Good day everyone, and welcome to the Copart Incorporated First Quarter Fiscal 2023 Earnings Call. Just a reminder, today's conference is being recorded. For opening remarks, I would like to turn the call over to Gavin Renfrew, Vice President of Global Accounting of Copart Incorporated. Please go ahead, sir.

Thank you, and good morning. During today's call, we'll discuss certain non-GAAP measures, including adjustments to income tax benefits related to stock-based compensation. 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 the 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. These 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 31, 2022, 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 the call over to our co-CEO, Jeff Liaw.

Thank you, Gavin. Good morning and welcome everybody to our first quarter call. We're pleased to report strong results for the first quarter of fiscal 2023 in the context of a complex global economic backdrop and a significant weather event we'll describe in more detail today. Many of the unusual conditions that we've described on our previous calls persist today, though with some apparent stabilization, including new vehicle shipment shortages, high used car prices in a broadly inflationary environment. Gavin and I will provide our customary data points throughout our call on these themes and others, but I wanted to start by highlighting our recently published inaugural ESG report. If you haven't read it already, I'd encourage you to do so. In that report, we address the topic of sustainability across a number of different dimensions, environmental sustainability, global economic empowerment, enterprise sustainability, and community sustainability and recovery. Events of the past few weeks have in particular underscored our commitment to the fourth of these pillars. But I'll take a moment to briefly summarize the first three. On the first of these subjects, environmental sustainability. Copart is a keystone enabler of the circular economy. Our business enables the reuse and recycling of vehicles, their components and materials substantially reducing what would otherwise be the carbon footprint of the transportation sector. In fact, upon tabulating our Scope 1 and Scope 2 emissions, as well as the carbon emissions that are averted by our marketplace, we estimate that we save a hundred times as much in carbon dioxide equivalents as we emit in our business. On the second aspect of sustainability, global economic empowerment. Our business is instrumental in improving access to mobility for residents of developing economies. In fiscal 2022 alone, we sold vehicles to members in 160 countries with approximately one quarter of our volume purchased by members in emerging economies as defined by the United Nations. While those of us on this phone call today, like we take physical mobility for granted, it is undoubtedly a critical enabler for access to education, healthcare, economic advancement, and leisure worldwide. And we're proud to play an important role in increasing its availability for people around the world. On the subject of enterprise sustainability, we make strategic decisions with a 20-year horizon. As a result, we own the vast majority of our real estate, ensuring its availability for our business and our customers for generations. We maintain a strong balance sheet to ensure that we have the flexibility to invest in our business and our customers' success regardless of economic conditions at the time. And finally, we are committed to our role in ensuring the sustainability and health of the communities we serve, most notably in our rapid response to major weather events. In late September of this year, Hurricane Ian made landfall in Florida. On a unit volume basis, Ian will be the single largest storm event in Copart's 40-year history. This category for storm included heavy rainfall and winds in excess of 150 miles per hour and cut a path through the heart of the state. Ian proved to be a storm of historic proportions. The robustness of our response was the fruit of seeds we've been planting for years. As you've heard us articulate at length on prior calls in anticipation of increasing storm frequency and severity, we've made proactive investments in land, technology, heavy equipment, trucks, drivers, and personnel in the form of our dedicated catastrophe response team. In this instance, of course, our investments paid off perhaps in economic efficiency, yes, but most importantly, in substantially enhancing the service we can provide our clients and their customers in their most acute times of need. We deployed more than 800 Copart employees from around the country to the affected areas, many while the hurricane still lingered over the state. In just the first 10 days of the event, we retrieved over 15,000 units and unprecedented efforts enabled both by our third-party subhauler network, as well as our company-owned tow trucks, transporters, loaders, and Copart employed drivers. From the first day of this event, we leveraged nearly 350 acres of Copart-owned dedicated catastrophe-only storage capacity within the affected region, allowing us to quickly receive an inventory of nearly 70,000 units through the end of the quarter. In turn, this expedited the settlement process for policyholders who are eager for economic relief. To put our catastrophic storage capacity in context, the 1,500 acres of land that we own for the purpose of catastrophic storage alone represents as much land as another major provider of insurance auction services owns in total. As we've noted following major storms in the past, we view our pre-storm preparations and our robust response as investments in the strong and durable partnerships we enjoy with our insurance sellers. We tend to experience operating losses in major weather events. Hurricane Ian in the first quarter is no exception with $25 million in extra costs incurred by our business, offset by $9 million of revenue in the period. Our elevated catastrophe-related expenses include premiums paid for towing and transport, logistics, travel and lodging, and increased overtime and labor expenses for our team. As such, in the quarter, the impact of Hurricane Ian was approximately 200 to 250 basis points of gross and operating margin rate compression. Finally, in November we completed a two-for-one stock split, our sixth such split since 1999. We view this split as an opportunity to improve the liquidity of our stock, making it more accessible to our employees and retail investors. And with that, I'll turn it over to our VP of Global Accounting, Gavin Renfrew, to walk through some key operating and industry statistics and our fourth quarter financial results.

Thank you, Jeff and good morning. I will start with the key statistics that we provide each quarter. Global unit sales increased 1.9% year-on-year for the quarter with US increase of 1.3% and international increase of 5.5%. Excluding catastrophic events from both periods last year and this year for the first quarter, US unit sales grew by 1.9%. Insurance business grew relative to one and two-year comparisons due to share gains and the continued recovery in driving activity and accident frequency and severity. Notably, record high used vehicle prices have for the past several quarters negatively impacted total loss frequency and have tempered overall insurance volume growth. For the first time in nearly two years, we've observed a small sequential increase in total loss frequency of 20 basis points, while auction returns remain near all-time highs and the ASPs continue to outpace the strong used car price environments on a percentage basis. Elevated used vehicle values and therefore, insurance ACVs continue to reduce total loss volume relative to what it would otherwise be. Though up slightly sequentially, total loss frequency for the third calendar quarter in 2022 was down year-on-year, falling by 220 basis points versus the same period in 2021. If vehicles were totaled at the same rate as in prior years, we would have observed industry total loss volumes 10% to 15% higher. While total loss frequency has declined over the course of the last two years, we still believe this to be a relatively short-term scenario. We appear to be observing some stabilization in total loss frequency based on the past two sequential quarters. Regardless, it is our view that the market will inevitably revert to its 40-year historical norm of steadily rising total loss frequency. Accident severity, repair complexity, duration repair labor costs and rental car costs will contribute to said reversion boys by Copart's best-in-class auction liquidity and global buyer base as we continue with significant resource investment into member recruitment, registration, retention, et cetera. While supply chain bottlenecks persist today, we do anticipate that the eventual unwinding of these conditions will lead to a moderation of used vehicle values, ultimately trending back to lower levels in the future. We appear to be experiencing a moderation of these forces now with Manheim's used vehicle index now at its lowest points since August, 2021. A decline in wholesale auction values may cause a reduction in our ASPs, but would almost certainly coincide with offsetting volume increases as well. We anticipate that lower ACVs and increased vehicle availability will inevitably reverse the observed short-term total loss frequency and volume trends previously noted. While overall, US non-insurance unit volume is relatively flat up approximately 0.2% in the quarter, excluding lower value cards from sources such as wholesalers and charities, we believe we are substantially outperforming other wholesale auction channels, both physical and digital. Next onto our financial results. For the first quarter, global revenue increased $83.2 million or 10.3%, including a $23.6 million headwind due to currency. Global service revenue increased $59 million or 8.8% for the first quarter, primarily due to higher average selling prices and increased volume. US service revenue grew 10.3% for the quarter, and international experienced a decrease of 2.4%. We saw continued strength in ASPs, which grew 5% year-over-year for the quarter with US ASPs up 6.4%. The Manheim indexes declined from the January record levels, but remain historically elevated ending October at 200, a decrease of 10.6% year-over-year. Purchased vehicles continued to comprise an increasing percentage of our overall revenue mix, driven by both strong used car values and growth in volume, particularly in our cash for cars business in the US and from international expansion. Purchased vehicle sales for the first quarter increased $24.2 million or 17%, with US purchased vehicle revenue for the quarter up 10.8% and international up by 27% for the quarter. Purchased vehicle cost of sales grew $24.7 million or 19.5% in the first quarter. As a result, purchased vehicle gross profits decreased slightly by $0.5 million or 3.1% during the quarter. Global gross profits in the first quarter decreased by $15.5 million or 4%, and our gross margin percentage decreased by approximately 600 basis points to 41.4%. US margins decreased from 50.3% to 44.1% and international margins decreased from 33.1% to 27.2%. The year-over-year margin decline was primarily attributable to two factors. 200 to 250 basis points of the quarter decline was due to elevated Hurricane Ian costs being directly expensed in the quarter. The balance of our margin contraction is attributable to a mixed shift to purchase vehicles. A modest reduction in purchase vehicle margins and cost inflation in both towing and labor offset, partially by higher revenue per unit and volume growth. However, we believe we can continue to increase margin and returns on capital over time as we benefit from scale and find further operational efficiencies through technology and innovation. I will now move to a discussion of G&A expenditures, excluding stock compensation and depreciation expenses. G&A spend in the quarter increased $3.4 million or 8.3%. While G&A can be volatile from period to period over the longer term, we anticipate G&A to decline as a percentage of revenue as we grow our business and create additional leverage. Our GAAP operating income decreased by 5.6% from $330.1 million to $311.5 million for the first quarter, including a $4.1 million headwind due to currency. Excluding catastrophic events from both periods, operating income decreased by 3.3%. First quarter income tax expense was $67.3 million, at a 21.5% effective tax rate. Adjusting for the tax benefits associated with the exercise of employee stock options on a non-GAAP basis, our effective tax rate would have been 21.7%. First quarter GAAP net income decreased 5.6% from $260.4 million last year to $245.8 million this year. Adjusted to remove the items detailed in our pro forma reconciliation included in our press release, non-GAAP net income decreased 4.7% from $257.4 million last year to $245.2 million in the first quarter of FY 2023. Our global inventory at the end of October decreased 3.6% from last year and was flat when excluding low-value units like wholesalers and charities. That is comprised of a year-over-year decrease of 6.3% for US inventory, down 2.6% when excluding low-value units and an increase of 17.1% for international inventory. For the first time in recent history, the number of total losses as a percentage of overall accidents has been declining. As a result, our inventory levels are lower than they were a year ago, despite incremental inventory attributable to unsold vehicles picked up during the quarter from Hurricane Ian. Now to briefly update our liquidity and cash flow highlights. As of October 31st, 2022, we had $2.8 billion of liquidity comprised of $1.5 billion in cash and cash equivalents and an undrawn revolving credit facility with capacity of over $1.2 billion. Operating cash flow for the quarter decreased by $1 million year-over-year to $311.6 million driven by lower earnings due to the additional expenses incurred in the quarter from Hurricane Ian. We invested $152.7 million in capital expenditures in the quarter with over 80% of this amount attributable to capacity expansion as we are continuing to prioritize investments in physical infrastructure. Despite unusual near-term forces that have suppressed unit sales relative to where they would have been, we continue to invest in capacity with the conviction that we and our customers will need it. That concludes our prepared remarks, and we are happy to take some questions.

Thank you. We will now start a question-and-answer session. Our first question is from Bob Labick with CJS Securities. Please go ahead with your questions.

Good morning and congratulations on strong operating performance.

Thanks Bob. Good morning.

I wanted to start with two quick questions related to the hurricane and I appreciate all the work that has been done around it. I'm trying to understand the sequential costs, particularly the unit costs excluding the hurricane impact for the quarter. How are you seeing changes in towing, fuel, labor, and so on? It seems like those costs have been elevated and are rising. Has it started to level off? Is it decreasing? Is it still increasing? I'm just trying to understand the trends in the cost to process a unit in light of the hurricane's impact.

Yeah. Excluding the hurricane, Bob, I think in broad terms, certainly costs are elevated relative to a year ago. I think your question specifically on sequential trends, I think we're seeing stabilization in many cases. Of course, gasoline is an easily trackable proxy for some of those underlying costs. Diesel prices remain elevated, certainly relative to conventional gasoline. But broadly speaking, we've seen stabilization in those underlying variables.

Okay, great. You mentioned some statistics, and we understand that you've invested hundreds of millions of dollars in additional land over the past few years, much of which was for dealing with catastrophes. Considering the increased severity of hurricane forecasts, how do you assess your current capacity? Are there plans to acquire more land, or what is your position on this?

Yes. So, we expect to continue investing in land very substantially, both for day-to-day operations as well as for catastrophic readiness. You've seen that elevated investment profile since the spring of 2016. And we continue to aggressively pursue land to support our core business as well as to address the spikes that, of course, occur in the context of catastrophic events.

Okay. Great. One more for me, I'll jump back in queue.

Yeah.

Just switching over to Germany. Could you just give us an update on volumes, quantitatively are they growing? When did they become meaningful? And then, also related to Germany, is that site integrated into the kind of US website? Meaning can international buyers that buy on the US site also seamlessly bid on cars in Germany and can alerts on cars they may like? Or is that potentially a future opportunity?

Got it. Fair question and I'll take a step back and generalize more broadly in Western Europe period. So, Germany and Spain together, and I'll leave Finland aside, but Finland has an insurance and total loss model that looks a lot more like the US and Canada and the UK. So a gross settlement model. In Spain and in Germany, we continue to grow our volume with insurance sellers very significantly on a year-over-year basis, and certainly on a multi-year basis as well. So, the progress is strong. We have traction with a number of different insurance carriers. As we've noted on prior calls, the ultimate objective is to secure nationwide agreements and to default to a gross settlement model across all policyholders in those markets. We continue to advance the ball in that regard. On your question of member crossover and such, we do have crossover marketing efforts. It is perhaps some day an opportunity to consolidate the entire auction platform into one today. The German auctions and even, frankly, yard-by-yard auctions in the US are still distinct online events. The member bases have overlapped. In some cases, meaningful overlap. There are separate registration and participation channels.

Okay. Got it. Thank you very much.

Thanks Bob.

Our next question comes from the line of Craig Kennison with Baird. Please proceed with your question.

Hey, good morning and thank you for taking my questions as well. I wanted to follow up on Hurricane Ian. I believe you mentioned 70,000 assignments through the end of October. Do you think that will be the total, or could there be more on the way?

More, but modestly so.

Got it. And then I know in the past, sometimes you take losses overall on catastrophes when they're particularly expensive, like something like this. Is that the expectation this time around? Or could you see kind of revenue offset costs in the coming quarters such that this would be closer to breakeven?

A fair question, Craig. I think, in the aggregate, so if you were to take a truly bird's eye view of the catastrophic events, certainly taking into account the many millions, likely hundreds of millions of capital we've deployed to build the catastrophic facilities to buy the equipment, the trucks, the transporters, the loaders and to train and employ the people, and the technology, specifically for catastrophes that we've also developed as well. In the aggregate, by the time you consider those costs, the catastrophic events are surely not a profitable endeavor for us, but a necessary one. We don't root for catastrophic weather events, but we do believe that they draw the contrast still greater between us and others in the industry in terms of our capabilities in those times of stress. So, in the aggregates, no, they are not profitable events for us.

Thank you. We are trying to understand the impact of average selling prices as they relate to the Manheim Index and used car values. Can you share any data regarding average selling prices for November to help us gauge the potential year-over-year declines in relation to your model?

You'll find we don't, as you know, comment intra-quarter about the current quarter. But I would say that through the end of the first quarter, ASPs were still up in a somewhat meaningful year-over-year. A 5% increase, if I have the number correct off the top of my head here. So, ASPs were rising year-over-year. Manheim certainly down over that same period, so we are correlated. There are some leads and lags and so you'll never see a perfect regression there between us and other such third-party variables. But the market, broadly speaking, I think we still observe vehicle shortages. If you wanted to go buy a new car today, you might not have your pick or if you did, it might not come for two or three or four months down the road.

Thanks. And lastly, I wanted to ask about Europe and your appetite for land there. We've certainly got a strong US dollar today and you have an urgent need for land over the course of decades, I suppose. Would you be inclined to be more aggressive in Europe to acquire that land now that you've got momentum in business and you've got maybe an advantage on currency?

We have a strong interest in making significant land investments to support both our established and growing businesses in Europe. While the currency situation provides a slight advantage in the short term, it does not significantly impact our strategy. We are investing in land with a long-term perspective of 10, 20, and even 50 years. Therefore, fluctuations of 5%, 10%, 20%, or even 30% do not greatly influence our decision-making process.

Got it. Thank you.

Thanks Craig.

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

This is Patrick on for Bret Jordan and thanks for taking our questions. If you could talk a little bit more about recent volume trends. Are there any signs of volumes picking up as volumes drop or any signs of recent market share gains?

On the volume question, and there are many different ways to slice this question into its component parts with our insurance sellers. As Gavin noted, in some meaningful detail, we are observing a literally once in a lifetime suppression of total loss frequency, which we believe will eventually abate and reverse very meaningfully. That, I think we would say, has stabilized. Driving activity has picked up. Depending on the country you're talking about, it's picked up a lot in Europe where the driving was more suppressed a year ago than it has been in the US. So driving frequency, times, accident frequency times, total loss frequency is plus or minus the volume equation plus the market share question that you posted a moment ago. So, in the aggregate, I think we're seeing stabilization on total loss frequency but still a year-over-year decline, and we're seeing an increase in driving frequency and accident certainly are picking up as well. On the question of market share, we aren't in a position. In general, we don't comment on individual accounts. If you look at the long-term arc of history, I'd say we generally speaking have earned more market share over the years both in insurance and outside of insurance. So, in our non-insurance businesses in which we serve automotive dealers, rental car fleets, financial institutions, among others, we believe we continue to gain share relative to other providers in that space.

Got it. Thank you. And then how do you guys see the competitive landscape changing with the RBA deal with IIA? Are there any synergies that you guys see?

I would like to make a general observation. We take our competition seriously and consider our competitors broadly. In earning the right to sell vehicles for our clients, we compete against all possible outlets for those vehicles, including hand selling, retail, repairs, and consignment through other wholesale auction platforms. We are continually investing and innovating to achieve the highest returns, allowing us to win more direct comparisons with alternatives and exceed the standards we set for ourselves. Regarding your question about another auction service provider in the insurance sector, we believe that a change in corporate ownership does not significantly impact how we compete in the market. Whether they are backed by private equity, an activist hedge fund, or any corporate entity, we believe that our stability as a founder-led independent company is a significant competitive advantage. We manage our business with a long-term investment outlook, which contributes to the advantages of owning our land, our technology platform, and building a global buyer base alongside our team.

Got it. That’s helpful.

The next question is from an analyst with JPMorgan. Please go ahead with your question.

Hi, everyone. I have a question regarding how you are addressing margin compression in light of decreasing used vehicle values and commodities. Is there anything you can adjust, such as the retention rate, that could impact this?

What rate?

Your retention rate or anything you guys can do to like offset margin compression?

Do you mind just rephrasing that? I'm not sure I understand your question.

Given that used vehicle values are decreasing alongside commodities, is there anything you can do to adjust your retention rate to mitigate that? How are you planning to address this moving forward?

Retention rate? I understand. As used vehicle prices decrease, we will likely see a decline in the selling prices of our cars, which would reduce our margins. However, we anticipate an increase in volume since the current high used vehicle prices are limiting our total loss volume. The added volume in our system will enhance our margins. Additionally, we have various strategic options available to us, including further investment in technology and automation. While we do not disclose specifics about our fee schedules or long-term management, it is clear that our business provides significant value to our members and sellers, allowing us to achieve a strong return on capital.

Yeah. Gotcha. And are there any data points that you guys are looking at that we should keep track of in terms of this that would help out?

In this, being used car prices?

Yeah. So, anything you guys are like particularly keeping an eye on that we should also look at?

Probably nothing insightful. So, we track the Manheim used vehicle index and ADA. We track anecdotally what's happening in the auction space, broadly auto retailers and the like. So, nothing that's not broadly available in what we track.

Gotcha. Helpful. Thank you.

Thank you. The next question is from the line of Ali Faghri with Guggenheim Partners. Please proceed with your question.

Hi. Good morning. Thanks for taking my question. Was there anything different than your cat response that allows you to process these cars quicker than historically? I think with the storm in mid to late September, I guess I was surprised to see that you were already selling through this inventory in October. I think historically, it's taken at least 60 days, especially for cat events.

I think it's an evolution of our capabilities, but we've invested over the years. But certainly, we have in recognition of rising frequency severity of these storms, have invested in that technology. We haven't gotten to the details of what that means. But in the technology platform, in processing titles, in receiving cars, in helping the insurance companies by absorbing much of the physical work that they used to do, there are many different individual levers pulled to collectively expedite the process on behalf of our sellers.

Okay. Great. And then just a follow-up here on total loss rates. They were up modestly sequentially. Do you think we've hit the trough there on total loss rates, and we should now see them start to climb higher from here?

The forecast is challenging, especially regarding used vehicle prices. We are confident that repair costs will continue to rise due to the increasing complexity of vehicles. For instance, a Ford Focus now has around 300 microprocessors, while a Ford electric vehicle can have up to 3,000. This complexity trend will persist in the coming years and decades. We understand that repair costs will go up, as will the international demand for our vehicles. The short-term uncertainty lies in the movement of used car prices, which are somewhat softening. However, predicting their trajectory over the next six to twelve months is more difficult for us.

Great. Thanks Jeff.

Thanks Ali.

Thank you. At this time, we've reached the end of our question-and-answer session. I'll hand the conference back to Jeff Liaw for closing remarks.

Great. Thanks everyone, and we'll talk to you next quarter. Have a good day.

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