lives and we harmonize them, so to speak, and adjusted them accordingly. So that charge is not one you would see on an ongoing basis for the quarter.

And I guess I'm just trying to understand what drove that decision to change the length of the lives.

I think as you know in the past few years alone, we have significantly increased our own experience in acquiring land and developing it, including with our own in-house team in Bright Excavation. So I think our -- the information we have available to us, our understanding even of our land has improved significantly even over the past two years. So when reviewing historical fixed asset ledgers, we bring that heightened awareness to bear and that caused us to revise certain of those numbers accordingly.

And then as we think about Germany and maybe the acceleration in activity there through the end of the year. Should we anticipate costs running ahead of revenues for a period of time here?

Craig, I think from the perspective of the overall P&L, I think the effect would not be that pronounced of what you just described. So there certainly will be moments when we invest when we have costs that are ahead of the contribution. There'll be moments when the opposite is true when we see the flow through the contribution in connection with costs that we've previously invested. I don't think that on balance you would see -- from your perspective, a meaningful drag on the P&L.

And then with respect to CapEx. Could you just lay out your plan for CapEx spending in fiscal '19, and maybe give us some of the bigger buckets where you expect to allocate capital?

CapEx in fiscal '19 will continue to be dominated by capacity expansions. So it will be land developments and acquisitions. In some cases the weak buyout. So I think the rough number over the past say eight quarters would be 85% or so of our CapEx has been for those. And as for capacity, in general, you know that our capital expenditures have been up over the past few years. We largely expect that to continue into fiscal '19.

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

I wanted to ask about revenue per unit. It's been really strong for some time here. Obviously, ASP growth has contributed to that. But you guys have also talked about some of the things that you've been doing around being dynamic in the auctions. So I'd be curious to, to the extent that you can, delineate between how much of the ARPU increase is from external factors, a reflection of the market? And how much of that is because of decisions you guys are making?

Ben, I would like to be fair, those variables would be really hard to isolate, because they both happen concurrently with literally every auction we run. So we can't isolate either the market effects or what we do as opposed to what we do we can to some extent. But what I would tell you is that both have been meaningful that as we've look at the market for used car prices, they are very strong but they're certainly not up 12% year-over-year either. So there is some function of the marketplace being strong, but also some meaningful function of our innovations, our member recruitments, our auction management.

And then my second question is just around a follow up on capital allocation. Cash continues to build on the balance sheet. And I know you don’t make a practice of talking about your future plans for buyback. But I'd just be curious we haven't heard an update around the M&A landscape in sometime. I'd be just curious to hear little bit more about how you think M&A fits in your future prioritization of use of cash flow?

It’s a fair question, Ben. M&A certainly has been a part of Copart's journey over the past few decades. It has driven growth in the business. And in some cases, I think that will continue to be true, going forward. That said, I think as you know in our core markets in which we are strongest, the U.S. and UK and so forth, there are more limited opportunities to acquire company. Beyond that, we do revisit this topic from time-to-time we always have as our hurdle that; one, we have to like the acquisition in isolation that it has to make financial sense as to generate the kinds of returns on capital that Copart is going to expect; and secondly, that it has to dovetail well with our strategic initiatives broadly, whether that’s international expansion in Brazil, Europe and the likes, or expanses into additional future spaces. So that rubric that calculus hasn’t changed at all. We won't largely comment on this kind of activity until after the fact, as you know, for all these reasons. But M&A will be a part of Copart's future as well.

And just a quick follow-on to that. A lot of the acquisitions you guys have made historically have been either geographically or capacity focused. When we think about building out future capabilities, are those all elements of your business that you can build organically? Or are you looking at targets from time-to-time that potentially bring capabilities to bear fruit for Copart as well?

The latter. So 2Q illustrations, National Powersport Auctions, an acquisition we completed in June of last year clearly an extension into the non-salvage power sports arena. So the addition or capabilities via acquisitions that was not organic per se. And even in Germany, our first foray into Germany was in connection with the acquisition of WOM, which is one of the listing services you heard us describe on prior conference calls as well. So from time-to-time, we will extend beyond what I would characterize as Copart’s traditional salvage auction business in our M&A activity. But for the reasons we just described, those of course have higher hurdles still if it deviates from what we know and have done day-to-day forever, we have to be that much more sure.

Thank you. Our next question comes from Bret Jordan with Jefferies.

As we maybe accelerate the business in Germany, I think in the early comments, you discussed your purchased vehicle volumes were up partially as a result of Germany. Do we think the purchase mix is going to accelerate from here, and I guess as we think about the gross margin impact going forward?

And Bret I think to be -- I think it’s a fair question. I think to be fair, we don’t -- we wouldn’t manage the business that way. I understand that as the purchased car volumes were to increase that would depress our nominal margin rate, but that's a particularly sophisticated way to run the business where we want to maximize contribution and profit. And so we wouldn’t think in those terms except when we end up on quarterly calls like this one…

Well, I was just wondering whether we should think about that going forward as you try to project your nominal margin rate. Is Germany’s acceleration going to be meaningful from here?

On Germany specifically, let me comment more generally. On Germany specifically, I think you heard Jay and I both say, we’ll have a whole lot more to say on the next call than on this one. But more generally, when Copart has grown into new spaces, we have often expanded, first, through the purchased car model until we have achieved liquidity and proven it in the various counterparties in the market, we’re often better off buying the cars ourselves, selling them at auctions, generating a profit and improving to all the market participants that we do so. Overtime, that very naturally evolves the consignment model as was true, for example, in the UK, most notably. Or you may remember from back in the day, we were heavily tilted to the purchase model when compared to the consignment. The opposite is true today as we’ve achieved that liquidity. So when we are growing in new spaces, NPA is another example. NPA has a five -- historically had a five store footprint, so to speak, in the United States. They had tremendous credibility among dealers in and around those locations. As they expand beyond those geographies, initially will they buy a few more bikes to prove their model? Yes. And the same will be true in Germany and could be true in other international markets as well. So it will have an effect. But as per that two lengthy paragraphs about purchased cars, I wouldn’t overweight that in the overall analysis. But yes, I think purchased cars could or will outgrow consignment sales for the near future.

And then a follow-up question. So Will’s commentary around Florence, sounds like an incremental $1.7 million spent to prep and I think volumes may be light coming out of that storm. Is that about the magnitude of the loss? Was there -- or the impact of the cap that may come from Florence? Or are they incremental expenses that have -- that will come along the way? And I guess there will be some volume to offset that expense. So it’d be maybe less than that $1.7 million.

It’s really too early to tell. When all the water subsides and the claims start coming in, the assignments come in then we’ll have a better picture of that. The $1.7 million that I quoted was just what we spent to prepare for the storm. So there’ll be other expenses to follow-on throughout the course of next weeks and months.

Thank you. Our next question comes from Gary Prestopino with Barrington Research.

You said your U.S. inventory was up 3% year-over-year. Were you comping against the impact of catastrophic events last year?

Not largely, Hurricane Harvey hit it August of last year. So July 31, '17 had some catastrophic events, hailstorms and the likes, but not the meaty ones you might have in mind.

So it's more of a seasonal impact and it just ebbs and flows, but this is a seasonally slow time for accidents. Is that more a way we should read that?

The seasonality, I don't think would factor into a year-over-year number, but I think this even should be set the same year-over-year.

And then your tax rate you said was I think somewhere around 28% for the year. And then you said something about a 5.3% decrease for next year. Is that 5% decrease off of that 28%?

Yes, fair question. And I would perhaps let me clear it. The fiscal '18 normalized tax rate includes big lumpy stuff, like the stock option exercises, would have been approximately 28% blended for the company. 28% includes the 26.9% U.S. federal and that includes state income tax through some foreign taxes and the like. The point about fiscal '19 is that for the U.S. portion of our income, which historically is in the 80% to 85% range of the total income for the company that on that specifically our U.S. federal rate will decline from 26.9% in fiscal '18 to 21% in fiscal '19. So that will in and of itself somewhat meaningfully lower our tax rate in fiscal '19.

And then could you just -- I was trying to write this down. Could you just give me your unit growth in the U.S. and international, and then on a combined basis in the quarter?

9.8% U.S. 12.2% international, global 10.2%.

And then lastly on your ASPs, you said the U.S. we're up about 11.9%. I couldn't write this down again. How much of that change was due to scrap?

It's tough to quantify. We can tell you how much scrap was up. The scrap year-over-year, it remains a pretty healthy environment, was up 18%. I think sometimes the perception is a little overwhelmed on the importance of scrap in our business. So if you consider the typical car that Copart sells, a passenger sedan has a ton and half of total content, the crushed car body just the usual number is just $200 per ton. So it's $300 of scrap content in a car for a car that sells for thousands. But even if the scrap is up 18%, you're talking about $40 or $50 change to the underlying value of a car that sells for thousands of dollars. So the expected matters in particular on our lowest end vehicles, I suspect it had virtually no effect on the cars that will be rebuilt and brought back on to the road. In some theoretical form, you could imagine that 10 years from now when that car is done that scrap value [indiscernible] back. But I think the scrap matters, it’s a contributor, but I don't think it's nearly -- it's not that meaningful a portion of that ASP.

[Operator Instructions] Our next question comes from Chris Bottiglieri with Wolfe Research.

I wanted the thought on the dealer first kind of descriptive details, I am not sure I got them all. But I think you were up 90% last quarter year-over-year, and maybe I'm misinterpreting that metric. But can you give the comparable metric, what it was this quarter? And collectively you've given these different sub-segments, the rental cars and whatnot. If you're aggregate what you're doing in the whole car space and how that's growing, maybe just provide some context to what that also had done last quarter?

I'm not sure the numerical questions that you had. I can talk about the segments in general. I mean, we're finding that -- we're tracking more and more buyers for these types of cars, which allows us to just the chicken egg, provide higher returns, which allows us to approach those who have these types of cars and ask them to test our re-marketing and our auction platform. And through that process, they found it to be fruitful in terms of increasing their returns, and in turn has grown that market. We've also developed specific programs for different buyers. So we have a different program for equipment sellers, or we have a different program for wholesalers, or we may have a separate program for financial companies. And so we're becoming more astute in identifying their specific needs and addressing those through our processes and our technology.

Let me rephrase it differently. Did your growth in dealer cars accelerate or decelerate, and what you've done last quarter it makes the simple question?

I think it accelerated.

Accelerated, that’s helpful. And then maybe just like holistically as you think about the strategy, given that you're growing pretty aggressively. But I would think your capabilities and service are lower and than -- your platform effect is a little bit lower right now. Can you talk about how your product is differentiated relative to the incumbents and what's driving that growth? And how we think about sustainability of how much longer you can compound this growth and dealer consignment?

We think there is a long runway ahead of us in terms of growth and dealer consignment. I think we're in the first or second inning of this game. And I think we're refining our processes. We're adding more resources to the pursuit of this volume. And we think that the sellers who are trying and utilizing our platform are very happy with the results. So I think there's a robust opportunity ahead of us with respect to dealer cars.

Thank you, sir. At this time, I am showing no further questions. I'd now like to turn it back over for closing remarks.

Well, thanks Katy. Thank you everyone for attending the call. And we look forward to reporting on Q1 in November. Bye, bye.