Copart Inc Q1 FY2022 Earnings Call

Please standby. Good day, everyone, and welcome to the Copart Incorporated First Quarter Fiscal 2022 Earnings Call. As a reminder, today's conference is being recorded. A brief question-and-answer session will follow the formal presentation. For opening remarks, I would like to turn the call over to Mr. John North, Chief Financial Officer of Copart Incorporated. Please go ahead, sir.

Good morning. During today's call we'll discuss certain non-GAAP measures, which include adjustments to reverse payroll tax benefits related to accounting for stock option exercises. We provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our investor relations website and in our press release issued yesterday. We believe these non-GAAP measures together with our 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 including the COVID-19 pandemic. 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 31st, 2021 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'll turn it over to our President and CEO North America, Jeff Liaw.

Thanks, John. Good morning and thank you for joining us for the first quarter. We are thrilled to report a robust performance for the first quarter of fiscal 2022 in the midst of various challenges, such as an ongoing pandemic, shifting global traffic patterns, supply chain issues, strong used car prices, and an active storm season. We continue to effectively meet our customers' needs, enhancing auction liquidity and maintaining our long-term trend of profitable growth. I will discuss several key themes from the quarter, followed by John's insights. My remarks will cover Hurricane Ida, the health of our auctions, the implications of the used car price environment, and our commitment to sustainability. First, regarding Hurricane Ida; it impacted the Gulf States on August 29 and the Northeast on September 1 and 2. This was our most significant storm since Hurricane Harvey in 2017 and the largest in the Northeast since Hurricane Sandy in 2012. Thanks to the lessons learned from past events and our substantial investments in land, technology, company-owned trucks, employed drivers, heavy equipment, and our dedicated team, we were well-prepared. Many of us worked over Labor Day weekend and the following weeks managing vehicle retrieval, processing, and navigating them through the titling process to eventual sale. As with most major storms, we encountered an operating loss of a few million dollars from this event. We believe our pre-storm preparations and our strong response demonstrate our commitment to maintaining durable partnerships with our insurance sellers. As you are aware from previous experiences, our storm-related costs encompass expenses for temporary storage, towing, labor, travel, and lodging, which are offset by increased revenue from unit volume. Financially, the storm's impact this quarter was about 100 to 150 basis points of gross and operating margin compression. We have not provided further specifics in our press release or made adjustments to our non-GAAP earnings for the disaster. Providing exceptional service during challenging times is a vital aspect of our value proposition, especially as these storms are expected to occur more frequently and severely in the future. Next, let's discuss our unit volume growth and auction liquidity. We saw a global unit sales increase of 21% year-over-year, with approximately 2 points attributed to Hurricane Ida. U.S. sales rose nearly 24%, again with several points due to the hurricane. International unit sales grew almost 8%. Responses to COVID-19 in other countries have generally been more aggressive than in the U.S. Our insurance business has expanded by 23% compared to the first quarter of last year, and we continue to see certain increases in total loss frequency. Driving activity is rebounding significantly compared to last year, although gasoline consumption remains slightly below prior year levels. The strong used car price environment is likely inhibiting assignment volume to Copart auctions. Turning to our non-insurance volume, when excluding lower-value vehicles from wholesalers and charities, our non-insurance business grew by 7.5% year-over-year, with dealer unit volume increasing by approximately 1% and strong growth in Copart direct. This solid performance is arguably the best relative performance in our history compared to other vehicle marketplaces given the pronounced industry shortage of available supply. This underscores the strength of Copart's marketplace. The vehicles we sell on behalf of insurance companies, coupled with rising total loss frequency, allow us to achieve higher returns on non-insurance cars as well. Conversely, the vehicles sold through dealer rental fleets, banks, and consumers also feed more insurance volume as total loss frequency rises over time. Lastly, I want to touch on vehicle prices. We are experiencing high used vehicle prices globally, with average selling prices at Copart auctions also strong. Our average selling prices increased by 11% year-over-year worldwide, with U.S. averages up 10%. The Manheim Index, an industry benchmark, is at record highs, currently reading 234.8. Questions about the durability of these prices are natural, but long-term trends favor higher prices due to our auction liquidity and total loss frequency, along with growing demand from emerging economies for wrecked vehicles. Our substantial investment in member recruitment and retention continues. However, we should also acknowledge the technical factors at play. The ongoing chip shortage is affecting new vehicle production and pushing used vehicle prices higher. Industry consensus suggests that this chip shortage will last well into 2022 and likely into 2023. Importantly, if used car prices decline, we expect an increase in assignment volumes. Total loss frequency is negatively correlated with used car prices; the higher a car's pre-accident value, the more likely it is to be repaired. Before I hand it over to John, I want to emphasize sustainability. At Copart, we strive to be judged by our actions rather than our words. However, we recognize the current need for companies to clearly articulate their ESG positions. Copart is integral to the automotive circular economy, facilitating the reuse, recycling, and responsible disposal of vehicles worldwide. We sell over 3 million vehicles annually, matching them with optimal owners to return automobiles to service that would otherwise be scrapped. Our efforts in reuse and recycling minimize unnecessary resource extraction and energy-expensive manufacturing. As climate-related events become more frequent, Copart will increasingly assist communities in recovery by clearing vehicles from roadways and storage facilities. Additionally, because many of our vehicles are exported, our auctions enhance physical and economic mobility in emerging economies, including regions in Central and South America, the Middle East, Africa, and Eastern Europe. I encourage you to read our annual shareholder letter on our Investor Relations website, which delves further into these themes, including diversity and inclusion. We will provide more details through a sustainability report soon. Now, I'll turn it over to our CFO, John North, to discuss the fourth quarter's financial results.

Thanks, Jeff. Before I get into the numbers, I'd like to begin by also acknowledging our team's effort relative to Hurricane Ida and thank them for their dedication and sacrifice. Being relatively new to the Copart family, this is my first opportunity to see us in action and to observe firsthand a tremendous sense of ownership we take to ensure positive outcomes in the face of both disaster and tragedy. Our people and our culture have always been and will continue to be the key to our success. Now I'll make a few comments on our operational results and then we'll open it up for questions. For the first quarter, total revenue increased $217 million or 37%, including a nearly $4 million benefit due to currency. Global service revenue increased to $152 million or 30% primarily due to higher average selling prices and increased volume. U.S. service revenue was up 31% and international experienced an increase of 18%. Purchase vehicle sales increased $65 million or 84% due to higher ASPs and increased volume. U.S. purchase vehicle revenue was up 87% over the prior year and international grew 79%. As a result, purchase vehicle gross profit is defined as vehicle sales less cost of vehicle sales, increased by $2.7 million overall. As Jeff mentioned, we had significant relative growth in our purchase vehicle volume, resulting in gross and operating margin rate contraction of approximately 150 basis points to 200 basis points. Global gross profit in the first quarter increased by $88 million or 30%. And our gross margin percentage decreased by approximately 250 basis points to 47.5%. U.S. margins declined from 52.6 to 50.3 and international margins decreased from 37 to 33.1 due to a higher purchase vehicle mix at lower margins, partially offset by higher ASPs globally. I will now move to a discussion of G&A expenditures excluding stock compensation and depreciation expense. G&A spend increased $5.9 million from $35.2 million a year ago to $41.1 million in 2022, yet it's lower from 5.9% of revenue to 5.1% of revenue this year. We anticipate G&A to continue to improve as a percentage of revenue as we grow our business. As a result, our GAAP operating income increased by 33% from $248.6 million to $330.1 million. First quarter income tax expense was $65.5 million, had a 20.1% effective tax rate, which reflected a $3 million tax benefit on the exercise of employee stock options. Adjusting those to a non-GAAP measure, included in our earnings release, changed our effective tax rate to 21%. First quarter GAAP Net Income increased from 30% from $200 million last year to $260 million this year adjusted to remove the tax benefit on the exercise of stock options. Non-GAAP Net Income increased 37% from $188.5 million last year to $257.4 million in the first quarter of 2022. Our global inventory at the end of October increased 12% from last year. This is comprised of a year-over-year increase of 14% for U.S. inventory and a decline of 3% for international inventory. These increases in inventory are largely a function of U.S. accident frequency and miles driven returning to normal, supplemented with the effects of Ida and share gains, partially offset by declines in international driven by countries with longer duration lockdowns in response to COVID. Now, to briefly update our liquidity and cash flow. As of the end of the quarter, we had $2.3 billion of liquidity comprising of $1.3 billion in cash and cash equivalents and an undrawn revolving credit facility with capacity of over $1 billion. Operating cash flow for the quarter increased by $54 million year-over-year to $312.5 million, driven by stronger earnings. We invested $65 million in capital expenditures in the quarter. Approximately 70% of this amount was attributable to capacity expansion. We are continuing to prioritize investments in physical infrastructure, above other choices, and believe this continued investment is helping to create durable advantages in our ability to handle increasing numbers of total loss vehicles and adjacent opportunities in the whole car marketplace. We're continuing to focus on investing for the future in both capacity and technology while maintaining a conservative capital structure that allows operational flexibility regardless of economic changes or transitory market dynamics. And with that we're happy to open up the call for some questions.

Thank you. We'll now be conducting a question-and-answer session. One moment, please, while we poll for questions. Thank you. Our first question comes from Stephanie Moore with Truist. Please proceed with your question.

Hi. Good afternoon. Thank you.

Hi, Stephanie.

I wanted to touch a bit on the overall inflationary and cost environment that you're currently experiencing, and if you are in fact taking the impact of the hurricane out of the equation and thanks for quantifying the impact that you saw from that event. But just looking at, 1, the dynamic that you called about on the last quarter was just operating deleverages inventory, the levels increase as well as somewhat newer dynamics that we've heard, whether it's higher towing costs, higher driving costs, you name it. So just want to walk through if you could what you're seeing from an inflationary standpoint and higher costs and then some levers that you might have in place to offset those costs would be helpful. Thank you.

Sure. In the cost categories you noticed, Stephanie, certainly, I think all participants in all economies worldwide are experiencing inflation, to some extent in the form of wages, towing expense, fuel, capital equipment, and the like. And certainly, we aren't immune to that either. It's our job to manage that, to absorb it where necessary, to manage with productivity as we can, and to deliver the results. So we're seeing and experiencing those things. I would note that inflation, although certainly more pronounced today, is not a brand new phenomenon. For years, we've experienced very meaningful inflation in healthcare costs, for example, land has continued to grow in value, capital equipment, the loaders we buy, for example, are more expensive than they were 5 years or 10 years ago as well. So inflation is more pronounced today, but it's not a radically new phenomenon. So we do have experience in managing through that, with productivity being the most important long-term lever.

Great. And then I guess maybe just talk a little bit about from an inventory standpoint. Do you find that given where inventory levels are particularly in the U.S., that you're seeing just as inventory builds just some operating leverage in the near-term as well as maybe some seasonality? Just trying to think through the dynamic that impacted the fourth quarter and if that continued into the first.

That's a fair question, Stephanie. As you know, we manage the business to provide service rather than focusing solely on optimizing individual quarters or specific inventory units. Your point about how inventory growth and unit volume growth can help absorb fixed or semi-fixed costs is valid. There are also other factors at play, such as the inflation you mentioned and Hurricane Ida, among others. However, if all else is equal, unit volume growth by itself is indeed beneficial to margins in the medium term.

Absolutely. Thank you. And then lastly for me, big picture, you put out a release in early November about a partnership with, I believe, Commerce Bank that just talked about some of the digital efforts that you have in place, rare. I feel like most of the time you don't advertise some of the investments and initiatives you have in place. But maybe if you could talk about incremental investments that you're looking going forward, is it focused on improving cycle times, or what are areas where you find most opportunities for improvement just for continued investments? Thanks.

Fair point. And Stephanie I'll talk perhaps in a broader framework here. It's our job to serve our clients and, as you know, multiple types of clients starting with insurance companies, which still represent the strong majority of the units we sell. For them, they care a lot about speed and execution. They care about auction returns; they care about policyholder experience. And on all dimensions, we are investing. There are different nuances to each, I think what you mentioned a moment ago about cycle times and the public notice you mentioned a moment ago about our partnership with Commerce Bank, for example, those are investments to address cycle times in particular for cars with outstanding liens on them, which also have derivative effects on the policyholder settlement timelines in some cases. So we certainly are investing there. Lienholder cars are particularly some of the most challenging vehicles in terms of cycle times and we invest all the time in initiatives like that. But anyway, the point of all that was there are many dimensions to that and we invest across those dimensions as well.

Great. Thank you so much.

Thanks, Stephanie.

Thank you. Our next question comes from Bob Labick with CJS Securities. Please proceed with your question.

Good morning. Thanks for taking my question.

Hey, Bob.

I wanted to start and dig a little further on the total loss frequency commentary you offered us in the prepared remarks and how it relates to used car prices and insurance carriers' formulas to total a car. If you had said two years ago, used car prices would rise 40% now 60% or 70% over a two-year period, I would have incorrectly said total loss frequency would crater unless repair costs went up equally to offset it. So I guess my question is, are repair costs up as much in terms of dollars as used car prices? I can't imagine that's true. Or are insurers adjusting their total loss calculation real-time to the current salvage recovery rates that you're getting, or is it something else? Because if it's dynamic insurance calculations, if they're changing it with used car prices much faster than they have in the past, would that potentially suggest that as used car prices fall then total loss frequency wouldn't rise as fast as anticipated? If that question makes sense.

That's a very insightful question, Bob. I believe your observation is correct that total loss frequency has been influenced by our used car prices. As for what shifts the balance in the opposite direction, it's a combination of repair costs and rental car expenses. The costs associated with repairs for insurance companies are considerably higher now compared to two years ago. Additionally, there are long-term trends contributing to this issue, such as advancements in accident prevention systems, increasing vehicle complexity, changes in materials from steel to aluminum and carbon, and the rise of electric vehicles. All of these factors are leading to a situation where total loss frequency is increasing, despite what the single variable of used car prices might suggest. Another point worth mentioning is the relationship between used car prices and our auction returns. Our auction returns have outpaced pre-accident vehicle prices during that same timeframe, which has helped narrow that gap.

Got it. Okay. That's great. Very helpful. And just kind of going back to cycle time. When I think in general, that's obviously a benefit in period entry, but you're always trying to improve cycle times. And obviously, they've probably improved over the last 5, 10 years as well. And as cycle times do improve a little bit, they open up yard capacity. So just curious regarding your well-capitalized balance sheet and the liquidity that you have, what are the primary uses of that liquidity as you run out of more land to buy or if cycle times pick up enough, you need less land at the same time. So just trying to balance those two and ask about other uses of capital beyond land, because eventually you won't have to always buy land.

Many puts and takes on the question of land. So the business is growing and has been growing for years. That by itself would necessitate more land not less. Cycle times have improved, but there's plenty of complexity in the ecosystem as well. So there are many examples, case studies, in which cycle times are increasing. And today, arguably, the very strong used car prices are making lien settlements faster than they otherwise would be, relative to an environment in which you had a bunch of underwater loans, for example, Bob, as you know. And so I think in practice we will continue to invest in land for years to come, and probably very substantially. That said, as you noted, overcapitalized, Bob, is more editorializing perhaps than I offer, but nonetheless I think the point there we have a very robust balance sheet today but the answer over the next 10 years is sure that we'll buy back stock as we always have from our share count excluding the split that we have contracted the open market show party the shares outstanding over the years and we'll continue to do so. That's a matter of timing and comparison to our relative investment options and land and otherwise. So we'll be good stewards of capital and return that via share buybacks at some point.

Okay. Super. And I meant to say well capitalized, but it slipped out as over-capitalized. I apologize. And thanks for answering. I'll jump back in queue. Thanks.

Thanks, Bob.

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

Good morning. Thanks for taking my questions. Some have already been asked, but I thought I'd shift to Europe. I think you mentioned 8% volume growth, which was slower than what you saw in the U.S. And I think you identified COVID and the response there as a factor. But it's also a smaller business with potentially a lot of momentum to it. Could you just comment on maybe the secular shift in that business and whether you still feel like you have momentum with insurance carriers in shifting their priorities to your platform?

Sure. And one technical clarification; when we said the growth rate, that was for our 'international business' which includes Canada, Brazil, the UK, Finland, Spain, Germany, and the Middle East, so it's not just Europe alone. I think underlying your question, Craig, is what's happening in Spain and Germany and our growth markets in Europe, for example. And there we've continued to experience very significant year-over-year growth. We continue to prove the economic model, if anything, the gap between the auction returns we generate at Copart auctions relative to the listing services we've talked about in the past, that gap is expanding still. The economic proposition, I think, is becoming more compelling, not less. But what you're seeing in terms of the overall growth rate is for sure that the UK and Canada for that matter, and Brazil in certain areas have been more aggressive about COVID-19 countermeasures than the U.S. has.

Thanks. And then you had good success in the U.S. with your non-insurance business. Is there a point when your international businesses mature such that you feel comfortable rolling out a service like that as well?

Yes, in some that we have. Where we do have liquid auction marketplaces we have pursued other sources of that volume, including dealers and otherwise. In Canada, in Brazil and the UK, Middle East. In most places we do business as liquidity comes in a hurry and the cars that we can sell that extend beyond total loss units from insurance carriers happen pretty quickly as well.

And then lastly, I appreciate your commentary on sustainability. Clearly, your story fits that narrative quite well and nice to hear you articulate it. I'm wondering if the board or you have done any analysis on whether you are under owned by that group of investors that put ESG as their number 1 priority.

A judgment call perhaps to make from where we sit. I'm not sitting in their rooms and understand their criteria. But certainly from our understanding of what constitutes true sustainability, I think our businesses should be at the very top of that list. I think that's a reasonable conclusion, Craig, but we don't spend a lot of energy with target lists and trying to figure out who should own us and not. We trust this. We deliver the results long term economically and sustainability-wise. And those questions will take care of themselves.

That's great. Thanks, Jeff.

Thank you. Our next question comes from Daniel Imbro with Stephens. Please proceed with your question.

Hey. Good morning, guys. Thanks for taking our questions. Jeff, I want to start on the non-insurance side of the business. You noted some pretty stark outperformance versus the peers. As you're growing into the diverse synergies back to the business, I have a few questions. One: right now, are you selling all of those dealer cars internationally, or are you actually transacting some maybe U.S. dealer-sourced cars to other dealers in the U.S.? And the second question would be, given the reverse synergies and, obviously, the attractive unit economics, what are the limiting factors on maybe growing into that faster as you think about the next 3 years to 5 years outlook on units’ side?

Got it. Daniel, regarding your first question, we are selling U.S. dealer cars to both U.S. and international buyers, and both segments are significant parts of our buyer base. For your second question about limitations, the situation is dynamic. As the total loss frequency increases and we acquire more dealer cars, our ability to acquire even more dealer cars also grows. The reasoning is somewhat circular. While we may not currently be the ideal choice for a perfectly intact $75,000 Audi in terms of liquidity, I believe we can still achieve strong results for that as well. However, there are certainly many cars, and an increasing number of them, for which we are the clear solution. I don’t think we have become the clear solution for $75,000 Audis yet, but there isn’t a strict ceiling. The same concept applies when people ask about the potential ceiling for total loss frequency. Could it reach 25% or 30%? This situation is constantly evolving, and we will witness changes over time, but there’s no reason to believe it is capped.

That makes sense. And, I guess, tied to Bob's question earlier, as you think about land capacity though, you're not feeling right now, given a tradeoff, like you don't have enough land for continued growth in either dealer or insurance cars? Your land gives you flexibility to pursue both?

Correct. The combination of our land and our logistics and our planning is such that we are in a position to serve our customers.

Perfect. And then last question, I just wanted to touch on the percentage of vehicles, I think it was 10,000 less that was filed that were getting sold overseas. I think we're still in the mid-30s. That's pretty flat from the year before. I guess where we are is a hard question to answer, but in terms of innings, where are we at in terms of opening up new countries that sell into? Are there still larger emerging markets, thinking like India, that you guys aren't selling into today? And maybe can you talk about what the steps look like as you enter into these new countries to really start scaling those buyer bases where you're not maybe fully matured today?

I think it's not anywhere close to mature. I think if you compare, and we do this exercise internally some years ago, but if you compare long-term GDP growth rates and have that on one axis, on the other axis have vehicles per capita, the very fastest-growing economies in the world tend to be the ones with the fewest cars and vice versa The ones with the slowest growing economies have the most cars, let's say, U.S., Western Europe, Japan, for example. And so there will be a 50-year trend of more of our used wrecked damaged vehicles moving overseas where they are meaningful contributors to economic and fiscal mobility there. That theme isn't going away anytime soon. As for tactically how we pursue individual countries, we do both. So we are responsive when we see activity from countries that previously didn't buy and we'll invest in online and physical marketing in some cases, we will invest in physical resources on the ground there as well to cultivate that new buyer base. And in some cases, we're simply proactively identifying countries that fit the parameters. If, obviously, country X looks a whole lot like countries Y and Z that already buy a lot, let's go dip our toe there proactively even before we see actual buyer activity. So we give you both.

Got it. That's helpful. Thanks so much and best of luck.

Thank you.

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

Hey, thanks for taking the question. Just one quick clerical one to start off with. With the revenue impact on the catastrophe, was that roughly like 2% as well in terms of the contribution to revenue that you gave volumes?

Yes. Directionally, yes.

That's okay. And then I want to ask about what you're seeing in terms of towing availability, what extent that may become a constraint as more brick-and-mortar dealers are going digital and online retailers, if that's putting pressure on the business? And then relatedly you have a small but growing fleet in the U.S. that's dedicated for CAT events. But what do you do with those towing vehicles when you're not in a car? The other 365 days of the year, how do you use those towing trucks in other parts of the year and is there any opportunity to expand that to vertically integrate or is it just an upscale? How do you think about that trade-off?

We've not implemented support for our business in markets where we are experiencing the most pressure related to towing vehicles. So you're correct that even in the absence of active storms, we effectively utilize those assets. In the medium to long term, there may be an opportunity to invest further in this area. Historically, we have had success with the third-party contractor model, as they are typically resourceful and productive. This creates a good alignment of interests since they are motivated to grow and support their own businesses while working efficiently for us. However, this is an evolving mix that we will continue to assess over time. During catastrophic events, and even afterwards, we are glad to have those trucks and drivers employed in-house, as they have proven to be very valuable members of our team.

Thank you. That's helpful.

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

Hey. Good morning, guys.

Morning, Bret.

On the Ida cars, and I think you called out the 14% U.S. inventory growth, have most of Ida's cars been processed or are there any that flow into the second quarter that might come with margins but fewer expenses associated with them?

Many of those cars have not yet been sold. They are arriving, many of them in the second quarter, and some will take longer to arrive.

And then you did comment that insurance growth of 23% included both a higher total loss rate as well as share. Could you maybe give us some insight on the share versus total loss in that growth?

No, we don't break that out. And, Bret, the share commentary, I think, as you know, is along that comment product find in literally every earnings call. It's been true for a long time; the industry tends to move more slowly in terms of switching providers, but over the very long haul, we have generally speaking grown our share both in the insurance realm and certainly in the non-insurance as well. And that was true in this quarter as it was in the past 30 quarters as well.

Okay. And then I guess a question for the longer-term, as you think about the purchase vehicle trend and purchase vehicles up 85%, if you were to think out 3 years to 5 years, do you see this becoming a business where you are doing a greater percentage of your unit volume on purchased versus service?

No, I think the long-term wins of history would suggest we move the other way that we migrate eventually from principal to a consignment basis. The principal business, for example in the UK, when we entered in 2007, was largely principal oriented and today we shifted a strong majority over to a consignment basis instead, which we think is a better long-term alignment of our incentives with those of our sellers. As opposed to being principals to trade against them, we are on the same side rooting for the highest possible sale price for those cars. Now the realms in which we do have more principal activity tend to be places where we are less established as a known brand and a known quantity. So today we are not yet a prominent consumer brand. So it's tough to ask Bret Jordan to consign his car through us and assume that we'll get a good return for you. Instead, we can offer you a compelling price. You sell the car to us and we sell it in turn as a principal. And ditto in the UK in the early days. Today that's no longer necessary because we certainly are a well-established brand among the insurance industry and otherwise in the UK. The point being all long term as liquidity grows, as our recognition grows in those subsections of the marketplace, so to speak, we will migrate to a consignment model.

Okay. Great. And I guess one final question, just percentage. As you think about the running drive that what percentage of the cars that you are processing could be put back on the road in these emerging markets? I mean, obviously, some are beyond repair. But when you think about the mix, is it 30% or 40% of cars that you see in theory could be roadworthy again?

Of the cars that are exported, I don't know off-head, Bret, so I don't want to speculate. But it's high. That number doesn't sound unreasonable to me in part because there is a natural filter, as you might imagine, for the kinds of cars that's even worth putting on a boat to get to Eastern Europe period. You will filter out the cars that are pure metal content or a couple of recycled parts and then otherwise dispose of them. They tend to by their nature be the more drivable repairable cars that would ever leave the country in the first place.

Thank you.

Thanks, Bret.

Thank you. Our last question comes from Ryan Brinkman with JPMorgan. Please proceed with your question.

Hi. Thanks for taking my question. I wanted to ask on what you think are the biggest drivers of your non-insurance volume and in particular, the dealer cars, which we know from following KAR Global and ACV are under significant pressure as the chip shortage has weighed on new vehicle inventories and therefore new vehicle sales and used vehicle trade-ins. Given your significant outperformance of the trend in dealer cars, I'm curious if you're doing anything differently or have changed your go-to-market strategy with regard to dealer cars or maybe it's a function of your greater capacity after the land purchases or just what has been the drivers there, and what do you think the longer-term potential for dealer cars might be?

Sure. Nothing radical in terms of our approach. We have a very capable sales team who approaches those dealers and communicates our value proposition to them being our global auction liquidity. Subjecting your car to a global buyer base and finding the best home for that car, whether it's in Ohio, Florida, Poland, or Honduras, I think there is a compelling value proposition there. But there's nothing radical that we had changed in the last quarter or 2 or 3. This is the byproduct of the auction liquidity we've talked about a moment ago as well as our own proactive sales efforts.

Okay. Thanks. And I'm not sure what percent of the non-insurance cars you auction are whole cars as opposed to like non-insurance salvage cars. Maybe you can help us with that. And then of the whole cars, what percent are dealer cars versus from other sources such as off-lease, off rental, and repossession? Because I think these other non-dealer whole car categories are down even more than the dealer cars. So just curious what you're seeing there too and if those other categories are also a potential source of share gain going forward beyond the opportunity in dealer cars.

Yes, those categories are relevant and accessible to us. All cars exist on a spectrum, so distinguishing between salvage and whole cars is not simply a binary decision. We have expanded our business naturally; for instance, we are a clear option for rental cars that are slightly or significantly damaged. We are also a suitable choice for older cars. However, the availability of newer rental cars is significantly reduced due to a shortage of new vehicles, as fleets are retaining their existing cars. Nevertheless, those newer cars are also potential targets for us in the long term.

Thanks. And just lastly, I want to follow up on your comment about higher used car prices being a global phenomenon. I found that quite interesting, curious if you could identify any trends that you're seeing in terms of used vehicle inflation by market? I think it is more severe in the U.S. I don't know if you have any ideas as to why that might be or if that's not what you're seeing. And also, if used vehicle prices aren't inflating more in the U.S. than internationally and the U.S. dollar has somehow outperformed all expectations hanging in there very strong rallying recently, how does that impact affordability overseas for these cars?

I think of vehicles with some notable exceptions. The automotive industry is a reasonably liquid global market, so I don't expect to see 50% inflation for two-year-old Toyota Corollas in one market while experiencing only 8% inflation in others after currency adjustments. We have seen increases in used car values globally in most of the countries where we operate. However, there are factors that can distort these trends, such as tariffs or shipping issues, which can create inconsistencies in comparisons. Overall, I view the vehicle business as fundamentally global. Regarding long-term versus short-term trends, we can certainly be impacted by currency fluctuations in specific auctions or quarters, but the long-term demand for our cars in other countries surpasses that in the U.S., and this trend will outweigh any currency effects over several years.

Very helpful. Thank you.

Thank you. Our last question comes from Chris Bottiglieri with BNP Paribas. Please proceed with your question.

Hey, guys. Thanks for accepting me back in. It's a follow up to Bret's question. Just want to make sure I heard you correctly. You said the vast majority of the CAT cars hadn't been sold yet.

We sold a bunch, but the majority have not yet been sold.

Got you. So are we thinking like it was 1 point or 2 point impact this quarter; is it like 2 to 3, or is it just much more than that? Any sense in the margin where it should be similar headwind, like how do we think about all that?

Yeah. As you know we don't provide any forward guidance. Those cars will sell, they will generate revenue. They do have costs associated with them. They'll have some implications. We'll talk about it next quarter.

It's okay. Thank you.

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

Good. Thanks, everyone, for joining us. We'll talk to you next quarter.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. Have a great rest of your day.