Greetings. Please standby. Good day, everyone, and welcome to the Copart, Inc. Second Quarter Fiscal 2022 Earnings Call. Just a reminder, today’s conference is being recorded. For opening remarks, I would like to turn the call over to Mr. John North, Chief Financial Officer of Copart, Inc. Please go ahead, sir.

During today’s call, we’ll discuss certain non-GAAP measures, which include adjustments to reverse payroll tax benefits related to accounting for stock option exercises and certain discrete tax items. We provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our Investor Relations website and in our press release issued yesterday. We believe these non-GAAP measures, together with our corresponding GAAP measures, are relevant in analyzing our results and assessing our business trends and performance. In addition, our comments today include forward-looking statements within the meaning of federal securities laws, including management’s current views with respect to trends, opportunities and uncertainties in our markets, including the COVID-19 pandemic. These forward-looking statements involve substantial risks and uncertainties. For more detail on the risks associated with our business, we refer you to the section titled Risk Factors in our Annual Report on Form 10-K for the year ended July 31, 2021, and each of our subsequent quarterly reports on Form 10-Q. Any forward-looking statements are made as of today, and we have no obligation to update or revise any forward-looking statements. And so with that out of the way, I’d like to turn the call over to our President, Jeff Liaw.

Thanks, John. Good morning, everyone. We’re pleased to report a strong second quarter for fiscal 2022. I know that over the course of our discussion today, we’ll naturally migrate to a discussion of near-term trends, such as driving patterns, new vehicle production, total loss frequency, cost inflation, market share trends and the like. But I’ll start by observing that the long-term fundamentals of our business are as strong as they’ve ever been. Auction liquidity and returns, member recruitment and participation, our collaborative engagement with our clients day to day and in catastrophic situations. And certainly, our aggressive reinvestment in capacity, technology and people that make all of the above a reality. A quick thank you to the Copart team worldwide for their efforts in making these true. Our results in the second quarter financially were largely a continuation of what we experienced in the first quarter as we observe commerce and mobility continuing to trend back to the quote to new normal, which we’ll elaborate on in greater detail. Accident and assignment volumes beginning and continuing to recover and ASPs remaining elevated as well. As I’ve done previously, I’ll elaborate on a handful of key themes for the quarter, and John will provide additional detail and perspective as well. Starting with our unit trends for the quarter, our unit sales globally increased 19% year-over-year, with a U.S. increase of 21% and an international increase of 9%. Our insurance business in the U.S., in particular, grew over the second quarter of 2021 by 21.5% and was also up on a two-year comparison versus fiscal 2020 due to the recovery I described a moment ago as well as share gains. Notably, our unit volume has been reduced by increasing used car prices, which I’ll describe in greater detail momentarily. As we noted…

Thanks, Jeff. I’ll make a few comments on our operational results, and then we’ll take a few questions. For the second quarter, global revenue increased $250 million or 40.6%, including a $3 million loss due to currency. Global service revenue increased to $178.5 million or 33.5%, primarily due to higher average selling prices and increased volume. U.S. service revenue grew 35.5% and international experienced an increase of 20%. Purchased vehicle sales increased 71.9% or 85.2% sorry, purchased vehicle sales increased $71.9 million or 85.2% due to higher ASPs and increased volumes. U.S. purchased vehicle revenue was up 84% over the prior year, and international grew 87%. As a result, purchased vehicle gross profit, defined as vehicle sales less cost of vehicle sales increased by $5 million overall. Global gross profit in the second quarter increased by $95.8 million or 31%, and our gross margin percentage decreased by approximately 350 basis points to 46.5%. U.S. margins declined from 52.2% to 49.4% and international margins decreased from 37.6% to 31.6%. The margin decline was primarily attributable to two factors: approximately 150 basis points of decline is due to the mix shift from a greater proportion of purchased vehicles, which have a lower gross margin, but a similar profit per vehicle. The balance of our margin contraction is attributable to cost inflation, offset partially by higher revenue per unit. There was a very modest impact to margin rate due to Hurricane Ida as we continue to incur expenses due to the sale of vehicles consigned to us from that event, although we have now sold through approximately 85% of our assignment volume from the storm. We remain excited by the opportunity to increase margin over time as we add additional scale and find further operational efficiencies through technology and innovation. I will now…

[Operator Instructions] Our first question comes from the line of Bob Labick with CJS Securities. Please proceed with your questions.

Good morning. Thanks for taking my questions. Wanted to start with cost inflation, as you guys talked about it a bit in the prepared remarks. Obviously, it’s not unique to Copart, the inflationary environment we’re in. So maybe just help us understand the primary drivers of the cost inflation for you? Is it towing, labor, other? Where is it coming from? And really what remedies you’re looking at and the opportunity to bring back kind of cost per unit to prior levels? Or how long do you think that might take?

Got it. Thanks, Bob, I think you may be astute preamble there that like all enterprises, frankly, across all industries, we experience inflation, we consume a mix of third-party goods and services and certainly employ a large number of team members worldwide. And so we’ve always been subject to inflationary pressures. I’d say, historically, on a more selective basis, whether it’s health care or commodity cycles and the like. Today, there is more widespread inflation across our cost base overall. I think you are already aware of the major costs in our business, but they do include the towing, the personnel, certainly, our technology platform as well. We have some structural protection in that, as you know, we own the vast majority of our land. And so that cost is -- we already own the land outright and therefore, don’t face the inflationary pressures when it comes to rental expense to the extent that we otherwise might. Historically speaking, over any intermediate term, Bob, we’ve always demonstrated the ability to recover or more than recover inflation in the marketplace. And I don’t think the expectation in this case would be any different long term. Now most importantly, we also strive for productivity enhancements and improvements over time to help absorb those same inflationary pressures, both before this wave courtesy of COVID-19 and otherwise.

Okay. Got it. Great. And then you’ve obviously had a lot of success in growing not just the salvage and insurance cars, but beyond that to non-salvaged dealer cars and whatnot. Can you talk about, I know not in specific numbers per se, but the relative credibility of the gross profit per unit of the salvaged vehicles versus the, say, dealer or rental or repose?

I think it’s tough to provide a sweeping answer that covers all such non-insurance categories. It’s a little bit of a contrived catch all basket for us. There are certainly groups of those sellers, as you noted a moment ago, for whom the average selling price is higher than our typical insurance car. And therefore, the contribution may be higher as well. There are other categories included in that non-insurance portion that are lower average selling price than our typical insurance car. So on a tough to answer so on a blended basis, probably on average, higher, but distributed.

Okay. Great. And then last one for me. And I don’t know if you guys are ready to answer this, not yet or not if it’s too early, but I’ll give it a shot. Obviously, you’ve recently launched Copart Select and it’s an attractive kind of less damaged non-insurance car, clean title, less damaged car auction. And so I was just curious if you could give your initial thoughts on the launch, if there’s any surprises from the launch and how you think about Copart Select going forward?

Bob, you’re always observant. On Copart Select, it is, as with many things we do at our action, we are innovating and experimenting and attempting new ways to position our auctions and the product that our sellers can sign through us. We think this kind of offering holds real promise. So, we’re not yet ready to share substantive results, but it’s the -- in keeping with the themes we’ve addressed in the past through you and I have been talking about these kinds of pursuing this market in these kinds of cars for years now, and this is one more arrow in the quiver to tackle that marketplace.

Okay. Super. Good luck. Thanks.

Thanks Bob.

Our next question comes from the line of Daniel Imbro with Stephens Inc. Please proceed with your question.

Yes. Hey, good morning guys. Thanks for taking my questions. I wanted to ask one on the pricing backdrop. Maybe first, Jeff, you made the comment the salvage market moved faster, but in aggregate, has kind of kept up with Manheim. Are you still as confident, now that we have the benefit of hindsight, that some of the more secular drivers, less damaged total loss vehicles, more improved auction liquidity were as big of ARPU drivers as we thought at the time? Or has hindsight proven that maybe that was more used car price driven than you initially thought? Just trying to understand that comment.

You were saying since March of 2020 or you were saying before that?

Yes, I feel like during 2020, some of the comments on the earnings calls discussed that you guys thought a lot of the maybe company-specific drivers, auction liquidity, things like that, were a larger contributor than used car pricing. The used car pricing was one of the inputs. Just trying to understand as we move further from it and gotten more data points, if your understanding is the same or if it’s changed at all?

I don’t think it’s changed. I think it’s been imprecise the whole time. When we look over the very long-term history, I think those secular drivers are unequivocally true, that they are newer cars that are totaled, less damaged cars there totaled. I think the auction liquidity is when we say that, those are objective measures, right? Those are the number of bids that are being submitted for a unit, the number of participants in a given auction, et cetera, et cetera. So those aren’t -- that’s much more science than art in that regard. Now as to precisely the trend for pricing for our cars in the pandemic and frankly, even the first year of the pandemic it was very different from the second in terms of the supply chain and used car availability and such. I think both were – both were factors, for sure, both our proactive efforts in both the character and the cars we’re selling as well as the used car marketplace.

That’s helpful. I wanted to ask one on the business mix. You’ve always been growing revenue much faster into purchased vehicles, but part of that is just the way you reflect revenue. Has the unit -- have units also been shifting towards the purchase side in a similar way to the revenue we’re seeing? And if so, why would that be? Is that a change in the U.S. insurance market? Or is there something else going on there?

Not a change in the U.S. insurance market. There are some portions of our business, including, for example, Copart Direct, the channel through which we purchase cars directly from consumers that yes, consumers will consign cars to Copart from time to time. But often, they prefer to deal on a principal basis for a price certain from us instead. So, as we grow that business, that is "principal volume" that drives growth in purchased car sales and purchased car costs. So that’s an example of what would cause it, but it is not by and large U.S. insurance carriers shifting back to principal. They understand the merits of the consignment model in which they and we share in the upside of the highest possible returns on cars. Generally speaking, nobody moves back to principle, they move from principal to consignment over time.

Perfect. And then maybe last one for me. Thinking about ancillary services, periods [ph] last week talked more about maybe offering transportation. I’m just curious if you guys have looked at that. I think you guys connect your buyers with transportation partners, but don’t actually provide that service. Have you looked at that? Would it be ROIC accretive for you guys? And maybe anywhere else you see an opportunity to add ancillary services for either buyers or sellers to your platform today?

That’s a perceptive question, in general, which is to say that the – as the leading marketplace online – global online marketplace for cars at the type that we sell. There may well be untapped potential when it comes to additional services that we offer the member base. I think, to be fair, there is a robust ecosystem of those service providers that has emerged around Copart as you might imagine, selling millions of cars a year to buyers worldwide. There certainly are transportation service providers. There are secondary storage providers and the like that have emerged proximate to Copart yards, and certainly who know many of our buyers firsthand as well. So the answer is, we are always evaluating those opportunities, experimenting with them trialing them. And from time to time, they stick and we expand them. So it is always on our radar.

Got it. That’s it from me guys. Thanks so much and best of luck.

Thanks, Daniel.

Our next question comes from the line of Ryan Brinkman with JPMorgan. Please proceed with your question.

Hi, thanks for taking my question. I think you are maybe reticent to discuss individual contract wins or customer relationships, et cetera. But I wanted to check in on the potential market share shift in the salvage auction industry. What you think your market share may now be? How much share you might have gained? And whether there are any practical or potential regulatory limits to your share in the U.S.? Or how much more room your share could run? And then on a related note, it would be great to get your thoughts on what has been the driver of your higher share, whether you may be competing on price or winning contracts based upon superior service level or greater ancillary services or just the net yield that sellers can realize as a result of your bigger buyer base, et cetera?

Got it. And as you might imagine, Ryan, I probably can’t answer the first half of your question at all, and we don’t discuss individual accounts, but certainly happy to comment on the second half of your question, which is, what is it that has driven our market share capture as a general theme, which I would say has been true for the past 40 years, not just the past few. And as for why we would win an individual account, I think the answer is often unsatisfying, we have a variety of things. It’s not one singular theme, which I think our brains would prefer. But certainly, to articulate a few. Our auction returns are critical, and that is literally how much money we put in the pockets of our sellers after we auction the cars, which is a function of our DB3 online auction technology, which we believe is the best in the industry. It’s a function of our ability to recruit new members and to engage them. It’s a function of how quickly we can pick up cars and reduce the advanced charges experienced by our insurance company sellers. It is a function of our streamlining the purchase experience and making it ever easier for third parties to buy cars at Copart. It’s also a function of the auction liquidity we’ve talked about a few times on this call, which is that the growth of our insurance business has helped to affect the further growth of our insurance business did own non-insurance and vice versa. The second thing I’d touch on is our approach to customer service, and we think a long-term horizon, take a long-term approach to problem solving on behalf of our customers. We believe that we re-earn the right to sell cars for our customers with every assignment that we get and that mindset starts with our founder, Willis Johnson and Jay Adair and to me and to the new hire, starts in New York well tomorrow morning. And that sounds like a throwaway cultural comment, but I think it absolutely rings true to us day-to-day here. And you would see it perhaps most pronounced in a catastrophic event when it is all hands on deck. And literally, all of us are physically or many even the executive leadership are on the ground, making sure that our teams are serving our clients capably. As one other example, we have acquired our physical land, nonstop in every instance we can for the past 40 years to ensure that we have the long-term ability to serve our customers that were never prisoners of – to third-parties who may prefer to do something else with the facility or otherwise. So it is a combination of those two. It is auction returns and the customer service mindset and having a long-term horizon, which we think has yielded those benefits over the long haul.

Okay. Thanks. That’s very helpful. And then just lastly, for me, it was discussed some already, the degree to which your surging revenue per unit during the pandemic may have been attributable to various different factors, including, increased prices for used vehicles, metals, et cetera, versus your proactive efforts, including relative to mix, et cetera. But I think fee increases have not really been a driver, right? My understanding is you’ve had more or less the same fee structure over this time that has just been applied to much more expensive vehicles. So if that is the case, do you think that there might be potential scope to increase the fee structure, particularly if we see some cooling off in used vehicle prices? I saw the mid-month Manheim finally ticked down today or some of the metal prices, which seem to have sort of peaked in kind of October type timeframe after surging every single month, in order to help offset some of these inflationary cost increases that you talked about?

We don’t comment on our fee structures, unfortunately, but I would direct you back to the overall comment that over the – any intermediate horizon, we’ve shown the ability to recover and more than recover inflation via both productivity and other measures we might take in the marketplace overall. So the – and the second point I’d add is that if and when we see a moderation in used car prices, we’ll almost certainly see a rebound or an increase in volume relative to where it otherwise would be as well.

Very helpful. Thank you.

Our next question comes from the line of Chris Bottiglieri with BNP Paribas. Please proceed with your question.

It was a good attempt. Hey, guys. So, yes first question is more gentle topic. But give me a sense of your exposure to like Russia, Ukraine, the neighboring Soviet blocks, and I would think they are probably 5% to 10% of sales, but maybe just give us some sense to that. And have you seen activity tighten up yet there? Is it like generally pretty healthy still?

Healthy? Less than that and healthy.

Yes, good to hear. And then the other question is, to the extent you can comment on it. Can I reframe the question on used car pricing? I would think a lot of your fees are fixed to the buy side. I would guess they’re probably fixed on the sell side on average. And then your price bands have a beta of less than one. So mix varies, but I guess my question is, is there like a rule of thumb you can give us for the ASP growth? Like what’s the contribution of ARPU growth? Is there – any kind of like, I don’t know, any way you could frame – that would help ease the discussion on used car pricing sensitivity? Is there some kind of rule of thumb or sensitivity factor we could apply?

We haven’t shared those rules of thumb, Chris, in the past. We certainly do have a publicly published fee schedule for our members. So some of that math you can literally do by hand based on our – based on what’s publicly available but we don’t elaborate on fees.

Yes, it’s okay. Makes sense.

Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Hey, I just to keep flogging that dead horse. Given that your fee structure does vary by transaction value, have you done the math to sort of explain from a correlation standpoint, what the relationship to Manheim is? You talked about some moderation in ASP in the prepared remarks, but do you have a feeling for what maybe what the actual statistical correlation of Manheim is to ASP?

Over the – I think it’ll be tough – I think over the long haul, our ASPs have outpaced the Manheim. Let’s stop the clock, March 2020. Our growth in ASPs have generally outpaced the Manheim used vehicle index, which is not a surprise given total lost frequency because lesser damaged cars and newer cars are totaled. So our mix naturally evolves over time. Manheim’s mix naturally does not evolve over time. So, I would say that is – that has been true for many years pre-pandemic. During the pandemic for – as you heard us describe today, our growth in the quarter on ASPs was a little north of 20% while Manheim, I think for the quarter, is up 40%, 45% or thereabouts. And I think that reflects a lag in their index, I suppose the best way to describe it because from, say, pre-pandemic levels to today, both they and we have experienced the percentage increases in our selling prices that are plus or minus comparable. And therefore, I’d argue that our prices increased earlier and today we are a plus or minus at parity relative to pre-pandemic levels. Over the long haul, I continue to believe we’ll – our ASP growth will outpace theirs by virtue of the mix shift in total loss frequency before accounting for non-insurance business.

Okay. And the other mix driver, or I guess, in your favor, is non-insurance, could you give us a little bit of an update as far as the dealer cars and maybe what the dealer relationship count is, or however, whatever metric you want to be using to measure the success in the dealer strategy?

Yes, I think it’s – our non-insurance business, I think, Bret, is a mix of dealer cars, rental car companies, financial institutions, our Copart Direct business in which we buy cars directly from consumers, and all of the above. And all of the above are experiencing some of the same disruptions that we just talked about for the purposes of Manheim and our insurance cars as well, meaning there is use – there are used car availability challenges there. There’s ample demand for cars, automotive dealers literally putting up billboards to buy cars, not to sell them. So, we’re experiencing an unusual dislocation in that regard, but have nonetheless grown our non-insurance business year-over-year for the quarter by 4.5%. But individually, I think there’s good traction there, which is a function again of returns and liquidity.

All right. Thanks.

Thanks, Bret.

Our next question comes from the line of John Healy with Northcoast Research. Please proceed with your question.

Thank you and thanks for taking my question. I wanted to ask about that tick down in total loss rates. When you look at that and see that, where do you see the total loss rate changing within your own business? Is it at lower dollar value cars or is it the middle or is it the high end? And how do you think that change in total loss rate actually impacted your ASPs this year? Was it helpful? Or was it hurting you guys depending on where it fell?

Tough question, because I think it’s some place where we’re mixing X and Y variables a little bit. But total lost frequency in general, the marginal car would be the higher end vehicle with insurance that is fixed instead of being repaired. If you’re driving a 2008 car with any kind of meaningful impact, that’s certainly an automatic total without much consideration. The newer cars are going to be the still somewhat more marginal ones. Now the reason that, and this is what I mean by X and Y variables, the reason why total loss frequency has tapered somewhat is because used car prices are as high as they are, meaning the cars are difficult to replace, availability is a problem outright. And certainly when you can’t replace it, it’s at higher prices, which makes the total loss decision, all else equal, more expensive than it otherwise would be. But those very same high use car prices that increase the selling prices for cars in Copart auctions as well. That’s what I meant by the X and Y variables is that the underlying cause, strong use – unusually strong used car price environment has helped our ASPs overall. It perhaps has "hurt" our ASPs by cutting off a slice of the cars that otherwise would have been totaled.

Understood. And then I might have missed it, but did you guys quantify what volumes were for the U.S. and the international business in the quarter in terms of just how those occurred?

We shared growth numbers, John. You have them?

Yes. Global unit sales are up 19%, U.S. is up 20.8%, International was up 9.3%.

Great. Thank you, guys.

Thanks, John.

[Operator instructions] Our next question comes from the line of Gary Prestopino with Barrington Research. Please proceed with your question.

Hey, John. Hi, Jeff. Could you just – I didn’t quite get the growth in U.S. purchase and international purchase sales for the quarter. Could you just give me that, please?

U.S. purchase was up 50.7% and international, was up 20 units.

What about sales? Did you give that number?

Gary, let me get it for you offline. We can go over the specific numbers.

Okay. That’s fine. Jeff, just kind of a little rhetorical question here. As used car prices come down, which they are going to eventually, is there a pretty much a quick correlation with total loss ratios going up because these prices are going down?

In short, yes. There are other variables at play as well, which is there’s a lot of confounding forces here that make it hard to give you a clean answer. But yes, certainly if nothing else in the world changed except the used car prices came down, we would see volume increase very meaningfully. And that’s the same answer by the way, I would have given you in December 2019 or this is a non-pandemic observation. When we’ve been asked in the past, do we want high use car prices or low used car prices? The response has generally been that high used car prices yield better unit economics for Copart, meaning we’ll make more money on the cars we sell, but also fewer units because of the total loss equation. Lower used car prices means we will face less attractive per unit economics, but we would sell many more units. So, we’ve always been ambivalent about used car prices and what it means for our business. And I suppose to characterize it more favorably, I’d say we have a hedged position when it comes to used car prices. As for today’s circumstances, I think we’re facing a more extreme set of variables than we ever have seen, at least in my own professional career, when it comes to used car availability and prices. If those prices do come down, I think we absolutely would see an increase, all else equal, in consignments to us from insurance carriers.

Okay. And then lastly, I don’t know if you make this public, but could you give us an idea of what percentage of your cars are processed on a non-insurance basis this quarter versus, say, a year ago?

That’s reasonably stable. I mean, it’s approximately 25% in the U.S. here.

Thank you.

Thank you.

Our next question comes from the line of Stephanie Moore with Truist Securities. Please proceed with your question.

Hi, thank you.

Hi, Stephanie.

I wanted to touch on – or return to this inflation discussion that we had earlier. I’m curious, you kind of talked about remedies in terms of trying to overcome the inflation that I think pretty much every company in business is dealing with in this environment. I know that in the past there’s been flexibility to adjust fee structures on the buy side, but what is the – your appetite and/or ability to have conversations with your insurance customers on the sell side to have them help offset some of this truly probably historical inflationary environment, especially with regards to some aspects like towing and others that they’re directly benefiting from? Thanks.

Got it. Thanks, Stephanie. Pricing is, as I’m sure you can tell from this call and a couple of occasions, is a delicate subject for us that we tend not to discuss on earnings calls, public forums like this. Suffice it to say that our agreements with our sellers tend to run multiple years at a time because we make long-term commitments to them in the form of our land and technology and people and so forth, and they do in turn with us. So we take those commitments to certainly very seriously, and the contracts are where they are. It’s our responsibility to manage our costs. And as I noted a moment ago, over any intermediate period of time, we have been able to recover and more than recover the inflation in the marketplace and through productivity enhancements. So unfortunately, we can’t say much more about the pricing on either the seller or buyer side.

That’s fair, and then just as a follow up, can you maybe discuss your towing process, i.e. the use of maybe company-owned trucks, the use of third-party brokers, just kind of what has been the normal practice and then maybe expanding on that, what might be an opportunity?

Got it. You mean the inbound retrieval of the cars that were part of it.

Yes, exactly.

So we use a mix of third parties as well as our own trucks, with a strong majority being the former, not the latter. We have the latter in terms of our own captive fleet, which has grown meaningfully over the past few years and will likely do so in the future as well to have additional capacity in the event of catastrophic events, for example. But we largely rely on third-party stockholders, who we dispatch directly so we don’t use intermediaries by and large in our local markets circuit to put them across the U.S. We know the local companies and local towers and build long standing relationships with them so that they can effectively retrieve cars for us on a near-daily basis once they’re on board.

Great. And then just – did you give, John, the U.S. ASP number? I know you gave the worldwide one, so wondering on that.

U.S. were up 20.3.

Great. Okay. Thanks so much.

Thanks, Stephanie.

And we have reached the end of the question-and-answer session. And I’ll now turn the call back over to Jeff Liaw for closing remarks.

Great. Thanks for joining us today. We’ll look forward to talking again after the third quarter. Take care.

And ladies and gentlemen thank you for your participation. This does conclude today’s conference. Have a great rest of your day.