Copart, Inc. (NASDAQ:CPRT) Q2 2024 Earnings Call Transcript

Copart, Inc. (NASDAQ:CPRT) Q2 2024 Earnings Call Transcript February 22, 2024

Copart, Inc. misses on earnings expectations. Reported EPS is $0.33 EPS, expectations were $0.35.
CPRT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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.

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 loss categories. This is up almost a full percentage point year-over-year and up 1.5% sequentially. As always, we continue to believe that long run trends continue to make repairing vehicles less economically attractive to insurance carriers and totaling vehicles more economically attractive to them at the same time. Our nominal U.S. insurance volumes increased just 0.3% year-over-year, so largely again due to the effect of the sell-through of units from Hurricane Ian a year ago. While we responded to multiple smaller weather events this year, they did not in the aggregate approach the magnitude of Hurricane Ian. Normalized for Ian’s impact, we estimate our U.S. insurance volume to increase 9.2% for the period, a reflection again of total loss trends and market share growth.

Turning to our non-insurance business. First, we continue to grow our Blue Car business which serves our bank and finance fleet and rental partners in the second fiscal quarter of 2024 — pardon me 2024 we observed year-over-year growth of north of 30%. Likewise, our dealer sales volume, a combination of our CDS business unit and MPA, our power sports auction platform, our volume increased by 21% year-over-year as well. All told our U.S. non-insurance automotive volume, excluding low value and wholesale units increased north of 30% year-over-year. Our growth is the result of our commitment to customer service and our auction liquidity. With each additional vehicle we earn the right to sell, we increase the attractiveness of our auction platform to the world’s automotive buyers, drawing still more buyers to our auctions to the benefit of all of our sellers, new and old.

I’ll conclude my comments with a brief welcome and introduction to three new members of the Copart Executive team, who joined us this quarter. First David King — David Kang, pardon me, our new Chief Marketing Officer and Neel Madhvani, our new Chief Product Officer, Dave and Neel bring with them the experience and expertise of global marketing brand communications, and member in product development on behalf of world class digital businesses. Dave’s previous roles included serving as the SVP of data insights, and as Chief Marketing Officer for consumer auto finance at Capital One, as well as various roles with McKinsey and Company previously. Neel served most recently as VP of product at Chewy and held various strategy roles at Boxed and Staples.

Together they bring a data centric approach to strategy, leadership, and customer experience that aligns well with our business objectives. I’ll take a moment to thank Steve Powers our longtime Chief Operating Officer who is transitioning to his new role as Chief Business Development Officer. He and his team have navigated our business through years now of pandemic response, abundant storm activity and various disruptive forces in our industry. We extend a warm welcome to Hessel Verhage his successor as COO. Hessel was the supply chain leader for DB Schenker, one of the world’s largest and most complex logistics providers for a litany of demanding clients such as Procter and Gamble, BMW, Apple, and many, many others. Hessel will spearhead our efforts to sustain and extend what we believe to be a substantial competitive advantage in our physical operations.

With a mix of new and experienced leadership, we believe we are well equipped to continue our profitable growth. Our bedrock operating principles, of course remain the same. We emphasize providing outstanding economic outcomes to our sellers through excellent service and auction results and to provide the best auction liquidity and experience to our members. With that, I’ll turn it over to our CFO Leah Stearns.

Leah Stearns: 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 revenue increased nearly $72 million or over 9% for the second quarter, primarily due to higher average revenue per unit and increased volumes. Our U.S. Service revenue grew by over 7% and international service revenue grew by nearly 26% for the quarter. Global purchased vehicle sales for the second quarter decreased to about $8 million or 5% and global purchased vehicle gross profit decreased by less than $1 million. In the U.S., purchased vehicle revenue was down over $7 million or about 9%, which was primarily due to a mix shift towards lower ASP units, while gross profit increased over $1 million.

Internationally, purchased vehicle revenue decreased by $1 million or about 1% and gross profit decreased by $2 million. Global gross profit increased to more than $464 million an increase of nearly $38 million or about 9%, and our gross profit margin percentage increased by approximately 100 basis points to 45.5%. In the U.S., our gross profit margin increased to 50.2% and our international gross profit margin increased to 24.9%. The year-over-year margin increase on a consolidated basis was driven primarily by a revenue mix shift resulting from strong growth in fee units, which generate higher margins and a decline in direct cost per unit sold. On the cost front, during the first and second quarter of last year, we incurred cat expenses, specifically related to Hurricane Ian, which did not occur.

Turning to general and administrative expenditures, excluding stock-based compensation and depreciation expenses. G&A spend in the quarter was over $72 million, reflecting an increase of over $24 million. The increase in G&A includes over $3 million in onetime costs associated with the conclusion of our CMA process in the U.K. The remainder reflects the financial consolidation of Purple Wave into our results, third-party project-related costs and the impact of investments in our technology and sales organizations to support Copart’s business growth. We expect that the investments we are making in our people, processes and systems will provide us with greater operating leverage over the long run. As a result, GAAP operating income increased by nearly 4% to $380 million.

Finally, second quarter GAAP net income increased by nearly 11% to over $325 million or $0.33 per diluted common share. During the quarter, we benefited from nearly $20 million of incremental interest income as we have actively invested our cash into treasury securities as well as a lower tax rate of 20.7%. Turning to our liquidity and financial position. Liquidity was $3.9 billion as of the end of January, which is comprised of nearly $2.7 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 nearly $162 million, which is a decrease of 14% from the prior year. In addition, we invested about $123 million in capital expenditures, with nearly all of this amount attributable to our real estate and physical infrastructure to support 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 our operating cash flow, less CapEx, we’ve generated about $39 million of free cash flow. As I’ve highlighted in the past, our top priority is to invest to grow our core business. To achieve this, over the last 12 months, we have deployed over $540 million into our real estate portfolio, fleet and technology to provide best-in-class products and services to our customers. And with that, Jeff and I will be happy to take some questions.

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Q&A Session

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

Peter Lukas: 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.

Jeff Liaw: 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.

Peter Lukas: 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?

Jeff Liaw: 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.

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

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

Daniel Imbro : 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?

Jeff Liaw: 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.

Daniel Imbro : 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?