Copart, Inc. (NASDAQ:CPRT) Q1 2024 Earnings Call Transcript

Copart, Inc. (NASDAQ:CPRT) Q1 2024 Earnings Call Transcript November 16, 2023

Operator: Good day, everyone, and welcome to the Copart Incorporated First 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 Security 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. Please go ahead, Jeff.

Jeff Liaw: Good evening. Welcome to the first quarter earnings call. Let me hand it to Leah briefly for the Safe Harbor.

Leah Stearns: Oh no, they already did that.

Jeff Liaw: Oh, they already did it, pardon. Well, let’s dive in. I’ll keep my comments brief. We’ll highlight a few recurring themes that you’ve heard about – that you’ve heard previously before handing the call to Leah for a more in-depth look at the first quarter, and then we’ll take your questions as well. First, as for our insurance business, we continue to observe a rebound in total loss frequency in the quarter. As you may recall, total loss frequency troughed at just north of 17% in the second calendar quarter of 2022, and it is now 19.3%, according to CCC, in the third calendar quarter of 2023. You’ll note though, that today’s total loss frequency remains substantially below pre-COVID highs of 21.7% in the fourth calendar quarter of 2020.

We continue to believe the total loss frequency will revert in time to historical levels and eventually well beyond in keeping with all recorded history on this statistic. Our expectation, our continued expectation is that new and used vehicle prices are likely to stabilize, perhaps decrease more. If and when they do, to do so more steeply than repair costs will, driving an ongoing recovery in total loss frequency. For the third calendar quarter of 2023 specifically, we observed a 4% decline in the Manheim Used Vehicle Value Index, while accident severity increased by 4% over that same period, as reported by ISS Fast Track. Although our U.S. insurance volumes continue to increase up 9.7% year-over-year for the quarter, we estimate that total loss volumes continue to remain suppressed when compared to historical total loss frequency norms.

And then, as you’ve heard us say before, a brief reminder on the long-term drivers of total loss frequency. First, vehicles become more expensive to repair with rising vehicle complexity, advanced components on the perimeter of vehicles in particular, rising labor costs and parts prices. And then, just as importantly, a rising demand for mobility in growing economies and our auction platform and marketing efforts accessing those prospective buyers. A brief note on the storm season. On our last call, we had talked about a potentially very active storm season, and at that moment we’d experienced 12 named storms, and we’ve had nine more since, up over 50% versus 2022. Ultimately, only a handful of these storms made landfall in the U.S., with none of them causing a substantial number of vehicular losses in comparison to prior years.

We know all of this now, of course, with the benefit of hindsight. Storms, however, are inherently unpredictable, and the storm season was sufficiently active to cause us to deploy hundreds of team members, co-part owned and third-party tow trucks, co-part owned loaders, telecom equipment, and generators all over the country in anticipation of major loss events. Last year, Hurricane Ian, the largest storm in our history as measured by Consigned Vehicles, caused us to incur substantial costs, including in the first quarter of 2023, with those units subsequently sold largely in the second and third quarters of fiscal ‘23. We view these undertakings in the aggregate as the normal cost of business in providing excellent service to our customers and our communities.

Turning then to our sellers beyond insurance, we continue to grow our Blue Car business, serving specifically the bank and finance, fleet and rental sellers. In the first quarter we observed year-over-year growth of over 35%. We increased our dealer sales volume over that same period by 13% year-over-year. We speak frequently about the flywheel effect of our platform and the global buyer base that we serve. Our ongoing growth in these non-insurance customer segments illustrates our ability to leverage the scale and momentum of this flywheel effect, maximizing auction liquidity and ultimately returns for all sellers, insurance and otherwise. I’ll take a moment to comment about our auctions outside of the automotive arena. In addition to gains in the insurance and non-insurance passenger vehicle space, we continue to grow our specialty equipment business as well.

By virtue of our serving our insurance and dealer clients, we have long been a substantial remarketer of specialty equipment, including in transportation, construction and agricultural realms. This past quarter we were pleased to announce a strategic investment in Purple Wave. We have known Aaron and Suzy McKee for over a decade and admire the excellent and growing business in Purple Wave that they and their team have built. They share our ownership mindset, a commitment to delivering excellent outcomes to their marketplace participants, and a digital-first approach. We’re delighted to welcome the Purple Wave team and community to the Copart family. Finally, on the subject of sustainability, last November we published our inaugural ESG report, our first-ever account of our commitment and contributions to environmental sustainability, global economic empowerment, enterprise sustainability, and community sustainability.

We intend to publish our 2023 update in the next month or so. In it, we’ll provide updated data on the enhanced mobility that our marketplace provides to developing economies, the accelerated recovery we enable in communities affected by extreme weather events, and our focus on workplace diversity, equity and satisfaction. And on the critical subject of environmental sustainability, we will again underscore and quantify the emissions avoidance that our business enables. We, of course invest time and resources to optimize our own CO2-equivalent emissions and energy consumption, but overwhelmingly, our most substantial contribution to environmental sustainability is in enabling the recycling and reuse of vehicles and their component parts and materials, meaningfully reducing what would otherwise be the more substantial carbon footprint of new vehicle and parts manufacturing.

As our volume grows, so too does this carbon emissions avoidance. In 2023 we estimate that we have helped the world avoid over 11 million metric tons of carbon dioxide equivalents, up roughly 10% year-over-year, and over 100x more than our actual direct emissions. With that, I’ll turn it over to Leah.

Leah Stearns: Thanks, Jeff. I’ll begin with our sales trends for the first quarter. During the quarter, our global unit sales and inventory increased nearly 13% and 3%, respectively. Given the relatively quiet hurricane season in 2023, our inventory growth was a function of a partial recovery in total loss frequency and share gain. During the quarter, we saw global ASPs decline by approximately 1% versus the prior year. Focusing on our U.S. business, we experienced strong unit growth of over 10%, which reflected fee unit growth over 10% and purchase unit growth of 14%. Consignment or fee units continue to generate the vast majority of co-parts volume growth, with our insurance units posting nearly 10%, our dealer units posting 13% growth, and our Blue Car units, which include units from fleet, rental and finance companies posting over 35% growth.

This unit growth was modestly offset by a decline in low value units from wholesalers and charities. Inventory levels in the U.S. increased 1% or nearly 12% when excluding low value units and CAD units. In the U.S., ASPs were down 2%, and more specifically, insurance ASPs were down 1.7% compared to the 4% decrease in the Manheim Used Vehicle Price Index. Turning to our international business, we saw unit growth of over 24%, with fee units increasing over 28%, and purchase units increasing by over 4%. Our international business ended the quarter with inventory levels nearly 14% ahead of the prior year. International ASPs were up 7% compared to the prior year period. Our auction returns remain strong as we continue to invest in growing our global buyer base by driving member acquisition, activation, and retention.

Copart’s 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 more cost-effective to deem damaged vehicles a total loss. In addition, we continue to invest in expanding our products and services to serve a more diverse mix of sellers and unit types. Examples of this include our national sales, such as our specialty equipment auctions, which primarily sell heavy and medium-duty trucks and agricultural equipment, and our select auction which sells clean title vehicles and now provides buyers with greater transparency in vehicle quality through sale lights and an arbitration policy. Turning to our financial results for the first quarter, global revenue increased $127 million or about 14%, including a 1% tailwind due to currency.

Global service revenue increased nearly $133 million or over 18% for the first quarter, primarily due to higher average revenue per unit and increased volume. U.S. service revenue grew by 17%, and international service revenue grew by 29%. Global purchased vehicle sales for the first quarter decreased about $6 million or 3%, with U.S. purchased vehicle revenue for the quarter down 19%, which was primarily due to a mix shift, with the decline in our power sports business and PA being offset by an increase in our Copart direct cash-for-cars purchased vehicle revenue. The U.S. decline was offset by international growth of 19%. Global purchased vehicle gross profit decreased about $2 million for the quarter, with U.S. purchased vehicle gross profit increasing about $2 million and international purchased vehicle gross profit decreasing $4 million, reflecting a 29% increase in cost of vehicle sales.

Global gross profit in the first quarter increased over $94 million or about 26%, and our gross margin percentage increased by approximately 400 basis points to 45.5%. This reflects U.S. margins which increased to 49.9%, and international margins decreasing to 24.9%. The year-over-year margin increase on a consolidated basis was driven primarily by a mix shift due to the strong growth in fee units in the U.S., which was partially offset by the impact of inflation and a slight decline in purchase unit margins internationally. On the cost front, during the first quarter of last year, we incurred cap costs, cap expenses specifically related to Hurricane Ian, which did not recur. Operationally, we are focusing on increasingly standardizing processes and leveraging technology and automation to mitigate the inflationary impacts we’ve experienced across our business.

We expect these efforts will drive greater scalability and efficiency across the organization and help mitigate longer-term cost pressures. Turning to general and administrative expenditures, excluding stock-based compensation and depreciation expenses, G&A’s spend in the quarter was $58 million, reflecting an increase in $13 million and includes $3 million due to a one-time maintenance project, the financial consolidation of Purple Wave into our results, and the impact of our overall growth in business. Over the long run, we continue to expect operating leverage as we grow. Because of our strong revenue growth and moderate cost increases, GAAP operating income increased by nearly 27% to over $395 million for the quarter. First quarter income tax expense was nearly $91 million, which reflects a 21.4% effective tax rate.

And finally, first quarter GAAP net income increased by over 35% to over $332 million or $0.34 per diluted common share. Turning to our liquidity and financial position, liquidity was $3.9 billion as of Q1, which is comprised of $2.6 billion in cash and investments in held to maturity securities and our capacity under our revolving credit facility of over $1.2 billion. For the quarter, we generated operating cash flow of over $375 million, which is an increase of 20% from the prior year period. In addition, during the first quarter, we invested about $162 million in capital expenditures, with nearly 80% of this amount attributable to our physical infrastructure, and more specifically, capacity expansion, which contributes to our ability to serve our customers while simultaneously reducing our transportation costs and corresponding fuel consumption.

Finally, for the quarter, if you take operating cash less CapEx, we’ve generated $213 million of free cash flow. I’ll conclude with a few remarks about our capital allocation strategy, focusing on investing in our core business and corporate development. We remain focused on building long-term value for our shareholders and endeavor to continue our strong track record for years to come. To achieve this, we will continue to use our disciplined approach to capital allocation and remain patient, flexible and opportunistic. Our first priority is to deploy capital to grow our core business, where we will continue to invest in our people, operational capabilities, including logistics, technology and real estate, as well as our customer experience.

We also focus on opportunities to diversify our business, including expanding our marketplace capabilities into new geographies or to service new asset types. A prime example of this was our investment into Purple Wave, which like NPA, brings a leading marketplace for a specialized used unit type, which in Purple Wave’s case, spans construction agate fleet. And further, we seek to partner with leaders in areas of technology and innovation, which expand beyond Copart’s core business, but directly support our customers’ needs. This includes in InsureTech, where we recently announced a strategic partnership with Hi Marley to accelerate the total loss process for our customers and their policyholders. This approach provides us ample opportunities to grow our core and drive diversification across our business.

And with that, Jeff and I would be happy to take some questions.

See also 14 Value Stocks to Buy With High Dividend Yields and 20 Most Valuable Brazilian Companies Heading into 2024.

Q&A Session

Operator: Thank you. [Operator Instructions]. One moment please while we poll for questions. Our first question today is coming from Bob Labick from CJS Securities. Your line is now live.

Bob Labick : Good afternoon. Congratulations on continued strong performance.

Jeff Liaw: Thanks Bob.

Leah Stearns: Thanks Bob.

Bob Labick : I wanted to start with Purple Wave. It’s an exciting announcement you made I guess last month, and obviously you talked a little bit about it. But maybe you could talk – discuss further what Copart brings to the relationship in addition to obviously to capital. And what are the key goals of the investment, and how will you define success in three to five years?

Jeff Liaw : Got it. Well Bob, as you know, having followed us for a while, we’ve talked in the past on multiple occasions about our potential interest in parlaying our expertise in managing high-volume digital auctions, parlaying that expertise into other arenas, including for industrial construction and agricultural equipment. We’ve actually said that specifically. And as you know, those kinds of expansions have had to clear a very high bar in the past. We invested or acquired National Power Sports Auctions in 2017 and have been very careful or disciplined about extending beyond that before and since. We’ve known Aaron and Suzy forever, literally before I arrived at Copart myself, and we have tremendous respect for the community and the business that they and their team have built.

As you noted, we’ll bring capital, expertise and relationships to help grow their business, and they, in turn, provide us with additional expertise in the equipment space, as MPA did in Power Sports as well. So we’ll measure growth as we – we’ll measure success or determine success as we do with our own core business. Are we able to grow it profitably to serve more buyers and sellers in a meaningful way over the course of the next five, 10 and 20 years?

Bob Labick : Okay, great. And then, obviously, you highlighted a lot of success. You have a lot of major initiatives going on or I guess just ongoing initiatives, including gaining market share in the insurance and salvage market, the acceleration and whole car market, Purple Wave, which we just talked about, and your international growth. How do you prioritize time and capital, and how would you rank the time and capital investments towards those initiatives, salvage market share gains, whole car acceleration, Purple Wave and international growth?

Jeff Liaw: Yeah, I think it’s a fair question. And as you know, Bob, we maintain a conservative balance sheet in part so that capital is by and large not the constraint, that when there are opportunities to serve our sellers and buyers better, to grow our platform, to grow our business, that we aren’t constrained at the moment, and also so that we can opportunistically acquire real estate and so forth. But the ultimate scarce resource is our own bandwidth, our ability to pursue initiatives successfully. I think you highlighted, really, the priorities for the enterprise, and I don’t think we stack rank them necessarily. It’s critical to us that we serve our insurance sellers and buyers better over the years to come. We mentioned in passing some of the tools that we’re working on to equip them to make better and faster decisions, to yield better economic outcomes.

In particular, we’ve been focused on reducing their advance charges. In many cases insurance companies incur literally thousands of dollars of storage and tear-down costs on cars that any one of us would have known as a total loss at the scene of the accident. And we are committed to developing the tools and processes to enable them to sidestep that entire food chain, just to avoid all those unnecessary costs that ultimately inflate their claims costs as a result. So insurance is critical. The international markets as you noted are critical to us as well. As you know, also, even using one word to capture all of them, it’s an oversimplification. Canada and Brazil and Germany and the U.K. and Finland are all radically different from one another, the Middle East and Spain and so forth, but growth there is a priority as well.

And then certainly as you know and as you’ve seen in the unit growth trajectory, the non-insurance domain is important to us, not just in isolation, not just because it is a profitable and growing enterprise, but because we view it as instrumental to serving our insurance companies better as well. The liquidity flywheel is real, and it’s our job to make sure that we’re spinning it faster with each passing year.

Bob Labick : Great. Thank you very much.

Jeff Liaw: Thanks Bob.

Operator: Thank you. Next question is coming from Craig Kennison from Baird. Your line is now live.