Earnings Call Transcript - CPRT Q3 2020

Operator, Operator

Good day, and welcome to the Copart Conference Call. At this time, I would like to turn the conference over to Jeff Liaw, President of Copart. Please go ahead, sir.

Jeffrey Liaw, President

Thank you, Dan. I'll start today's call with the safe harbor before turning it over to Jay for opening remarks. During today's call, we'll discuss certain non-GAAP measures, which include adjustments to reverse certain discrete income tax items, disposal of nonoperating assets, foreign currency-related gains and losses, certain tax benefits, and payroll taxes related to accounting for stock option exercises. And the effect on common equipment from ASU 2016-09. We've provided a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures on our website under the Investor Relations link and in our press release issued yesterday. We believe these non-GAAP measures, together with our corresponding GAAP measures, are relevant in assessing our business trends and performance. We analyze our results on both GAAP and non-GAAP basis. In addition, our comments today include forward-looking statements within the meaning of applicable securities laws, including forward-looking statements concerning management's current views with respect to trends, opportunities, uncertainties, including with respect to the COVID-19 pandemic. These forward-looking statements involve risks and uncertainties. The current worldwide pandemic could adversely affect our financial results in future periods based on declines in accident volume and other pandemic-related factors, and our business and operating results are generally subject to additional uncertainties such as dependence on our major vehicle sellers, business risks relating to our international expansion strategies, factors affecting average selling prices for auction vehicles, and the additional risks identified under the caption 'Risk Factors' in our annual Form 10-K for the year ended July 31, 2019, and each of our subsequent quarterly reports on our Form 10-Q. Any forward-looking statement is as of today, and Copart has no obligation to update or revise any forward-looking statements. With that, I turn it over to CEO, Jay Adair.

Jayson Adair, CEO

Thanks, Jeff. You're breaking up just a little bit on that. So maybe we should dial in. I'll go ahead and kick off. Yes. Perfect. Again, welcome, everyone. Thanks for coming to the third quarter call. If I were to describe Copart at the beginning of the quarter, I would say, 'full speed ahead.' We were acquiring land, developing that property, winning business, and selling a record number of units company-wide. Fast forward a month later to the beginning of March, and the best way I could describe us would be 'unpredictable but prepared.' Clearly, looking at COVID, it was all day, every day COVID in the first week of March. By the time we got to the second week of March, I had reached out to some friends of mine in the service industry, people that own hair salons and restaurants. The government had not yet told anyone to specifically not go to work or to specifically not open their business, but just the rhetoric coming out of the news and Washington was enough to keep people from going out to dinner and traveling, and so we saw that company-wide. We saw, overnight, our customers couldn't travel. Overnight, we had to cancel conferences and events we had planned. We had, at that point, gone from a position I would say, unpredictable to one where who could anticipate that the government would actually be thinking of shutting down business. My concern was really about the behavior of people. I reached out to some political contacts and quickly came away from those meetings thinking they were going to actually shut business down. The country has been through many experiences over the years, whether it be polio or Spanish flu, and we haven't been in that situation where we think business is going to be shut down. The U.K. shut down much harder than the U.S did. Regardless, this was really unpredictable. But as I said, very prepared. The first thing we did, it felt a little like the '08 financial crisis. We weren't sure if there was going to be liquidity at banks. So the first thing Copart did, not knowing the future, was we pulled down in excess of $800 million on our line. At that point, we had over $1 billion of cash on the balance sheet. After that, we reached out to all of our employees, put together the first of what would be a number of company-wide phone calls with all of our management and all the fields. We recorded the calls to play them back. This was really about setting people's fears aside. The fear of COVID is uncontrollable, but your financial security is something we could control. So we reached out and let everyone know that we had a lot of cash. Can you hear me okay? Okay. We reached out and made clear that Copart had a significant amount of cash on the balance sheet; we could operate for months without picking up or selling any cars. That's going to be a problem for the nation, and I'll get into that later. But the initial messaging to our company was that we are strong, that there will be no furloughs for 90 days, and that this is about continuity. We wanted to give the people at Copart confidence to deliver on that promise. As I said, we started off the quarter full speed ahead, and we didn't want to change from that position. We continued throughout the quarter to acquire and develop land. We believe this is necessary for Copart's long-term success. We are already seeing volume coming back, as Jeff will talk about. That was really Message one. Message two was this new concept of essential business, something none of us have thought about before. If you were to speak to my friends that run businesses, they all feel their businesses are essential to their family and their success. So conceptually, it was hard to understand that the government might be telling businesses not to operate. I argued with some politicians that we should look at quarantining high-risk individuals instead. Throughout this experience, we encountered multiple instances where law enforcement tried to shut down Copart locations, both in the U.S. and internationally. Throughout all those experiences, our team rallied and made strong arguments to keep our operations running. If Copart doesn't pick up vehicles, tow companies get full, leaving cars on the streets. If we don't sell vehicles, we're not going to have parts available for repairs. We made those clear arguments, and I’m happy to say that all of Copart's locations have been mostly open, meaning we were down for a day occasionally but back up quickly. We were able to pick up vehicles and sell off a lot of inventory throughout this process. Overall, it's been a very unpredictable experience. We did not anticipate seeing jobless claims of 36.5 million, and I couldn't be prouder of how the Copart team has handled this pandemic. On that note, I'll turn it over to our President, Jeff Liaw, to give you an update on the quarter.

Jeffrey Liaw, President

Thanks, Jay. We'll start the remarks with a deviation from our usual script and offer some comments on the COVID-19 crisis following Jay's narrative and its effect on our business. Beginning in March 2020, our operations experienced interruptions worldwide, first within our European operations, and as the month and quarter progressed throughout our global operations. In materially all of our jurisdictions, we've been deemed by local authorities as essential businesses because we help ensure the removal of vehicles from repair shops and impound yards, streets, and highways, enabling the critical function of our world's road infrastructure. We’ve taken great care to follow appropriate health and safety protocols in all our facilities. Our facilities remain fully operational as well as the online-only auctions. We've not experienced any disruptions in how we sell cars. Our priorities focus on investing in international member recruitment and retention. We will continue to invest aggressively in capital expenditures in support of capacity. Our financial results were, of course, affected by lower processed vehicle volume due to the pandemic. We received and sold fewer vehicles in the quarter than anticipated due to fewer accidents from people driving less. We have also noted some volatility in selling prices for vehicles at our auctions, partly due to a substantially strengthened U.S. dollar, affecting countries that purchase cars at our auctions. Our auction liquidity has remained high throughout the crisis, and some recently selling prices have actually reached levels higher than pre-crisis. We drew down $825 million under our credit facility as a precautionary measure due to perceived systemic uncertainty. However, we have repaid all outstanding borrowings, and as of April 30, 2020, we had approximately $1.1 billion of available liquidity. We expect the pandemic to have an adverse effect on our revenues in future quarters, but this is not a permanent structural shift.

Robert Labick, Analyst

I wanted to start off where you finished the prepared remarks regarding land. You talked about the potential impacts on miles driven. How does this impact your land strategy right now? And is it easier or harder now to purchase land as a result of the economy?

Jeffrey Liaw, President

In short, those big societal questions will remain to be resolved over the upcoming months, quarters, and years. On land investments, our expectation is that we will use that land to accommodate our customers' growth for the long-term horizon. Our ability to do so has been limited in some cases because of the virus impact. Still, the crisis may unlock opportunities to move forward because land is available at more reasonable values. We have not disrupted or changed our strategic approach to land acquisitions.

Robert Labick, Analyst

You noted total loss frequency seems to have ticked up recently. Can you expand on what value you can add to the carriers in the total loss process?

Jeffrey Liaw, President

We believe that providing more data to our insurance carrier partners early in their loss claims process will help them make more informed decisions, empowering them to total cars more quickly, which saves them on processing burdens, storage costs, and uncertainty. Weamas we have sold tens of millions of vehicles over the years, we can value them efficiently and quickly based on limited data sets.

Robert Labick, Analyst

Can you give us an update on Germany and how has the economic impact over there affected insurance carriers' decisions to convert to the U.S.-style auction?

Jeffrey Liaw, President

In broad strokes, we continue to move forward in Germany. We have invested and continue to invest in land, people, and technologies. Our dialogues with insurance carriers remain productive. This disruption cuts both ways; on one hand, it’s more challenging to meet face-to-face with customers. However, on the other hand, shifts like this may open the mind to considering alternatives. Our conviction that our long-term prosperity in Germany remains strong.

Craig Kennison, Analyst

To what extent did the pandemic reduce revenue in the quarter, knowing that revenue recognition can be something like 50 days after the loss event? Are we meaningfully better as driving activity normalizes?

Jeffrey Liaw, President

The directional impact is difficult to assess accurately due to variances in different locations. Yes, driving activity has seen increases, and we are seeing assignment volumes rebounding from the troughs.

Gary Prestopino, Analyst

You said your noninsurance vehicles were down 13.4%. If you back out the charity cars, what were they?

Jeffrey Liaw, President

If you exclude the charities and wholesale business, our noninsurance business actually grew slightly, just north of 1% for the quarter.

Jayson Adair, CEO

Appreciate everyone coming on the call. We look forward to reporting on Q4 in the fiscal year 2020. Everyone stay safe, and we will talk to you then. Thank you.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.