Good day, everyone, and welcome to the Copart Incorporated Third Quarter Fiscal 2019 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.

Thanks so much. Good morning, everyone, and welcome to the third quarter conference call for Copart. In the room today is Will Franklin, Executive Vice President, and Jeff Liaw, Chief Financial Officer. We are calling from a hotel. So, hopefully, you can hear us okay. It's kind of a little echoey. We just finished a great week at our annual advisory board. This is a chance for us to invite our Canadian customers, our US customers and exchange ideas and information about the industry and items that Copart's working on technology and processes that we're working on. So, it's been a great week. And I think we can share some of that with you this morning, some of the facts that we've got are quite fresh since we just completed the conference. So, with that, let me turn it over to Jeff Liaw.

Thanks, Jay. I'll start as always with a 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 impact of the income taxes on the deemed repatriation of foreign earnings, discrete income tax items, disposals of non-operating assets, foreign currency related gains and losses, certain income tax benefits and payroll taxes related to accounting for stock option exercises and the effect on common equivalent shares from ASU 2016-09. We've provide 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 strength and financial performance. We analyze our results on both a 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. We do not undertake to update any forward-looking statements that may be made from time to time on our behalf. 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. I'll provide brief remarks on our financial performance in the third quarter before turning it over to Will Franklin for additional context. We achieved another record quarter in revenue, gross profit and operating income, starting with the top line. We experienced global revenue growth of 15.7% despite an unfavorable year-over-year currency effect on revenue of $7.9 million, primarily due to the…

Thank you, Jeff. [indiscernible] some more insights into our third quarter performance. Our worldwide sales volume grew by 4.5% and our worldwide inventory grew by 12.2%. Hurricane volume activity was immaterial for both this quarter and the second quarter last year. In the US, our sales volume grew by 2.8% and our inventory increased by 14.5%. Our volume growth continues to be driven by organic growth within the insurance market, market wins within the insurance market and our continued expansion into the noninsurance segments. Organic growth in the salvage market is driven, we believe, by an increase in total loss frequency. Published statistics suggest a total loss frequency of 19.9% for the first quarter of calendar 2019, an increase of 2.6% over the same quarter last year. This metric measures the percentage of estimates written that result in total losses. What is not reflected in this metric is the increase in the instances in which insurance companies salvage cars without ever writing a repair estimate. Our conversations with insurance company executives as well as the current trends and assignments lead us to believe that the growth of total loss frequency is higher than that published. Repair costs, particularly for new cars, are trending now at a rate exceeding that of inflation. An increase in the number and the average cost of replacement parts, the growth in pre and post repair scans and the supplemental damages they're identifying, the lack of capitalized repair capacity and the consolidation of the repair market by the three major MSOs are all leading to a rise in repair cost. We believe the industry is simply trending to less repairable cars. While repair costs are increasing, so too are the returns that we're generating for our sellers. The combination of our marketing efforts and efficiency of…

Operator, you could open it up for questions, please.

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

Good morning. And congratulations on a nice quarter.

Thanks a lot, Bob.

So, thanks for some of that color. I wanted to follow-up on Will's comments on the international buyer base first. You may or may not have this with you, but I was just wondering if you could give us a sense of where that was, sort of the percentage of sales for that base three or five years ago, would be one part of the question. And then, the second part, which is probably more important anyway, is talk about some of the drivers that have changed in the US just in the salvage market that have led to more international buyers getting into this market?

Got it. Much appreciate your question, Bob. And this is actually a topic we addressed and discussed at some length with our customers this week. As for the underlying drivers of that shift over time, I think there are two major ones worth mentioning. The first is that, of course, we're observing higher economic growth in a lot of countries outside the huge developed economies, like the US and the UK. And, therefore, there is just more natural demand for vehicles, including rebuildable cars coming from Copart auctions. The second is the nature of total loss frequency. I think you've been following the industry for a long time, Bob. So, you know that even what was a 50% damaged car 20 years ago looks very different from one today because the cars today are much more easily rebuilt. Some of the damage may be technological modules that could be fixed more simply in places outside the US. So, that's been the 30, 40-year trend really starting with airbags many years ago and more recently with the arrival of newer technologies in the cars as well. So, a combination of growing economic activity and, therefore, demand for cars in these countries with higher economic growth, but much lower vehicle penetration, number one. And number two, the changing nature of the cars as well. As I told more easily, the cars have value not just as dismantled parts – that's probably one fundamental misunderstanding of this business, is to assume that the cars really go only to dismantlers. Over time, they are increasingly going to rebuilder, many of them international in nature.

Let me add one more element to that growth, and that is that cars rebuilt in foreign markets are generally not held to the same standards as cars that are rebuilt in domestic markets. For example, the car in Eastern Europe may or may not have the airbags replaced at all. So, that gives them an advantage in terms of lowering the cost of converting that car to a drivable vehicle.

Okay, great. That's super color. Thank you. And then, just kind of sticking with the trend of technology going into cars, the centers, et cetera, and what you've talked about over several calls that younger and less damaged cars are being totaled, just wondering if you could give us a sense of where you believe we are in that process. And is this early innings, middle, late? Where do you think the trend to more younger and less damaged cars being totaled stands?

I think as a general matter, Bob, the nature of total loss frequency is big and slow moving, in the sense that it reflects the installed base of cars in the growth. Right? So, our business principally serves those cars that are literally being driven or the insurance carriers, of course, who insure them. And, therefore, there aren't step function changes in any given month or quarter or year. We're talking about 250 million, 300 million cars in the road, registered vehicles in the United States, for example. So, I don't think those are spiky sudden changes. I think it's a gradual change that has generally been a favorable one for decades now. As for the precise age of the fleet and the precise age of vehicles that are involved in accidents and therefore totaled, I don't think we expect dramatic changes. But, collectively, the changes will ultimately be favorable to total loss frequency.

Got it. Great. And then, one last quick one, if I could. Just on Germany, I know you went on about it quickly. The tenfold increase in volumes was tremendous. But could you just give us a sense of the feedback you're getting from the insurers right now as to what's holding them out from switching to the Copart model, if there is any specific things that still need to be worked on or addressed? Or if they just need a year or two of data? Or what do you think is the kind of, I guess, last or hopefully near the end of impediments towards switching over to the Copart model?

Sure. It's a great question. Right now, Bob, what we're focused on for this fiscal year was getting the network built. So, we've got the network of facilities in place. We've got the trucks now, the carriers in place to tow vehicles. And I would say the best way I can explain is we're pressure-testing the team now. We're achieving the results that we have in the UK, that we have in the US, that we have in Brazil where a vehicle can be assigned and picked up in sometimes hours, but within a day or two as opposed to a longer period of time. So, we're getting all of the operational performance in place and we do have a couple of accounts already, but we are not going out and hitting – swinging big or swinging for the fences with some very large carriers until we've got everything working the way it should. So, it's a process of building the team, the network, pressure testing. And then, this year, we will be going out and speaking with some carriers about switching over to the model. But we want to have everything working perfectly before we do that. You get really one shot at success.

That's great. Okay. Thanks so much.

Thanks, Bob.

Our next question comes from John Healy with Northcoast Research.

Continue to be really impressed with the non-insurance business that you guys are putting up. When I first started covering the company, I used to think non-insurance business was all about charity and, clearly, it's not anymore. And I was just hoping you guys could talk a little bit about what's the value proposition or what's the message that you're sending and allowing you to win that share from dealers? And even more specifically, the growth that you cited in the rental car industry is really interesting. Curious to know, how you are getting that business and kind of how you're convincing some of these fairly decent size consigners to work with you?

So, thanks for your question, John. I think, in short, it's not particularly about messages or marketing. It's just fundamentally about returns. So, we offer a buyer base, including large quantities of international active buyers of rebuildable and drivable vehicles. And so, it's really the net auction results that we can deliver to the non-insurance segment. And I think you're mentioning dealers in particular that has proven to be persuasive. So, it's not particularly any silver-toned communications on our part. It's really just that we demonstrate week after week and month after month that we can generate better returns for them on their vehicles and to do so quickly with the logistics and the infrastructure to deliver those outcomes .

Let me just add a couple of comments there. Our returns, obviously, are a huge part of our ability to be successful in that market. I think another thing that we don't ignore is the operational aspects and the ability to eliminate any friction to send us these cars. So, every one of these segments is significantly different. Charity cars completely different than a [indiscernible] equivalent which is completely different than a car coming from a franchise or independent dealership. And each of them have their own operating systems. So, to the extent that we can integrate our operations into their systems, to the extent that we need to change our process, to accommodate their specific needs, it makes it more likely that they will be testing us on their volume. And the results of the tests have been such that they continue to increase the volume that they send to us.

Great. And then, just wanted to ask about the real estate investment. I think, last call, you guys noted 45 or 46 projects kind of underway. And you thought maybe 24 months to kind of tie that up. Any updated thoughts on the real estate investment? Do you expect to do more than that or you're ahead of pace there? Just kind of how you're thinking about that investment.

Yeah. There is no [ph] slowing down our expansion with – we project out five years in terms of volume needs. And the reason we project out so far is because the gestation period for some of these new properties can be two or three years very easily, especially in these expensive markets. And so, our activity, I don't see decelerating at any point in the next two or three years.

Great. And, I guess, I'm going to hook in on that five-year forecast that you just kind of mentioned there, Will. When you kind of are building out that five-year forecast for your needs in terms of real estate, obviously, it's going to correlate to the volume and the capacity. So, when you look at those forecast, are the forecasts meaningfully different than the volume numbers globally that you're seeing today? So, I know you guys don't have long-term growth targets. But as you think about those needs and what you're buying forward, does the year-in, year-out kind of movement look a lot like what you've put up the last few quarters or do you guys think the growth in the market accelerates or decelerates thus far in your business?

So, I'm not really motivated to share our exact projection numbers. I can tell you this, though. We have a couple of absolutes in our [indiscernible]. One is the auctions have to run every day. And our auctions do. Our KCLO [ph] on our auction sites is three or four, five 9s [ph]. The other absolute is land. We have to have land. So, we really can't risk under-projecting our land needs going forward. And so, once again, we are very aggressive in our pursuit of the land capacity to accommodate the growth that we're anticipating.

Understood. Thank you, guys. And congrats.

Thanks, John.

Our next question comes from Stephanie Benjamin with SunTrust.

Hi. Good morning. My first question is just a clarification. And I apologize if I missed it. Did you give the revenue per unit that you saw during the quarter? I don't know. Both in the US or internationally or in total?

No. We don't always provide that metric. We did talk about a couple of the levers that are driving up that revenue per car, primarily our higher ASPs and, secondarily, the increase in services that we're providing to our sellers and our buyers.

Great. And then, you talked about this kind of in your opening remarks in terms of the congress you've had in the last week and some of the – maybe the technology investments that you're looking at or potential investments. But maybe you could speak a little bit more about the technology side of your business and what can be done as we move forward? Thanks.

Sure. So, the selling process that the insurance companies go through sounds very simple. But in reality, it's fairly complex. You have a lot of constituents in that whole process. You've got the insurance company. You've got the policyholder. You're going to need an appraisal and repair estimate, both of which can be provided by different people. You can have a lean payoff. You're dealing with the DMV. And all these activities and transfer of information need to be coordinated and sequenced in the right order. And we work with virtually every insurance company in the United States. And so, we're able to identify best practices and developed the technology around those best practices and offer that technology and those best practices to all the insurance companies. And generally, smaller insurance companies will take advantage of it. The large ones will too. So, to answer your question, we generating the technology that allows us to integrate the flow of information, the flow of documents, the flow of the process around our total loss process.

Stephanie, the only thing I'd add there is, when I think about technology, Copart kind of framework for it, I'd say think of it in three pieces. The first is the importance of technology in helping our customers perform better and faster from their side. And that's the integration that we all talked about, providing data at the right time to better enable their own decision-making processes. Second aspect of technology for us is to help us perform better. So, we have different applications, different technologies, for example, that help us manage our towing network better, to dispatch trucks more efficiently. And then, thirdly, of course, technology enhances our own reliability. You heard Will talk about investing for KCLO, which in our parlance is to keep the lights on, an auction reliability. And so, a good part of our technology investment as well is to prepare us for the growth that we are serving to make sure that we can continue to serve our customers. well.

That's really helpful. Thanks for all the color.

Thanks, Steph.

Our next question comes from Craig Kennison from Baird.

Yeah, good morning. Thanks for taking my questions. Wanted to start on the insurance side with RFPs. I know, in the past five years or so, you've landed a handful of very large national contracts with insurers. With that in mind, has the trend stabilized? Are there any upcoming renewals or RFPs with new prospects? And then, additionally, what's the dynamic in Germany? And are there any big RFPs that would be a national contract there?

Got it. Craig, thanks for the question. As to your first question, we're not like a subscription business that has a bunch of customers coming due upon their contract expiration at the same time. Our dialog with our customers is literally on a daily basis. So, no, there is not a particularly lumpy either opportunity or risk for us to win or lose a big chunk of business simply by the nature of contract expiration in and itself. That said, we think all of what you've heard today about our auction platform, the returns we generate, technology, et cetera, generally enables us to win market share over time, which we have done now for decades and believe we will continue in the future as well. As for Germany, the issue isn't principally RFPs as someone posed a question earlier. It's principally about changing the way business is done altogether by the German insurance carriers. So, it's a shift in a way they think not a contract expiration per se or an RFP that – it triggers the opportunity for us. Copart certainly is a well-known enough and, obviously, a very successful enterprise in salvage auctions around the world generally. So, those dialogs are available to us when we are ready and when they're ready for them, but it's not per se an RFP.

Thanks. And then, Will, I had a question for you on real estate and hoping you can share some metrics to frame that spend, but maybe what are the economics of the typical real estate project, either the average cost of an acre or the range you might pay depending upon the market? What kind of capacity do you get in terms of car volume on a project like that? And then, what's the path to breakeven or to corporate average returns on that investment? Anything you can shed light on would be helpful.

Sure. Let me start by saying there is no typical transaction. So, we can buy land for $50,000 an acre in some parts of the country. We just bid on land an equivalent over $3 million an acre and didn't get into the second round of the bidding for that land. Continuing on some of your questions, you can't look at the economic output from one yard because we don't service one insurance company in one yard. We service insurance companies nationwide. So, you can't really ignore these very expensive markets because they may not be as economically profitable as the less expensive real estate markets. So, that's really not even a consideration for us. We just know that we have to have the land whenever insurance companies need it.

Craig, even to put it in financial terms, I think if you took snapshots at any moment in Copart's history and said, does this next parcel of land generate an ROI in the form of its cap rate that exceeds Copart's weighted average cost of capital, the answer is almost certainly no. But if you had the benefit of a time machine, if you go back to the early 1990s and decide Copart, whether we should buy land or not, now that we have the benefit obviously of hindsight, having acquired massive parcels of real estate in the United States and the United Kingdom and elsewhere around the globe, is one of the key economic enablers of our business. It's proven to be incredibly strategically valuable. We believe that will be true going forward as well. So, as Will noted, it's not about the cap rate on any given parcel of land. It's about building the network that allows you then to amass a global liquid market of buyers as well. So, it's a two-sided auction and owning our land has been a critical enabler of that two-sided auction.

That is super helpful. And maybe just to follow-up, Will, with your point on the property where you didn't make the second round. What is the consequence of that? Does that mean longer towing distances or higher costs? What is your backup plan given you need to service customers in that market?

Well, there's a number of ways to approach markets like that. Typically, we like to have one large yard. In certain situations, we'll settle for multiple smaller sites. We'll also look at trucking and we'll do that tracking in a manner that is not negatively impactful to our sellers. For example, a truck in the evening. We can operationally address some of the yard constraints by taking older inventory and moving it off site. There is ways around it. But, ultimately, land will continue to become more expensive and the development costs will become more expensive as well.

And, Craig, let me add to that. Will talks about a five-year plan. We get bumped on land all the time. That example he gave you is just another example of land that we've tried to buy, we couldn't buy and there will be another piece of land we can buy, but we can't get zoning. Because we're working on this five years out, we're not out of capacity. We've got room and we can service customers. And, specifically, in the market he's talking about, we've got plenty of room and we can service customers, but we've eventually got to get land in that market. And if we didn't, then we would do some of the things that Will just spoke about.

Great, thank you.

Thanks, Craig.

Our next question comes from Daniel Imbro with Stephens Incorporated.

Yeah. Good morning, guys. Thanks for taking my questions. I wanted to start on a comment you made on ASP strength and the growing number of bidders in the US despite it being a more mature market. I think, in recent quarters, you've noted that you've increased your international marketing to bring more international bidders to auction, but are there any initiatives you can point to that you guys are doing to help bring domestic buyers to auction? Or what do you attribute that strength in bidders to?

Yes. We have specific initiatives for both domestic and international buyers. We work with buyer profiles. And through our marketing efforts, whether they are social or PPC or SEO, we're targeting those buyers to make more aware of car auction and particularly the cars that are available. So, when we introduce or we go into a new segment that may not be a familiar segment to our existing buyer base, we'll spend an extra amount of time and resources to identify that segment and to those particular buyers. And Jay just handed me some of my call notes. Obviously, we've been successful. We've increased our unique bidders on the domestic side by 14%. And I'd say that's 14% over very large volume numbers. International is more segmented because it's country by country. So, two of the countries that are growing are Georgia and Jordan. And Georgia, for whatever reason, they're buying electric cars. So, Teslas and Priuses are finding their way to Georgia at very, very high ASPs. And so, we are obviously promoting that. And in China, they're buying Harley-Davidsons. In Mexico, they're buying pickup trucks. In the Netherlands, they are buying sports cars. So, we're getting to know the demand in these particular regions. In Nigeria, they just want affordable transportation and our marketing efforts reflect that knowledge that we're gaining.

Got it. That's really helpful color. Jeff, switching gears a little bit, looking at the revenue growth in the quarter, kind of the implied, revenue per unit remaining strong, especially considering the scrap steel headwinds that we saw during the quarter. Can you maybe just give us a reminder on how scrap steel impacts your business and your ASPs? I feel like a few years ago, it felt like a bigger driver of ARPU, but has anything changed or can you just give us a refresher on how that impacts your business?

That's a great question. And I think the answer is a strong yes that the nature of scrap and its influence on our business has shrunken over time. It's declined very meaningfully. And it's the flip side of the coin of the issue we talked about a few moments ago that a car – imagine a car has a spectrum of potential values. And at the very low end, it is literally worth its waste in steel and its metal content. And at the other very – the other extreme end of the spectrum, it's a drivable car the next day. A perfectly intact automobile. As the nature of technology and the increasing complexity of cars has made more the totals – more the total cars at the end of this – closer to the end of the spectrum of drivable cars, they're more rebuildable, they're more drivable. They're certainly worth more as parts than they are as the metal. And, therefore, scrap is not something, by the way, operationally, we particularly focus on day to day at all. It's really about finding the right buyers of cars and the high value – the higher value cars for us assuredly are not being sold for scrap. The international buyers are, obviously, not shipping a car several thousand miles to melt it down. So, scrap matters, but increasingly less over time.

That's helpful. So, yeah, we should change how we're thinking about it. That's helpful. And then, maybe last one. Internationally, we've touched a lot on Germany, but looking – it looks like you're growing – scaling your offering in Spain pretty nicely, although it's still pretty small. Can you update us on how you're thinking about that opportunity? Or any kind of feedback or learning on that market as we think about what's next beyond Germany in Europe? Thanks.

Sure. So, we implemented a new playbook, if you will, in Germany to build the network out. And we're letting the team in Europe basically take that playbook and implement it in Spain. So, they've added locations. And they're, in many ways, mimicking what we're doing in Germany to achieve their own success. There is focus in both markets, but, clearly, we're putting the vast majority of our efforts right now into Germany to get that market to see a big win in terms of volume and a switch over. This has been a continued investment in the market in terms of people, process, technology, land, et cetera. And once we start to see that transition over, it will be even further growth into expanding locations. Will's example of the US for land is what we're doing right now in Germany. We've got a dozen sites we're looking at. And we're trying to purchase and then we'll develop those sites. So, the ability to build that network and to achieve success takes time. And so, Spain is doing the exact same thing. They're much smaller weight than Germany, but nonetheless doing the exact same thing in that market and they are seeing success. So, we're excited about that.

Great. Thanks so much, guys. Best of luck.

Thank you.

Thank you.

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

Hi. This is Chris Bottiglieri. Thanks for taking the questions. The first one was, did I hear correctly that international buyers are 40% of units, but 50% of revenue?

40% of units. It's 50% of the value of everything that we auction. And that's because we're buying the rebuildable cars and not the cars that are being parted out.

Got it. That makes sense. And can I – as a rule of thumb, that would suggest that the selling price of those cars is 25% higher than the non-international bidders. So, would it be fair to kind of use that as a rule of thumb for the impact on ARPU growth, the 25% premium as international mix grows?

I've got to validate that precise arithmetic, but, directionally, yes. They are buying meaningfully higher value cars on average, in part because of that scrap phenomenon you heard a few moments ago. But the very low end cars, of course, none of them go internationally. Many of the high-end cars do.

Got you. That's what I figured. Okay. And the next question I had was, can you – I don't think you've talked about this a lot recently. But can you talk about, kind of within the US, the mix of fees excluding purchase vehicles? That just makes the math fuzzy. Can you give us a sense of what percentage of revenue is fee-based versus ancillary service based and kind of like – to what extent that's contributed to ARPU growth in the last couple of years?

I think, Chris, on fee schedule, we tend not to discuss them in any substance. I think we have delivered additional services. You heard Will talk about a few of them, including our title procurement services, loan pay-off amounts and so forth. But our fee schedules are competitive and sensitive matters for us. We deliver, we believe, very strong value to both our sellers and buyers.

Got you. Okay. And then, just a quick question on rent expense, that's doubled over the past years. I was wondering if this is driven entirely by international expansion or you've had a change in philosophy on like rent versus own or cap rates or whatnot. And is there a way to bifurcate the rent expense between the US and international business for us? Thank you.

You were posing the question about the lease versus own decision on real estate?

Yeah. If you look at the facilities rent expense, for the company, it's doubled over the last two years. Just trying to figure out what's driving that? Is it all international? Or is it something else going on that's driving that like doubling of rent expense?

I would think of rent expense a little bit like purchased cars for Copart. It's a number that you'll see and, therefore – and we've reported publicly and, therefore, it draws attention. But, in practice, we buy what we can. So, we buy anything we can and we lease when it's operationally necessary. When we enter a particular market, when we are adding capacity to a metro area in our existing markets, our expectation is that we're there for decades, and so we're always better off buying. There are some circumstances in which the land that's available can't be bought and, therefore, have to be leased. There are some circumstances, for example, in Germany, as you mentioned a moment ago, in which our desire to be up and running very quickly can help us to pursue actionable properties, in some cases, or in many cases, lease properties instead of purchasing them. But our preference fundamentally in almost every case would be to buy, not to lease. And any additional rental properties are by necessity, not by desire.

Got you. Okay, thank you.

Thank you, everyone . At this time, that concludes today's question-and-answer session. I will now turn the call back over to Mr. Adair.

Thanks so much. We appreciate you all attending the call and we look forward to reporting on the end of the year and the fourth quarter on the next call. Thanks so much. Bye-bye.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day.