Good day, everyone, and welcome to the Copart, Incorporated Second Quarter Fiscal 2023 Earnings Call. Just a reminder, today's conference is being recorded. For opening remarks, I would like to turn the call over to Jeff Liaw, Co-CEO of Copart Incorporated. Please go ahead, sir.

Thank you, Maria. Good morning, everyone, and welcome to our second quarter call and thanks for joining us. I’ll actually start briefly with the Safe Harbor. Good morning. During today's call, we'll discuss certain non-GAAP measures, including adjustments to income tax benefits related to stock-based compensation. We provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our Investor Relations Web site and in our press release issued yesterday. We believe these non-GAAP measures, together with the 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. 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, 2022, 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. With that, I wanted to start today by introducing our new Chief Financial Officer, Leah Stearns, who will provide additional data and context in a few minutes as well. We're very excited to have her join the leadership team here at Copart after an expansive search. We hired Leah for the richness and relevance of her prior experience, both at CBRE and American Tower, two industry leaders and public companies in their own right. She has experience with institutional customers, complex regulatory environments, real estate certainly as well, and brings exceptional analytical capabilities and leadership skills as well. So we're very…

Thank you, Jeff, and good morning, everyone. I'd like to start by saying how excited I am to join Copart. For me, the opportunity was compelling for a number of reasons, including the collaborative and entrepreneurial culture, Copart's enduring focus on delivering best-in-class service to our customers, the business' natural position at the center of the circular economy in automotive, as well as our solid financial foundation. I believe that with these factors, Copart is positioned to deliver exceptional results for our customers and create enduring value for our shareholders over the long term. And I couldn't be more energized to help drive these objectives forward. Turning to the quarter. Global unit sales increased 4.7% year-over-year, including an increase of nearly 4% in the U.S. and over 10% internationally. In the U.S., our fee units grew about 5%, primarily due to growth across our insurance business and our purchased units declined 23%. Internationally, our unit growth came from a mix of fee and purchased units, which increased nearly 9% and over 23%, respectively. During the quarter, our U.S. insurance business grew relative to its one and two-year comp of 9% and 35%, respectively. This was primarily due to the continued recovery in driving activity, increasing accident frequency and severity, total loss frequency and share gains. Our auction returns remain strong as we continue to invest in growing our global buyer base by driving member recruitment, registration and retention. As a result, Copart auctions provide our insurance customers with best-in-class liquidity and returns, ultimately providing a more cost-effective way to manage growing claims costs by making it a more cost-effective way to deem vehicles a total loss. Turning to our financial results. For the second quarter, global revenue increased $89 million or just over 10%, including a nearly 2% or $15…

At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Bob Labick with CJS Securities. Please proceed with your question.

Good morning. This is Stefanos Crist calling in for Bob. Thanks for taking our questions.

Good morning.

You touched on this during the call, but could you provide a little more detail on the cost structure of the yards, how it's changed since pre-COVID and maybe how much of those changes are permanent versus temporary?

Sure. I can take that one. In terms of our yard expenses, the majority of that cost comes from our labor as well as the costs associated with our sub haul and towing. So as we think about how those costs are either permanent or temporarily impacted as a result of the overall economic environment post COVID, labor costs certainly have increased and we don't expect those to abate, although we do focus on technology investments, which will over time make us more efficient in our processes and hopefully help to mitigate future growth on that line item. And from a sub haul perspective, a portion of that is directly attributable to fuel costs, and that is certainly something that we do see fluctuate. So that could be more of a temporary phenomenon. And those really account for the majority of the increase that we've seen from a yard ops expense over the last couple of years.

That's great. Thank you. Just a follow up. Can you just talk about what Copart's sweet spot is for non-salvage cars in terms of age and miles driven, and if you see that evolving any direction over the next five years?

Yes. I think it's fair to say it has evolved and very steadily so since the company's inception. So if you look at the cars, if somehow there was a website in 1982 and you could see all the cars we had for sale, they would look markedly different from the cars that were available five years later, five years later, five years later and so on. So over time, the sweet spot for us has expanded. And today, I think it's safe to say it includes vehicles you would customarily see at dealerships and so forth that are very much whole cars that are drivable off the lot. So I think that sweet spot does move and shift over time. So I think we'll expect the continued expansion. It's not a static view, right? It definitely expands progressively over time.

Great. Thanks so much.

Our next question comes from Craig Kennison with Baird. Please proceed with your question.

Hi. Good morning. Thanks for taking my questions and congratulations Leah. I had a housekeeping question first. Just what was the U.S. insurance volume growth ex-Ian?

Approximately flat or thereabout -- flat or thereabout, Craig.

I think you mentioned Ian was 70,000 cars, but did you get more cars post the quarter last time?

In terms -- post this quarter you mean?

Post your last conference call when you said you had about 70,000 car assignments.

A few more. But that was the strong majority of it.

Perfect. And then sort of a big picture question for you on AI making headlines across many industries. I'm just curious in your world, how you see AI impacting Copart since you guys like to think in decades?

Yes. I think we are certainly following it closely and think that AI will be deployed -- well, in some respects, if you're viewing the AI and machine learning all collectively as the future of technology and neural computing and so forth. We do deploy some of those tools in our systems today, most notably for our vehicle valuation guide ProQuote, which helps insurance carriers make the optimal real-time decisions about total losses, when and when not to total vehicles. But I think you're referring specifically to I think the notion of automated chat and so forth. And that is the evolution, of course, of where FAQs eventually go. You end up with smarter and more informed answers on some of the questions you most frequently get here at Copart. I'd say today, with our sellers and members, the questions are often nuanced enough, specific enough to individual circumstances, lots purchased and so forth that it's not a ready solution for us today, but we follow the space. Our tech teams certainly are avid students of the space as well. So if and when relevant for our business to deploy much more broadly, we will certainly do so.

Great. Thank you.

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

Thanks for taking the questions. First of all, I wanted to follow up on kind of what's the non -- can you maybe bifurcate the non-insurance a little bit further? If I heard you right, you said 20% what you've now defined as Copart Blu, which is a combination of your dealer consignment and the commercial channels. I assume your kind of historical legacy shared municipalities, it sounds like there's a bad actor being price there that might be offsetting some of that growth. Can you just give us a sense for like the bifurcation of the two would be the first question?

Directionally speaking, what we characterize as non-insurance includes those Blu Car sales, which are rental cars, banks and financial institutions fleets rent of our companies and the like. That's a meaningful portion of our non-insurance volume. Copart Dealer Services, we didn't talk about specifically today. That's also a sizable portion of our non-insurance business. They are also performing well and growing the business in a difficult and challenging environment. The other elements of our non-insurance business include Copart Direct, which is our cash for cars business in which we buy cars throughout different consumers and sell them at auction. Here at Copart, Leah mentioned that in her comments as well as one of the elements of our “principal business” that had proven very successful for us over the years, but we also want to be thoughtful about how aggressive we are buying cars in a volatile price environment. And then the portion you mentioned as well, which is the charities and wholesalers business relatively lower value vehicles, we have in some cases optimized our business to serve insurance companies, Blu Car, Copart Direct, Copart Dealer Services and the like and have foregone some of the volume in those lower value segments.

Got you. Okay, that's helpful. And then just a bigger picture question. One of your closest peers that's having to merge with an auctioneer of heavy machinery, has this led you to rethink the opportunity at all for TAM expansion in your business? Do you think these businesses are synergistic? Is there a place for Copart in those types of end markets? Just kind of curious how you think about TAM expansion generally speaking?

Yes, I think it's a fair question, Chris. I don't think it's specifically the catalyst for us to consider it, but it's a topic we have wrestled with ourselves. And when evaluating our own strategy and our opportunities to expand into new arenas, we take stock first of our core strengths. We think we are -- we excel at managing high volume online auctions and recruiting the sellers and buyers for them. We think we excel at physical infrastructure, both the development of greenfield facilities and the acquisition of existing ones and then managing the physical logistics to and from those facilities of high volumes of physical equipment and high volumes of vehicles historically. And we -- the third national capability of ours that I characterize is our ability to navigate complex regulatory environments. We have 50 different DMVs in the U.S. alone as well as a number of other relative regulatory layers here and certainly worldwide tax and otherwise, we think we are uniquely equipped to address. And we've taken and looked at those capabilities and asked ourselves the question of where can we deploy those into adjacent spaces to grow the business over time, and have done so selectively and very conservatively as you know. We've expanded with our acquisition of NPA five and a half years ago or thereabouts into the Powersports arena. We today are expanding this Blu Car initiative into the whole car space as well. And frankly, within Yellow Iron [ph], as you just inquired, we already sell within Yellow Iron specialty equipment, trucks and trailers and the like in many hundreds of millions of dollars of that equipment every year without per se a dedicated effort to expand our business there. So it's something that we revisit on an ongoing basis. I think this transaction doesn't per se affect us negatively or positively in terms of our interest in the space.

Okay, very helpful. Thanks, Jeff.

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

Hi. Good morning, guys.

Hi, Bret.

On that quick discussion of that other company's transaction, the buyer is certainly making a pitch that there are services that could be offered in the salvage space that would sort of add another lever on the revenue side. Do you see that? Is there an opportunity? Obviously, if you're selling scrap cars to LKQ, they don't want them waxed first. But are there things you could be doing as you -- whether it's Blu or Dealer Services where you could attach ancillary services?

In short, I think the answer to that is yes. And yes, that there are additional services to be offered to both sides of the marketplace, and we are doing that today. And we haven't talked about them at great length on earnings calls. We find those more relevant in discussions with our sellers and our members themselves. And those services certainly include things like delivery, financing, title services and the like. And the buyers -- that universe is expanding real time. As you noted, if you went back 30 years ago and the buyers are largely dismantlers and so forth, they're not that interested in other services we have to offer waxing or otherwise. Today as the cars -- as we expand our universe into more drivable vehicles, lighter damaged cars, I think that becomes more relevant over time. I'd argue that we are the industry leaders in that regard in terms of the mix in that direction. And so that thesis is a bit more relevant for us than it is for anyone else who is loosely in our industry.

Okay. And then a quick question on that. On the supply side, which sellers most dependent upon you being the purchaser as opposed to an agent? Does that most impact -- obviously, Cars Direct is probably the most, but are Blu versus Dealer Services, are those sellers expecting you to own the car as opposed to just consigning?

No, they are not. The principal business is largely Copart Direct, in which we buy cars from consumers at some modest residual volume in the UK. I think you know that when we entered that business in 2007, probably four out of five cars or thereabouts was managed on a principal basis. Today, I think that's reversed and then some. So we are largely when you're looking at principal volume for Copart, you're talking about Copart Direct.

And Germany is really not -- is Germany still mostly agent or --?

Germany does a mix of both, that's fair. In Germany, we are doing both. We're selling consignment cars on behalf of insurance companies and we are also buying cars both directly from consumers and on residual value platforms.

So I guess does the temporary move away from or maybe cutting back on purchased vehicles impact Germany in the short term, or is it not meaningful enough to really move the needle?

No, that's principal. The principal car, the moderation of principal car volume is principally here in the U.S.

Okay, great. Thank you.

Thanks, Bret.

[Operator Instructions]. Our next question comes from Joseph Enderlin with Stephens Inc. Please proceed with your question.

Hi, guys. This is Joe Enderlin on for Daniel. Thanks for taking the question.

No problem.

So with total loss rate moving higher again this quarter and inventory bottlenecks improving, do you expect the industry to return to historically normal unit growth rates from here?

From here, yes. Precisely when, I think it's harder to forecast. That's a function of the variables we talked about, which is the value of used cars and therefore ACV or pre-accident value as the European call it, and what the car is worth before it's in an accident, what happens to repair costs and rental car costs and the like. So I think we have total conviction, the total loss frequency revert to historical levels and continue to grow from there. The precise trajectory from today until that point I think is more difficult to forecast. But this is an unabated 40 or 50-year trend with the exception of the past 18 to 24 months. And so I think we do believe that it will revert.

That's helpful. Thank you. As a follow up, we wanted to ask about ASP trends during the quarter. Did we see ASPs decline and then increase along with Manheim, or was there a more consistent trend?

Do you mean within the quarter?

Within the quarter, yes.

I don't even know we know offhand. I think the prices I think remained quite strong at Copart and have meaningfully outperformed at least the headline numbers we're aware of for the Manheim used vehicle value Index. I don't know that there was any meaningful intra-quarter volatility of cohort.

Super helpful. Thank you, guys.

Thank you.

Our next question comes from Gary Prestopino with Barrington Research. Please proceed with your question.

Hi. Good morning, everyone. I just want to get a couple of statistics go over correctly. Units processed, Leah, were up 7% globally. Is that correct?

Total units were up, yes, about 5%.

5%, okay. And then getting back to ASPs, I didn't quite get what you said on ASPs as you went through all these numbers. What were ASPs up year-over-year and sequentially? Do you have that?

Yes. So ASPs in total were basically flat year-over-year. And sequentially, they were down about 3%.

Okay. So we're starting to move down 3%. Okay. And then lastly, with total loss ratios, you said, Jeff, they were 19.7% in Q4?

Correct.

Versus 17.4, but a lot of that was flood vehicles, right, that led to that sequential increase?

Yes, we think half of that or thereabouts was flood related. And I should have noted that and I will now that there is some natural lag then between when cars are both deemed a total loss and when, of course, they are processed by companies like us, the title process loans paid off and the car is sold.

Okay. Just for comparative purposes, what were total losses, the ratios running in Q4 of '21? Do you have that handy?

We do. This is all straight from CCC here, but in the fourth quarter, 19.2 a year ago.

Okay. And then is there -- with the non-insurance business that you're doing, it's always been kind of at about 19%, 20% percentage of vehicles. How much has that moved up over time as you've grown this business?

There's some seasonality to it. I think to be fair -- and so I would say it's between 18% to 25% just from memory going quarter-to-quarter. And it has grown over the very long term. But to be fair, over the past few years, we've grown our insurance business as well. So they've both grown. So we don't generally think in mixed terms. We think in terms of growing Blu Car, growing Copart Dealer Services, growing Copart Direct and the like. So that the mix number is not one we particularly focus on. Both have grown meaningfully, of course, over the past five years.

Okay. Thank you.

Thanks, Gary.

There are no further questions at this time. I would now like to turn the floor back over to Jeff Liaw for closing comments.

Great. Thanks everybody for joining us, and we'll talk to you next quarter. Bye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.