Copart Inc Q2 FY2026 Earnings Call

Please stand by. Good day, everyone, and welcome to the Copart Incorporated Second Quarter Fiscal 2026 Earnings Call. Just a reminder, today's conference is being recorded. Before turning the call over to management, I will share Copart's Safe Harbor Statement. The company's comments today include forward-looking statements within the meaning of the federal securities laws, including management's current views with respect to trends, opportunities, and uncertainties in the company's industry. These forward-looking statements involve substantial risks and uncertainties. For more detail on the risks associated with the company's business, we refer you to the section titled Risk Factors in the company's annual report on Form 10-K for the year-ended July 31st, 2025, and each of the company's subsequent quarterly reports on Form 10-Q. Any forward-looking statements are made as of today, and the company has no obligation to update or revise any forward-looking statements. I will now turn the call over to the company's CEO, Jeff Liao.

Thank you, Owen. Welcome and thank you for joining our second quarter fiscal year 2026 earnings call. I'll begin with some brief remarks on trends in our insurance business before passing the call to Leah to provide a summary of our financial results. We'll then be happy to take your questions. On our insurance business, for the second quarter, our global insurance units declined 9% or 4%, excluding the effect of catastrophic units from a year ago. Our U.S. insurance units declined 10.7% for the same period, or 4.8% excluding those catastrophic units. The underlying drivers of these changes remain consistent with what we've discussed on our prior calls. First, shifts in policies in force and exposure levels across insurance carriers, who themselves are experiencing differential growth rates. softer overall claims activity driven by a consumer pullback in auto insurance coverage, all partially offset by continuing increases in total loss frequency. On the latter point, total loss frequency continues its inexorable rise, consistent with the long-term historical trends we've observed and discussed at great length. In the United States, total loss frequency was 24.2% in the fourth quarter of calendar year 2025, a slight 10 basis point uptick from a year ago. The year ago period, of course, does include the effects of Hurricanes Helene and Milton. It's notable that total loss frequency has increased over that period nonetheless. Then, when you step back a bit over a multi-year horizon, the upward trajectory becomes clearer still. Total loss frequency in calendar year 2015 was 15.6% in comparison to 23.1% in calendar year 2025. Against that backdrop, our focus remains on delivering superior long-term economic and service outcomes to our insurance clients. First and foremost, we maximize returns for our insurance partners. We believe our auction returns continue to reflect structural advantages of our marketplace, and recent account wins for which we have empirical before and after returns data validates that position. As you know, industry-wide vehicle values have normalized somewhat from the elevated levels we observed during supply chain-constrained period of 2021 and 2022, as evidenced by Mannheim indices and otherwise. We are nevertheless generating record average selling prices for our U.S. insurance consignors. As we discussed at great length on our first quarter call, we attribute this performance to the scale and diversity of our global buyer network, rising international participation, enhanced data-driven merchandising, and the liquidity that comes from consistently finding for each vehicle we auction its highest and best use globally. The critical driver of long-term competitive advantage for Copart is that liquidity. We migrated first to an online-only auction in 2003 and have benefited from an almost two-decade head start in comparison to the rest of the industry. In short, then, we benefit from a growing base of bidders, as evidenced in bidders per auction, bidders per lot, watch list additions per lot, and so on. Our selling customers have also voted with their pocketbooks, entrusting us with more pure sale units than they ever have before, knowing our auction will achieve a full and fair market value. The ancillary benefit from that change and that evolution is that our sellers can themselves reduce their own internal administrative burdens by extension. As evidenced by marketplaces across a multitude of industries, liquidity begets liquidity. The fact that our auctions continue to drive strong returns and price discovery yields further growth by bringing new sellers to our platform and, frankly, by enhancing the the economic attractiveness of the total loss pathway for our insurance clients as well. Our strong returns are literally one of the critical drivers of rising total loss frequency in the industry. To that point, our U.S. insurance ASPs for the quarter increased 6% year-over-year, excluding the effect of the catastrophic events from a year ago. Our average selling prices for the U.S. insurance sector grew by 9% year-over-year, yet again outpacing industry trends. The second important element from our insurance carriers perspective is cycle times, both from assignment to vehicle retrieval and from vehicle retrieval to vehicle sale. These are critical drivers of economic value and policyholder satisfaction for our insurance clients. To deliver excellent pickup times, we operate the largest tow network in the industry by a long shot, a unique combination of third-party subcontractors, owned trucks, and employed drivers, and what we call truck-in-a-box operators, who are independent third-party drivers who leverage Copart's purchasing and financing scale for their vehicles. All of these service providers benefit from Copart's best-in-class route density to optimize performance and Finally, our Title Express offering, the process by which we obtain loan payoff balances and accelerate the retrieval of original titles, whether held by the banks or by individual policyholders, is by a factor of 5x or more the largest such platform in our industry. In many cases, we deliver cycle times 10 days better or more than the insurance clients can deliver on their own because we benefit from unmatched scale and the purpose-built technology platform that that scale enables. On the specific question of claims activities, we talked at length about, on our last two calls, about trends we've observed in the insurance industry, including consumers paring back their coverage by foregoing collision coverage, raising their deductibles, or both. These trends have continued in our most recent quarter. Historical data does indicate over the long haul that these are more cyclical forces than and they are secular. The last point I wanted to make was to shed some light on artificial intelligence and what it means as a critical tool for COPAR specifically. We have deployed artificial intelligence at scale along multiple dimensions across our enterprise, including my own significant personal engagement in Claude Code and other such platforms. We've observed, not surprisingly, an exponential monthly increase in use by our own in-house team of engineers, With approximately 1,000 full-time engineers across North America, Europe, and Asia, we have by a healthy margin the most robust and experienced bench of technology talent in the industry and the tech platform to show for it. Artificial intelligence is turbocharging their productivity day-to-day. We have also deployed artificial intelligence in business analytics, document processing, our call-for-release processes, driver dispatch, and so on and so forth. As one commercial example, two full years ago, we launched a total loss decision tool to the industry, which assists insurance carriers in making expedited total loss decisions with limited information, including, for example, a small sample of photos and otherwise. In every case, as we deploy this critical technology, we are appropriately respectful of the critical privacy and reliability considerations that our sellers will have, as well as the business practices, legal, and regulatory considerations of our insurance business partners specifically. We have already seen AI substantially increase our productivity across functions, and we will continue to deploy it to continue doing so. We also know that artificial intelligence will enhance the value proposition we can deliver to sellers and buyers at our marketplace over the long haul. With that, I'll turn the call over to our CFO, Leah, to discuss our second quarter of financial results.

Thank you, Jeff, and good afternoon to everyone on the call. I'll begin by walking through our financial results for the quarter, beginning with our consolidated performance, followed by a review of our U.S. and international segments. For the second quarter, consolidated revenue declined 3.6 percent year-over-year to $1.12 billion. The prior year included revenue from over 49,000 CAT-related vehicles. Excluding CAT, consolidated revenue increased 1.3 percent. Service revenue declined 4%, and purchase vehicle sales decreased 1.4%. Revenue performance was driven by higher ASPs, which were up 6% on a reported basis and 7.1% excluding CAT, which were offset by lower unit volumes, which declined 8% globally and down 3.6% excluding CAT. Global insurance units declined 9.3% or 4.1% adjusted for CAT, while global non-insurance units decreased 2.7%. Global inventory declined 7% from the prior year, while global assignment volume declined low single digit. Global gross profit decreased 6.2% to $492.8 million. The prior year included profit from the CAT units, and this quarter included a $6.8 million one-time expense accrual related to international VAT. Adjusting for these items, global gross profit increased 0.4%, and global gross margin increased 178 basis points to 45%. Operating income declined 8.8% to $388.7 million, while net income was $350.7 million, down 9.5% from last year. And earnings per diluted share decreased 9.2% to $0.36. Turning to our U.S. segment, total units declined 9.5%, or 4.5%, excluding CAT and direct buy. Insurance volumes decreased 10.7%, or 4.8%, excluding CAT, which are consistent with the claims frequency trends Jeff described a few moments ago. Dealer services unit growth was 5%, while commercial consignment units, which are marketed through our blue car channel, declined 11.8%. reflecting higher repair activity among our rental customers, while fleet and bank and finance seller volume continues to grow at a healthy double-digit pace. In addition, as we continue to shift lower-value units to our direct-by channel, reported U.S. purchase units declined 23.6%, or just 8% on a normalized basis. As of the end of the quarter, our U.S. inventory had declined 8.1% from the year-ago period. During the quarter, U.S. assignments declined low single digit from the prior year. Purple Wave's gross transaction value growth of more than 17% over the last 12 months continues to significantly outperform the broader industry and reflects our strong performance in our expansion markets as well as growth in our enterprise accounts. U.S. total revenue declined 5.5%, but was flat excluding prior year CAD events. Fee revenue declined 5.6% and was also flat, excluding CAT. As lower unit volume was offset by an increase in revenue per unit. U.S. insurance ASPs increased 6%, or 9%, excluding CAT, and non-insurance ASPs increased 2%. U.S. gross profit decreased 7.2% to $430 million, or 1.6%, excluding CAT, and gross margin was 46.6%. Operating income was $341.5 million, down 9.2% year-over-year, or 2.3%, excluding CAD. And U.S. segment operating margin was 37.1%. Turning to our international segment, international units declined less than 1% or grew 1% excluding prior year CAD events. Insurance units decreased 2.6%, or 1%, excluding CAD. and international non-insurance units increased 9.1%. We continue to see strong non-insurance growth across our diversified international footprint, including in the U.K. and Canada. Revenue increased 6.1%, or 7.7%, excluding CAT, to $200 million, including a $13.4 million favorable FX impact. Service revenues increased 7.7%, or 9.4%, excluding CAT, which was driven by a 7.6% increase in fee revenue per unit. International insurance ASPs rose 9%. Gross profit grew 0.9% and operating income was $47.2 million, or a 23.6% operating margin. Finally, turning to our capital structure and liquidity, Copart remains in an exceptionally strong position. We ended the quarter with liquidity of approximately $6.4 billion, including cash and cash equivalents at $5.1 billion and no debt. We continue to generate robust free cash flow, which has increased 58% year-to-date. This is supported by disciplined capital allocation into assets, which position us to efficiently support our growth to serve both insurance and non-insurance clients while also delivering strong operational efficiency. In addition, during the second quarter, we began to repurchase shares of our common stock through open market purchases and have subsequently repurchased shares under a 10B-5-1 plan through the month of February. Fiscal year to date, we have repurchased over 13 million shares for an aggregate amount of over 500 million. And with that, I'd like to thank you for joining the call, and we'll open it up for questions.

Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and the confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. And our first question comes from a line of Bob Labick with CJF Securities. Please proceed.

Good afternoon. Thanks for taking our questions. Hey, Bob. Hi. So, you know, Jeff, you talked a little bit about some of the macro factors, you know, claims frequency and, you know, lower earned car miles. We talked about last call and stuff, you know, trending similarly to prior calls. What are the things you guys are watching to see changes that will change this trend line and get the, you know, industry volumes, you know, back to growth going forward? I know, obviously, total loss frequency will impact that as well, but excluding total loss frequency, What are the other kind of macro factors that we can watch and you're watching to, you know, get industry volumes back to growth?

Yeah, fair question, Bob. I think there is, as you know, there's cyclicality in the auto insurance of the industry.

Great. And then just one more for me, just changing gears a little. SG&A has, you know, been back to, you know, getting generally operating leverage or been flat after, you know, a period of time where you had growth for multiple reasons. One of them was the Salesforce buildup. So I was wondering maybe if you could just give us a sense of, you know, what you've learned from that Salesforce, what you've learned from the buildup, what are the expected returns and outcomes from the larger Salesforce, and how have they been, you know, what are the successes and failures so far from that?

Yeah, a fair question, Bob, and I think it would be probably oversimplifying the picture.

Okay, great. Thanks so much.

The next question comes from line of Craig Tennyson with Baird. Please proceed.

Craig, good afternoon. Thank you for taking my question as well. I wanted to ask about your land capacity needs. If you look at or project your volume for the next one, five, and 10-year period and take into account faster cycle times that you've experienced, but also whatever market chair dynamics are out there. How would you frame your need to invest in additional land capacity?

Craig, I'll take that. Today I think we are in an incredibly strong position relative to where we were say a decade or even longer ago. That has been a result of very disciplined and focused investment in the magnitude of several hundreds of millions of dollars per year. But we are still focused on where we want to be positioned 10 years from now, and that ultimately may require additional investments in land. Certainly, faster cycle times will allow us to use our land on a more efficient basis, and we take all of that into consideration as we look at individual assets, as Jeff said, even on the investment front, whether it's G&A or an incremental land parcel, We look at it on a specific investment basis to ensure that it's adding capacity and capabilities for Copart to serve our customers in the future. So ultimately, we'll continue to use that same discipline and that same approach. I certainly think that relative to where we were, like I said at the outset 10 years ago, we're in a much better position from a land ownership perspective and capacity, but we do anticipate continuing to invest in our portfolio on a disciplined basis is to ensure that in a decade from now, we will be well positioned as well.

Yeah, thanks, Leah.

Quick, I've added to that point.

Yeah, thank you both. And then, Jeff, just to follow up on your AI commentary, certainly it's been a big topic, especially in the last week. But could you maybe share with us where you see any disruption risk to what Copart does and where you feel well defended by your moat as it stands today? Excellent. Thank you.

The next question comes from the line of Brett Jordan with Jeffries. Please proceed.

Hey, good afternoon, guys. I'm going to question about market share dynamics. Do you think it's becoming more price competitive as the other player in the space doing, I guess, either rebating or discounting or pricing delta to you that would explain what seems to be a differential in unit growth? Obviously, you've got the title transfer product and the cycle times and the foreign buyer base that would suggest that Copart might be a better outcome. But I guess how do we think about the differences that we're seeing in units recently?

The unit growth phenomenon I think is described is explained in parts.

Great. Thank you. And could you – I might have missed this. Did you give us an update on how CDS has been doing?

Yeah, CDS had a nice quarter. They were up 5% year-over-year in terms of unit volume.

Okay. Is that growth with various dealers, or is that comp store, is that comp dealer growth? Are you expanding it to a broader user base, or are you growing within the current user base?

We're always growing the user base.

Thank you.

The next question comes from the line of John Healy with North Coast Research. Please proceed.

John, you might be on mute.

Sorry about that. I wanted to spend a little bit of time just on accident frequency. You know, for the last three or four quarters, I feel like it's been a hot-button debate. And knowing Leah and Jeff, I'm sure you guys don't stop thinking and working on this viewpoint. Would love to spend a little bit of time there. Just, you know, any updated thoughts about ADAS, view of kind of the algorithm that investors might be able to use to think about the nuances of growth. Obviously, the volume numbers are down big, but, you know, there's some explainable reasons in terms of policies in force that you noted. But we're just hoping we can try to get some comfort with thinking about that overarching volume number for the industry, you know, put aside whatever you or I are doing. Just what does this business really grow, do you think, in the next three to five years? Thanks, Jeff. And just on capital allocation now, but is this the right tool for you guys? Do you see yourself just using open market purchases, or do you look to kind of, you know, evaluate maybe something more formal or, you know, conceptual in terms of, you know, an accelerated program or something like that, or do you think this is just the right approach for right now?

Next question comes from the line of Jeff Lick with Stevens, Inc. Please proceed. Good afternoon.

Thanks for taking my question. And, you know, Jeff, I know you're always thinking about long-term stuff. I was wondering if we just think about the next, you know, year that's in front of us, year or two, you know, things that are changing. Obviously, you've got an insurance cycle. You know, rates are coming down and marketing dollars going up, so they'll be more focused on profitability and lease returns that will be ramping up. You know, potentially a lot of those lease returns will be EVs. And then, obviously, we've talked about, you know, the interesting kind of transition where you'll have some autonomous in the hands of, you know, a select few. I'm just curious if, you know, any of these things you view affecting your business in some kind of, you know, nonlinear way. And then just as a follow-up, I'm just curious, you know, since you guys did make the decision to buy back shares, you know, and you're very deliberate in how you do everything, why did you view now is the time to do it? And then just one last quick follow-up. As you think about units inflecting positive, you know, is there any particular catalyst that you look for, or will it just be, you know, the law of, you know, negative numbers getting less negative? You know, is there anything that you're looking for that says, hey, this might drive an inflection back to positive unit growth? Thank you very much for taking my question, and best of luck next quarter.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. And the next question comes from Lauren of Josh Batwa with J.P. Morgan. Please proceed.

Hi, good evening, and thanks for taking my questions. Just wanted to start with a question on the headwind from rising mix of uninsured customers. Jeff, as you've noted previously, these vehicles are still getting into accidents, but may be flowing through alternate channels. With Copart having de-emphasized the low-value units from some of these channels, has this led to an additional pressure on Copart's overall volume growth relative to the broader salvage industry, including the non-insurance channel? Thanks for another follow-up.

Josh, I'll take that. I don't think so. Most of the lower-value units are units that are less than $1,000 in pre-accident value. So they are very old, non-drivable. what the industry would consider junk units. I think that the units that we are seeing flow through on the uninsured or underinsured side are likely ending up in impound yards. They're likely ending up retained with the driver, but they then need to find a way to either get it repaired or disposed of the vehicle. So ultimately some of those vehicles end up at our cash for cars business. Some of them may end up, you know, being auctioned or sold through an impound yard. So there are other avenues in which those vehicles could be disposed of. It just so happens that it's a highly fragmented market, given that it's the consumer's decision to determine where that ultimate vehicle goes if it's not going through the insurance channel.

Understood. That's helpful. And then I just appreciate your perspective on the heavy equipment expansion you know how is this initiative performed relative to your internal expectations a couple years ago when purple wave was integrated while the industry cycle has been challenging you know curious like what areas do you see as a room for improvement and given the significant consolidation opportunity in the sector what has kept co-power on the sidelines from pursuing more and many activity over the past couple of years understood that's very helpful color and if i could sneak one more in here. Could you double click on the sequential moderation and service revenue gross margin in the quarter and whether there were any one-time factors that may have impacted it during the quarter?

Sure, Josh. I had mentioned in my prepared remarks that there was a $6.8 million one-time tax accrual in the international segment. If you look at the ex-cap margins, I think you'll see that year over year on a gross margin basis, we perform quite it will. And then on the international side, there was that one-time item.

Thank you.

There are no further questions at this time. I'd like to turn the call back to Jeff Lea for closing remarks.

Yes, and we'll talk to you next quarter.

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