Good day, everyone, and welcome to the Copart Incorporated Second Quarter Fiscal 2024 Earnings Call. Just a reminder, today's conference is being recorded. Before turning the call over to management, I will share Copart's Safe Harbor Statement. The company's 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 the company's markets. These forward-looking statements involve substantial risks and uncertainties. For more detail on the risks associated with the company's business, we refer you to the section titled Risk Factors in the company's annual report on Form 10-K for the year ended July 31, 2023, and each of the company's subsequent quarterly reports on Form 10-Q. Any forward-looking statements are made as of today, and the company has no obligation to update or revise any forward-looking statements. I'll now turn the call over to the company's Co-CEO, Jeff Liaw.

Thank you. Good evening. And thank you for joining us. We're pleased to report our results for the second quarter of fiscal 2024. I'll start my comments today with commentary about our business, I’ll than talk about a few recent additions to our senior leadership team before handing the call to Leah to review our financial results. And then she and I will take your questions. First on our insurance business for the quarter. We're pleased with our ongoing profitable growth with our insurance sellers, albeit with the year-over-year noise of a significant catastrophic event in the first and second quarters of last year in the form of hurricane Ian, which I'll comment on in a moment. As anticipated, new and used vehicle prices have decreased somewhat steeply in the past few quarters while repair costs continue to increase. Those factors have driven a strong and continued recovery in total loss frequency. For the months that comprise our second fiscal quarter, we noted a 7% year-over-year decline in the Manheim Used Vehicle Value Index. At the same time accident severity as measured in cost of repair increased 1.7%, over that same period -- or pardon me, during the third calendar quarter of 2023. The most recently available measurement period, as reported by ISS Fast Track. Despite the decrease of 7% in the Manheim Used Vehicle Value Index, our U.S. insurance selling prices by comparison have remained flat year-over-year, a reflection of our auction liquidity and buyer activity after adjusting for the removal of hurricane Ian from the prior year. As I noted the combination of these forces, decreasing used vehicle values and increasing repair costs has driven a recovery in total loss frequency. According to CCC, total loss frequency for the fourth calendar quarter of 2023 was 20.9% across all…

Thanks, Jeff. I'll begin with our second quarter sales trends. During the quarter our global unit sales and inventory increased over 7% and 6% respectively, from the year ago period. Given the relatively quiet 2023 hurricane season, this growth was a function of a partial recovery, total loss frequency and shared gains. Focusing on our U.S. business, unit growth with nearly 5%, which reflected fee unit growth, over 4% and purchase unit growth of over 10% consignment or fee units continued to constitute the vast majority of our U.S. unit volume. Our insurance unit volume was flat year-over-year and up 9%, when excluding Hurricane Ian units from a year ago. And as Jeff mentioned, our non-insurance unit volume growth has continued to outpace that of our insurance business. This volume growth substantially came from dealer units which increase over 21% and fleet rental and finance units which increased 35%. Inventory levels in the U.S. increased over 4% and over 6% when excluding low value and cat units. Turning to our international business. We saw unit growth of over 21% with fee units increasing 22% and purchased units increasing by over 19%. Our international business ended the quarter with inventory levels over 16% ahead of prior year. For the quarter, global ASPs and U.S. insurance ASPs declined by nearly 5% from the year ago period, and U.S. insurance ASPs excluding Hurricane Ian units were flat. In addition, international ASPs were up about 1%. Overall, our ASPs continue to show resilience compared to the more than 7% year-over-year decrease in the Manheim used vehicle price index for the quarter. Turning to our financial results for the second quarter. Global revenue increased to $1.02 billion, representing growth of over $63 million or about 7%, including a 0.7% tailwind due to currency. Global service…

[Operator Instructions] Our first question is from Bob Labick with CJS Securities. Please proceed with your question.

Yes. Hi, good afternoon. It's Peter Lukas for Bob. First, just a general question. I was just wondering, can international buyers on your U.S. platform easily buy at other auctions, a German, Finland, et cetera? Or do they have different log-ins and different interfaces? Basically, just trying to understand if all your buyers are seeing global auctions equally and getting alerts on the cars they're looking for, regardless of point of origin.

Pete, good to hear from you, and thanks for your question. In short, copart.com, is certainly a unified platform period. We do have, by virtue in some cases, of different regulatory and licensing requirements and so forth, separate registration paths for that reason. But ultimately, we are one global auction platform with buyers, many buyers purchasing vehicles on multiple of our -- from multiple of our countries.

Helpful. Thanks. And then just one more. I guess, in terms of the whole car side, given the relatively recent additions of arbitration and outsourced inspections in the industry, how would you describe Copart's role and in the non-salvage market versus other industry participants?

I think -- the market, as you know, is a dynamic one and looks different today even from what you might have seen five years ago and certainly a decade ago. And I think even our offering at the same time, continues to evolve as well as we better understand and respond to the needs of our very different types of sellers. So even though we talk about non-insurance as though it is one monolithic entity, as you understand, I'm sure a bank with a repossession acts very differently from a rental car fleet, acts very differently from a dealer as well. And they, in turn, have a variety of different service needs and requests in terms of the degree in terms of compliance, certainly, but also the degree to which we are assessing and altering the vehicles themselves. So our offering has evolved even over the past few years and will continue to evolve in response to those seller needs for years to come. So we are quite a bit more sophisticated today even than we were a decade ago, but those offerings will continue to expand in the years ahead.

Great, thanks. I’ll jump back in the queue.

Our next question is from Daniel Imbro with Stephens Inc. Please proceed with your question.

Hi, good evening, everybody. Thanks for taking my question. I want to start on a longer-term one on the top line. The total loss rate, I think you said 20.9%. I believe that exceeds prior highs we saw last time before this kind of near-term dip. If we dig into that data, how divergent are different carriers on your platform? Are you seeing some that are already in maybe the high 20s? And I think in the past, you've said you thought total loss rate could exceed 30% over the very long term. Is that still an applicable long-term goal, I guess, as you see the data today?

I appreciate the question. First, at least from memory, I thought total loss frequency approach to 22%. Yes, 21.7% at one point before the pandemic. So we're not all the way back, though, I think that's a matter of time. To the second part of your question, there continues to be a wide dispersion of total loss practices across our insurance carrier base. In some cases, because of our own customers perceived differences of their policyholder preferences. So I think there is long-standing conventional wisdom among some folks that drivers and owners prefer to have their cars back, they will repair insurance companies will sponsor repairs of cars that they economically should not. So that behavior does continue in the industry. And as a result, then we see a pretty wide dispersion of total loss practices across all carriers, though virtually all of them have increased total loss frequency over the long haul. As for your question about where total loss frequency would, can it exceed 30%? I think the answer is affirmatively yes. The economic value, meaning some carriers are there today. And others as used car values will -- even as used car value stabilized, repair costs divided by the value of cars has increased monotonically forever, and we expect that to continue as well. So total loss will increase in relative attractiveness because our auction liquidity, our global buyer base keeps driving the values of the damaged cars up while repair costs also rise. So the relative attractiveness of total loss will increase over time.

That makes a lot of sense. I appreciate all that color, Jeff. And then maybe one on the financials. Jeff, I know we shouldn't extrapolate any one quarter, is probably the answer, but it has been a multi-quarter trend of maybe accelerating G&A spend. So if we look back in that line item, can you maybe parse out what has been accelerating? And given it's a multi-quarter trend here, is it kind of a fair thing to extrapolate that there may be some things changed and that line the needs to keep growing at a faster rate?

I don't think the growth rate and Leah can comment here as well. Certainly, we are growing our capabilities. So the bringing on of new senior talent and the expansion of our offering in the whole car universe and frankly, our sophistication in the insurance world as well. Those all require new capabilities, and we are delighted to invest in them. So that reflects some of the G&A growth over time. That said, we continue to expect operating leverage over the medium-long term. But I think we always say, look, over multiple quarters to look over even most years for the right long-term trend. And I think the trend over time is that we invariably grow unit volume and revenue over the long haul, faster in many cases, meaningfully faster than we grow G&A.

And from just an inclusion of Purple Wave, we did have about a little over $7.5 million related to the incremental consolidation of that business in the quarter, which was obviously not in the prior year period.

That's true. That's permanent.

So that is permanent. But other than that, I would say everything else we're focused on is really to drive incremental operating leverage in the future.

Got it. That’s helpful. Thanks guys.

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

This is Ian Davis on for Chris. Thanks a lot for taking our questions this evening. First, it seems you won business with a few larger accounts in the past year. How do you think about the cadence of market share wins from here? Do you feel you have the operational capacity to onboard more accounts if insurers want to make the switch? Or would this likely happen after the recent wins are fully transferred over with the business?

Got it. We don't comment on individual accounts, but to your broader question about our capacity to handle additional volume. We invest years ahead of the curve as reflected, of course, in capital expenditures over the course of the past 7 or 8 years. We invest ahead of the curve in the various geographies in which we do business. And so we would be delighted to serve new volume and certainly have the capacity to do so. As you know, it's not even just the storage capacity itself. It's also the logistics capabilities trucking, both owned trucking assets as well as third-party assets, it's people and it's the scalable technology, auction platform and buyer base. And so to the answer more generically across all of those dimensions, it's absolutely yes. And the flywheel effect, frankly, applies to some of those dimensions, not just the auction dimension as well. For example, the stronger we become and the larger we become as a logistics company, the better access we have to both third-party and first-party transport capabilities, the better we are about deploying people to a storm and so on and so forth. So the answer is affirmatively yes.

Got it. That's helpful. And just one more, if I may. Ocean freight seem to be rising due to the conflict in the Middle East. Could you help us understand how rising ocean freight rates impact your business? We presume that international buyers in these markets would just bid less for the vehicles? Is that the right way to think about it? Are there any other impacts to consider?

In a word, yes, though, I think it's always worth commenting on what the relevant substitutes might be, right? So in so far as you're talking about ocean freight, the demand for mobility in these various countries, the countries that sell vehicles too, which is effectively every country in the world, but the growth tends to come from what we would characterize as developing economies and their demand for mobility is real and sustained and the growth is real and sustained. So the question becomes what their natural alternatives might be? And in many cases, they will still ultimately turn to Copart cars as a result. And then the last comment I'd make on that front is that, while ocean freight rates can rise I think it's still systemically naturally the case that ships mostly come to the U.S. or to the UK, for example, to our dominant origin markets. They come here full and they leave empty. So it's often the case that the backhaul legs are considerably cheaper. So the headline numbers may or may not be representative of our buyers' lived experience.

Got it. That’s really helpful. Thanks a lot.

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

Good afternoon. Thanks for taking my questions. Just on that shipping topic. Did you have any issues in the Red Sea due to the conflicts there?

No, not appreciably so.

Thanks. And Leah, I wonder if you would expand on factors behind the resilience in your average selling price given the commentary relative to the Manheim Index.

Sure. Absolutely. So just as our overall mix shifts within the underlying unit makeup of our business and what's selling through the Copart platform, that is one driver. So as you think about the increase in our unit volume coming from our Blue Car sellers, our dealer units, those are higher ASP units. But also as you think about used car pricing coming down and total frequency increasing, the incremental unit that is totaled by an insurance company is inherently a higher value unit, and that's because when total loss frequency came down as a result of rising used car prices that resulted in the underlying borderline units falling out of the mix, and those are now coming back. So as insurance companies are facing elevated repair costs, they're incrementally totaling the higher-value vehicles more frequently, and that's driving additional resilience within our ASP.

And then the -- I would offer also that it is the auction liquidity you've heard us speak about on a few occasions today as well. That as we -- as the platform grows, as we earn more Blue Cars, as the total volume of activity on the website grows, that draws more buyers, which has helped to sustain prices at levels well beyond what the Manheim Used Vehicle Index might reflect.

That helps. And if I could sneak in one more, Jeff, on Purple Wave. Just curious if you've made any -- you've taken any initiatives since you've acquired a stake in that business and maybe highlight what those might be?

Fair question. We're very excited to have them as our partners in their arena, the leadership team there, Aaron, Susan McKee, and others are terrific. And so by and large, I think I described them as leading the charge with their customers, their community and so forth and doing a terrific job of it. So yes, we are finding ways to support one another efficiently, but it's principally about backing what we think is one of the very best teams in the industry.

Great. Thank you.

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

Good evening, guys. Could you talk a bit more about the international market as far as various country performance?

Yes, I think we've seen strong unit volume really across all of our geographies. As you know, Brett, they are in various stages of maturity. The U.K. as a business, of course, looks a lot like ours. And they like ours here in the U.S., and as a result, we'd see the same total loss trends and with the results being driven in large part by the same factors we see here. In places like Germany and Spain, those, of course, are newer businesses for us. And so changes there are driven also by market share wins and conversions and so forth. So there are more local dynamics specific to those countries. But I think performance across the board has improved year-over-year.

And then I guess in the Blue Car or just the noninsurance business in general, could you talk about the unit economics? Are you getting a better seller fee because you're not negotiating with a very large insurance company for high volume? Or as you're growing that business, do you charge a lower seller fee to get the volume?

Yes. I think for a host of reasons, Brett, we don't talk about the seller fees that we charge. We certainly endeavor to provide the specific type of value is requested by a given seller and the range of service varies tremendously, even among sellers within a specific seller type. Even among insurance companies, we perform a very wide range of services for folks and different portfolios for each. And the same is true on the non-insurance side as well. As for the unit economics they -- we tend to do well in those domains because the ASPs are high, but they are also, in some cases, higher touch and more transactional by nature, as you've heard us comment on in the past. There's something very scalable about a large insurance company with whom we have elegant B2B integrations and so forth that tends to be less true among the smaller sellers.

Great. Thank you.

[Operator Instructions] Our next question is from Ryan Brinkman with JPMorgan. Please proceed with your question.

Hi, good evening and good afternoon. This is Josh on for Ryan Brinkman. Thanks for taking our question. Just maybe the first question on capital allocation. Could you maybe share your latest thoughts around capital allocation and how you're thinking about capacity expansion and category diversification into 2024? Thanks, and then I have a follow-up.

Sure. I'll touch on capital allocation, and Jeff can jump in. Just from an overall allocation perspective, we do focus our priority from the top of the list for our core business. So we are constantly focused on adding capacity, the ability to serve cats. From a cost perspective, we're managing our yard distribution to ensure that we have optimal positioning from a cost perspective for [indiscernible]. So investing in real estate, investing in our logistics capabilities and ultimately, our technology platform to serve our customers is our number one priority from a capital allocation perspective. Beyond that, we do look at expanding geographically. We look at complementary adjacencies as we expanded with Purple Wave earlier this year. And from an overall corporate development perspective, we do find ourselves with lots of opportunities to assess potential targets. However, we have a very high threshold for how we think about generating returns long term. And we have an incredible track record and we endeavor to continue to perform along those lines. And so for us, we remain incredibly patient on the capital allocation front as it relates to deploying capital through M&A and through investments. We do seek to enter into partnerships with complementary companies that can serve our customers alongside us in a very efficient fashion. And so we've done that with folks at companies like Hi Marley, where we've endeavored to solve problems for our customers that collectively we can do more efficiently together than we can do alone. And then ultimately, historically, to the extent we had excess cash, we have leveraged the share repurchase program, but have done so very opportunity. And so going back to my prior comments, I would just point you to, we remain incredibly disciplined and very patient. And we'll act when we see tremendous value to create on behalf of shareholders.

The one after thought I'd offer is that our capitalization with our clients is a distinctive competitive advantage. Our conservative balance sheet, our net cash balance equips us such that we can be patient even through a crisis. So in the midst of a pandemic when nobody knew for how long driving an economic activity would be shut down. We were able to continue our business as it stands today. We didn't lay off folks. We didn't suspend CapEx, et cetera. Our insurance clients have a long memory, and they know those things. They know that when land is available for us to acquire so that we can preserve it for the industry's use for the next 50 years then we'll do so gladly and proudly despite it, of course, coming with big ticket prices as well. So the point there is that capital allocation is not a subject in isolation. It's also a commercial matter that affects how we interact with our customers as well.

Understood. That's very helpful color. As a follow-up, maybe would you be able to share any on-ground trends that you were seeing from the recent floods in California? And if you could just give us any color on the potential profitability impact that it could have in the third quarter?

Yes, I think we were all struck of course, by unusual weather patterns in California relative to, I think, what we would all agree is long-standing history in the state. We are well equipped there with, again, land, trucks, personnel technology, et cetera, to respond to events as they emerge. To date, we haven't yet observed events of anything near the magnitude of Ian, Ida, et cetera, as we experienced in the Northeast in Florida, in Texas, Louisiana, et cetera. We're ready for it and should the weather evolve in a manner that the activity becomes very elevated. And on a sustained basis, you'll see us continue to invest in that as well.

Understood. Thanks for taking my questions. And good luck.

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

Great. Thank you for joining us, and we'll talk to you after the third quarter. Take care.

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