Copart, Inc. (NASDAQ:CPRT) Q4 2023 Earnings Call Transcript

Copart, Inc. (NASDAQ:CPRT) Q4 2023 Earnings Call Transcript September 14, 2023

Copart, Inc. beats earnings expectations. Reported EPS is $0.34, expectations were $0.31.

Operator: Good day, everyone, and welcome to Copart Incorporated Fourth Quarter Fiscal 2023 Earnings Call. Just a reminder, today’s conference is being recorded. Before turning call over to management, I will share Copart’s statement on Safe Harbor and non-GAAP financial measures. During today’s call, the company will discuss certain non-GAAP measures, including discrete income tax items, the effect of extinguished debt and adjustments to income tax benefits related to stock-based compensation. The company has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on its Investor Relations website and in its press release issued at approximately 3:00 PM central time today.

The company believes these non-GAAP measures together with the corresponding GAAP measures are relevant in analyzing the company’s results and assessing its business trends and performance. In addition, the company’s comments today include forward-looking statements within the meaning of the 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 details 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 31st, 2023, and each of the company’s subsequent quarterly reports on Form 10-Q.

Photo Credit: Fiat Chrysler Automobiles

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: Great. Thank you, and good evening, and thank you, everyone, for joining us today. We’re pleased to report our results for the fourth quarter of fiscal 2023 and the conclusion of a strong fiscal year. We continue our trend of generating excellent results for new and existing customers of growing our business profitably and of reinvesting in the future prosperity of our customers and ourselves. Today, I’ll keep my comments brief focusing on some of the recurring themes that are most relevant to our business and to our customers. A year ago on this same call, we talked about the various dimensions of enterprise sustainability that we consider here at Copart, including environmental sustainability, given our critical role in the circular automotive economy.

Our financial sustainability in the form of our conservative capitalization, operational sustainability through our land stewardship and ownership strategy and global socioeconomic sustainability and our providing mobility to developing economies around the world. Today, I’ll spend just a few minutes elaborating on a fifth dimension, which is the proactive role Copart plays in assisting communities in their recovery from catastrophic weather events. The 2023 hurricane season has been forecast to be “above normal” according to the National Oceanic and Atmospheric Administration, a division of the Department of Commerce. That forecast feels evergreen now year-to-year. So far in 2023, we’ve experienced 12 named storms, more than double the number we encountered last year.

Thankfully, for our insurance clients and their policyholders, the insurance loss impacts of the first hurricane to make landfall this year, Hurricane Idalia, were relatively modest in comparison to major storms in prior years. The threat of a more substantial event nonetheless remains in 2023 as many of the most significant storms in the past 20 years have occurred late in the season. Hurricane Ian, for example, the largest ever catastrophic event in our history, as measured by unit volume, did not itself make landfall until the 23rd of September last year. For any substantial storm likely to affect our insurance clients and their policyholders, we don’t have the luxury of perfect visibility before we deploy resources, both in the moment and in the years prior.

Our response to Hurricane Idalia illustrates this reality. Though the landfall of the hurricanes eye was projected to be in the big band area of Florida, prevailing weather models showed a wide range of possible outcomes, including a potential initial landfall in the Tampa area and Eastwood progression thereafter through Florida, Georgia and Carolinas. Well before landfall, we deployed hundreds of team members, Copart-owned and third-party-owned tow trucks and Copart-owned loaders, telecommunications equipment and generators from around the country to the region. We were prepared to immediately retrieve inventory store process titles for and sell many thousands of vehicles in the affected areas. And of course, our real estate investment and planning had begun years in advance, yielding more than 600 available acres of dedicated cat storage in Florida alone.

For a given storm quarter or year, our investments in catastrophic readiness may appear to be overkill, but we recognize the responsibility we have to our customers and to the communities we serve together to optimize our readiness for such severe weather events. I’ll touch on a few additional themes for both our insurance and noninsurance businesses. But first on the — in the insurance universe. According to CCC, total loss frequency troughed at 17.1% in the second calendar quarter of 2022 and has subsequently rebounded to 18.8% in the second calendar quarter of 2023. This is down a bit sequentially from calendar quarter one into calendar quarter two, though this is the result of seasonality. We’ve observed that same modest reduction in total loss frequency from the first quarter to the second quarter in each of the past eight years of CCC’s data.

Our expectation is the new and used vehicle prices are likely to stabilize or decrease in more swiftly than repair cost will. We believe this, in turn, should lead to a recovery in total loss frequency eventually surpassing pre-COVID levels as well. In March 2023, Kelley Blue Book data indicated that average retail transaction values for new vehicles were below MSRP for the first time in nearly two years. In April 2023, this average transaction price was nearly $400 below MSRP compared to being $600 above just one year prior. The long-term drivers of total loss frequency, of course, remain unchanged. First, repairs are more expensive and less attractive due to increasing accident severity, vehicle complexity, labor costs and rental car costs and two, salvage economics are more attractive because the growing economies in Central and South America, Africa and Eastern Europe depend on our damaged vehicles to provide the mobility they need.

Although our insurance US insurance volumes continue to increase, up some 9% year-over-year, we estimate the total loss volumes continue to be relatively suppressed when compared to historical total loss frequency norms. As this inflationary environment persists, our insurance clients continue to experience hiring and retention challenges. And we, therefore, believe they’ll lean still more heavily on trusted partners like Copart to provide additional services, including virtual inspection, loan payoff and title procurement services, among many others. Our insurance company clients continue to leverage and incorporate our image recognition tools and machine learning algorithms to enable better decision-making on total losses and importantly, faster decision-making.

As we’ve noted in the past, for a vehicle that will ultimately be totaled, insurance companies often nevertheless incurred literally thousands of dollars in towing, storage estimating teardown costs and appraiser labor, much of which could have been mitigated with streamlined decision-making. Our insurance companies continue to benefit from and appreciate the importance of our global marketplace in providing superior salvage returns to the insurance industry and minimizing their claims expense as a result. Finally, a few comments on the noninsurance world as well. In the fourth quarter, we observed year-over-year growth of 13.8% in our Blue Car division, underscoring the realization of the benefits of our auction platform and our global member base as we serve the bank and finance fleet and rental segments as well.

We likewise increased our dealer volume year-over-year by 5%. These dealers are unique as they serve, in some cases, as both sellers and buyers on our platform. In both cases, for the Blue Car and dealer sources of vehicles for Copart, we believe we are outperforming other wholesale channels for vehicles. Lastly, in July of 2023, we received approval from the competition authorities in the UK to complete the merger of our acquisition of Hills Motor Company, which we had — which we had completed in financial terms a year ago prior. Hills Motor Company is a leading vehicle dismantling business in the UK, our insurance customers in the region have made clear to us that they prefer us to be partially — to be partially vertically integrated in auction vehicles on their behalf while also directly satisfying some of their needs for recycled parts.

With that, I’ll turn it over to our CFO, Leah Stearns, to provide additional commentary, to walk through some key statistics in our fourth quarter financial results before we open it up for questions. Leah?

Leah Stearns: Thank you, Jeff. Turning to the quarter. Global unit sales increased nearly 10% year-over-year, including an increase of almost 8% in the US and over 22% internationally. For the fiscal year 2023, global unit sales increased over 5%, including an increase of over 4% in the US and over 12% internationally. In the US, our fee units grew about 8% for the quarter and 5% for the year, primarily due to growth across insurance units. Our purchase units declined 3% for the quarter at about 14% for the year. Internationally, our unit growth came from a mix of fee and purchased units, but fee units increasing over 22% in the fourth quarter and over 11% for the year and purchased units increasing nearly 21% for the quarter and 20% for the year.

Our US insurance business grew relative to its one and two-year comps of 9% and 19% during the quarter and 7% and 28% for the year, respectively. This is primarily due to the continued recovery in driving activity, increasing frequency — accident frequency and severity and total loss frequency and share gain. Our auction returns remain strong as we continue to invest in growing our global buyer base by driving member recruitment, registration and activation. As a result, our auctions provide 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 damaged vehicles of the total loss. Turning to our financial results. For the fourth quarter, global revenue increased $114 million or nearly 13%, including a 1% or $6 million tailwind due to currency.

For fiscal year ’23, global revenue increased $369 million or over 10%, which includes a 1% or $44 million headwind due to currency. Global service revenue increased $126 million or nearly 18% for the fourth quarter and $345 million or 12% for the year, primarily due to higher average revenue per unit and increased volume. US service revenue grew by nearly 16% for the quarter and over 12% for the year, and international service revenue grew over 36% for the quarter and over 11% for the year. ASPs were up slightly year-over-year for the quarter, with U.S. average sales prices up about 2%, and that’s compared to an over 11% decrease in the Manheim Index, which ended July at 211.7. Purchased vehicle sales for the fourth quarter decreased $12 million or 7%, with US purchased vehicle revenue for the quarter down 25% and international up 29% for the quarter.

For fiscal year 2023, purchased vehicle sales increased $23 million or about 4%, with the US down 15% and international up about 37%. Purchased vehicle cost of sales decreased $12 million or 7.5% for the fourth quarter and purchased vehicle gross profit decreased by about 1%. For the fiscal year, purchased vehicle cost of sales increased $29 million or 5% and purchased vehicle gross profit decreased by $6 million or 9%. Global gross profit for the fourth quarter increased by $76 million or about 20%, and our gross margin percentage increased by approximately 270 basis points to 45.9%. US margins increased to 51.2% and international margins decreased to $21.4. Global gross profit in the fiscal year ’23 increased by about $131 million or 8% and our gross margin percentage decreased by approximately 100 basis points to 44.9%.

US margins for the year increased to 49.2% and international margins decreased to 24.5%. I’d like to note the decline in our international gross margin reflects approximately $6 million of prior period noncash expenses, which are primarily depreciation and amortization and the effect of marking our acquired inventory to fair market value, which was incurred due to our completion of the final purchase price accounting for Hills acquisition in the UK. The year-over-year margin increase on a consolidated run rate basis was primarily driven by a mix shift in the US, partially offset by inflationary impacts to labor and fuel costs and a slight decline in purchase unit margins internationally. On the cost front, our teams remain focused on optimizing our operational processes by leveraging technology and automation to mitigate the inflationary impacts we’ve experienced across our labor and transportation costs.

In addition, we have recently observed some attenuation in certain expenses, particularly transportation, which was partially driven by reductions in the cost of diesel, which has experienced a 29% decline year-over-year. In addition, we are constantly seeking to optimize our operational processes by leveraging technology and automation, which we continue to expect will drive scalability and efficiency across the organization to continue to help mitigate longer-term cost pressures. Turning to general and administrative expenditures, excluding stock-based compensation and depreciation expenses, G&A spend in the quarter increased $12 million and $23 million for the fiscal year, and G&A as a percentage of revenue was 5.6% in Q4 and 5.1% for the fiscal year 2023.

Because of our strong revenue growth and moderate cost increase GAAP operating income increased by more than 20% to over $390 million for the quarter and about 8% to nearly $1.5 billion for the year. Fourth quarter income tax expense was nearly — was near $72 million, which reflects an 18% effective tax rate. And for the year, income tax expense was nearly $317 million, which reflects effective tax rate of 20%. Finally, fourth quarter GAAP net income increased about 32% to almost $348 million or $0.36 per diluted common share, while GAAP net income for the year increased 13.5% to over $1.2 billion or $1.28 per diluted common share. Our global inventory at the end of July increased 9.5% from last year. And when excluding low-value units like wholesalers and charities, global inventory increased 11%.

That is compromised with a year-over-year increase of over 8% for US inventory or over 10% when excluding low-value units and nearly 16% for international inventory. Turning to our liquidity and financial position. Liquidity stood at $3.6 billion as of year-end, which is comprised of $1.4 billion in investments and held-to-maturity securities, $1 billion in cash and cash equivalents and our capacity under our revolving credit facility of over $1.2 billion. For the year, we have generated operating cash flow of nearly $1.4 billion, which is an increase of almost 16% from the prior year. And in addition, during 2023, we invested nearly $517 million in capital expenditures, with over 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, year-to-date, if you take our operating cash flow less CapEx, we’ve generated over $847 million of free cash flow. Given the strong financial position, we intend to continue to invest in our business to meet our customers’ needs. These investments include yard expansion, new yard acquisition, logistics and our technology platform. As Jeff outlined in detail, we believe that these types of historical investments have differentiated Copart as a service provider while ensuring that we have the capacity necessary to serve our industry’s future growth. With that, we’re concluding our prepared remarks, and we’re happy to take some questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session.[Operator Instructions] Thank you. Our first question comes from Bob Labick with CJS Securities. Please proceed with your question.

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

Jeff Liaw: Thanks, Bob.

Bob Labick: First question, I have a related follow-up as well. But could you talk a little bit about the recent announcement of, I guess, a partnership with Hi Marley tech-enabled services in general to help your insurance customers? Maybe talk about what you’ll do with that company and if there’s other areas of interest where you might be partnering to help your insurance customers?

Jeff Liaw: Sure. Happy to address that, Bob. So Hi Marley is a service provider in the insurance ecosystem broadly speaking. They started in the messaging space, in particular, but they’re committed to improving workflow efficiency as well as the interface between policyholders and companies within the insurance industry. Well I think we share that objective to improve insurance outcomes, to streamline processes and automate them on behalf of all the participants in the industry, so we’re delighted to partner with them. We see that they have achieved some traction with some of the leading carriers in the space, and we think that we can develop product offerings together that will achieve those outcomes, reduce cycle times, reduce waste, increased policyholder satisfaction in total loss scenarios.

Bob Labick: Okay. Super. And then kind of as a related follow-up, we’re increasingly seeing AI-based programs just using smartphones for enhanced inspections or valuations of autos, other damage or valuation of the car. Do you see this as an area that you’re interested in investing in? And is this a buy, build or potential partnership opportunity for you?

Jeff Liaw: I think it’s likely a mix of the above. So we have developed and continue to refine our own image-based tools. And the more precise the exercise is certainly the more difficult the development challenge. But to assess a vehicle as a total loss, I think, for a healthy portion of them, the AI required is not best sophisticated, right, a car that has multiple airbags delivered, pardon me, deployed and they collided at 35 miles an hour that is five years old, it’s highly probable to be a total loss, and the image recognition will only enhance the conviction of that call, where I think the image recognition becomes a more complicated endeavor is when there is slight damage and to estimate the actual repair cost and to try to forecast from deflection in a given panel, how much damage has been done to the underlying drivetrain or computing capabilities of the car, that’s harder to do.

But for the total loss application, we have a robust product ready to be deployed and deployed in some cases with insurance companies. But likewise, if there are other service providers that insurance companies prefer, we’re happy to plug in with them as well. Ultimately, we share the same objective, maximum efficiency, maximum speed on behalf of our clients. If that happens through our natively developed products, great. If there is a product they prefer instead, that’s great, too.

Bob Labick: Okay. Super. Thanks for that. And then one last one, I’ll jump back in queue. You kind of touched on this already, but just — you mentioned obviously CapEx this year, $500 million, 80% for capacity additions essentially. Where do you stand in terms of your capacity and your yard efficiency based on the capacity in those yards? Obviously, you’ve had record volumes. You keep increasing that volume. And there’s still a lot of room to run with total loss frequency, as you pointed out today as well. So just I know you’re investing $400 million in the last year and tons and tons of capital. But how do you see the yards current efficiency? And where do you stand in terms of capacity that you want/need?

Jeff Liaw: Yes. I think it’s a great question and tough to answer in a single paragraph in part because the answer varies very significantly by geography, by region, by city, even by areas in a given city. So as a blanket statement, we are certainly in a good place in terms of capacity and being able to serve our customers as they stand today. But we forecast 5 and 10 and 20 years at a time. And so very much still have the appetite for significantly more investments as well in land and capacity in part to support the growth that Bob you observed at the outset here. So we are — if you were to look across our system, there’s certainly pockets in which we know we need land relatively soon. There are other areas in which we know we are in good shape for 5, 6, 7, 10 years even, but I think we would expect to continue to deploy capital in support of our growth.

If we look back now with the benefit of hindsight after 40-some years, the land we have bought is generally proven to be objectively a good financial investment regardless, which is not to say we would be wasteful or reckless about it. But in general, land itself is not consumption. It’s investment in a durable asset that has proven to accumulate value as well over time.

Bob Labick: Okay. Super. Thanks so much.

Operator: Thank you. Our next question comes from the line of Daniel Imbro with Stephens. Please proceed with your question.

Daniel Imbro: Yeah, good evening, everybody. Thanks for taking our questions. Jeff, I want to start on the demand side, maybe the equation. You mentioned these emerging markets need Copart to provide affordable transportation. I’m curious where else can those markets supply vehicles from at scale? There have been some headlines around maybe Asian manufacturers, especially China, exporting more cheap cars. But are you seeing any change in the need for those cars or the availability maybe from outside of your channel that you would compete with in the buyer side?

Jeff Liaw: In a word, no, which is not to say that picture can’t change in the years ahead. But the international demand and to be fair, there are countries that are — they — in the aggregate, international demand for cars from Copart has expanded very significantly on a one, 5, 10 year basis. For any individual country, the demand can be subject to economic volatility, inflation, unemployment, et cetera. But in the aggregate, the developing economies have seemingly perpetually growing appetite for our cars. Could that be satisfied by other providers, perhaps. But it seems that a high-grade US quality vehicle, UK, Canada, for that matter, that can be repaired is the better instrument to address that demand. And it has been — at least that’s been true for the past 20 years. I think we don’t expect that to change.

Daniel Imbro: Great. And then maybe more near term, looking at the quarter, Leah, I think you mentioned US vehicle sales maybe units were down a few percent, but there was a nice pickup sequentially in the service vehicles. Was that just a customer shifting maybe from principal to agency? And is that still something you see in your new markets? I’m curious, internationally, vehicle sales units were up a lot. Is that just the onboarding of customers that still want you to take principal risk, but the long-term strategy to convert them to agency?