Q2 2020 Earnings Call
[music].
Please standby.
Good day.
Everyone and welcome to the Copart Inc. second quarter fiscal 2020 earnings call. Just a reminder, today's conference is being recorded.
For opening remarks, and introductions I would like to determine the coal over to Mr., Jay 80, or Chief Executive Officer of Copart Inc. Please go ahead Sir.
Thank you Samantha.
Good morning, everyone and it's a pleasure to welcome you all to be second quarter call them to turn it over to Jeff We all our president for Safe Harbor and nimble lot.
Well give you I'll give you a quick update on the company and he will give an update on financial performance so with that Jeff.
[laughter] during today's call will discuss certain non-GAAP measures, which include adjustments to reverse the but certain discrete income tax items disposal nonoperating assets foreign currency related gains certain income tax benefits in payroll taxes related to account for stock option exercises and the effect on comedy equivalent shares from is your 2016.
Yes.
We provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our website under the Investor Relations and in our press release issued yesterday. We believe these non-GAAP measures together with a corresponding GAAP measures are relevant that assessing our business trends and performance, we analyze our results on both GAAP and non-GAAP basis. In addition, this call me.
Contain forward looking statements, which which are subject to risks and uncertainties that could cause actual results to differ materially from those project or implied by our statements. We do not undertakes to update any forward looking statements for a more complete discussion of the risks that could affect our business. Please review the management's discussion and analysis portions and our related.
Periodic reports filed with the FCC.
Jay.
Thank you Jeff.
For starters I'd like to state that we have never been better prepared for the future.
So we think about capacity, we think about it globally and whether it's in Europe, where the U.S.
We have more capacity today, we have ever had this is an effort that has been ongoing for the last five years to build out of network of locations.
That are closer to the car and they have more room. So that we can continue to handle vehicles that come in due to continued total loss rates.
Again due to technology in cars and due to market share gains that we've seen over the last five years, we expect the both those trends will continue.
And I'm happy to say, we had the capacity to handle that when it comes to catastrophes, whether they be small catastrophes or superstorm events.
No batch for the way that Copart handles a cat.
Our preparedness has never been better through equipment that we utilized in the field through locations, where we have large.
Facilities that can store 2030, 40000 vehicles in a super storm events in the process. We've developed over the last five years and to the technology that we deploy.
It is not an understatement to say that that our position in the industry is unmatched when it comes to those events.
Our people are also the best in the industry, whether it'd be through our tenure as the company is has a cheap. So many years of success now whether it'd be the training or the talent their ability is unmatched and I put a huge huge.
I'm not credit on our success over the last five years and wins due to the people that run this company.
Our technology continues to lead the industry, we've been a leader in the technology space now for 20 years.
Moving completely online back in 2317 years ago.
And I would put our technology came up against any of the tech tightness in Silicon Valley, what we have developed over the years and what we are developing currently and that we'll be rolling out in the years to calm we'll continue to keep the gap between us and our competitors and offer a service offering to our customers that is unmatched.
[noise] Copart is a technology company, but were also a land holding company with over 10000 acres over 200 facilities and we're also logistics company.
Picking up over 250000 vehicles a month.
And we do that from assignment to pick up in less than a day.
There are people our process and our technology will continue to win.
With that it's my pleasure turn it over to our President Jeff We all for an update on the financials and the performance of the company Jeff.
Thank you Jay.
As Jay noted we are pleased with our results for the second quarter <unk> record second quarter for Copart revenue gross profit and operating income.
We experienced global revenue growth of 18.6% or 90 million to change over last year. Our us revenue grew at 23.8% International revenue nominally declined to 2.6% year over year, but thats, primarily due to converting a substantial UK customer purchase station purchased space sales comp.
Tracks to a fee based arrangement instead.
Our global service revenue grew 93.2 million or 22.4% year over year, which along with units sold is a more accurate measure of the under our underlying activity in our business as we've noted on prior calls vehicle sales and costs are disproportionately visible in Paris.
And to their economic relevance to our business.
Purchased vehicles have declined 3 million year over year for the second quarter or 4.4%.
Due primarily again to the ship UK customer purchase arrangements to a fee based consignments engagement.
Our global unit sales grew by 13.7% year over year with U.S. units growing 15.3% international units growing 5.7%.
Our us due to growth was driven by organic growth from our existing insurance customers and non insurance customers as well as market share gains the long term trends we've noted.
In prior discussions in favor of rising total loss frequency are continuing driving organic growth for insurance customers as the strong salvage returns we generate at auctions to continue to become more and more economically attractive compared to rising repair costs.
We continue to grow our non insurance business as well nominally on a unit basis, 5.8% year over year, which reflects growth in certain seller groups, such as automotive dealers offset five proactive capacity management efforts on our part with charities and wholesalers, excluding those charities and wholesaler.
As our non insurance business grew on a unit basis, 20.6% year over year, we attribute this growth to our increased marketing sales efforts, but perhaps most notably the auction liquidity, we achieved a truck parts.
We have brought a large pool of buyers and sellers together and the auction liquidity, we delivered to our sellers. We would argue is the very best in the industry.
Our global inventory increased 7.5% year over year us inventory grew at that same 75% international inventory growth just north of 7.8%.
This inventory growth was again driven by the same unit growth trends noted above both industry growth as well as customer wins. Our gross profit grew from 208 million 208.2 million to 259.9 billion or 24.8% increase year over year, we experienced a gross margin rate.
Change from 42.9 to 45.2 with gross margins expanding by 230 basis points. A portion of this is attributable to of course to that same shift of the customer from a principle based arrangements to our fee based arrangement.
In addition to that we achieve efficiencies across the globe in the form of operational leverage which helps to further expand gross margins.
In the U.S. and globally, we would again as always note rising labor health insurance fuel costs towing costs et cetera, offset also by generally benign trends in asps as well as operating leverage.
On those average selling prices in particular in the US our asps grew at 0.7% year over year, our is fees continue their growth.
Reflects I believe now 13 consecutive quarters of ASP growth.
Yes that a few lift as a product of more bidders more international bidders and therefore more auction liquidity so year over year comparison.
Well as an increasing mix of newer less damage cars that trend, we talk about on our call now for years and it continues to prove true international bidding and buying activity again, a reflection of our proactive marketing efforts as well as the effectiveness of our all digital auction platform Vbthree.
Outcome is that we generate more auction activity more bits per units and therefore better selling prices for our customers.
Just shy of 50% of the value of our US auctions are attributed or one by international buyers and the vast majority of our units have their prices affected lifted by the participation of those same international buyers.
Turning to general and administrative expenditures I'll speak about them, excluding stock based compensation depreciation.
They are up from 33.2 million to your go to 39.2 million. This quarter. It's also up slightly sequentially by about $400000 relative to the first quarter in general June a expenditures will fluctuate grow overtime as with other.
Numbers on RPL and our bell at our cash flow statement, we generally encourage folks to take multiple quarters view in projecting the business. We continue to believe we can achieve operating leverage given the top line growth rates, we have experienced in recent years.
We do believe there are like as with yard costs. There are certain inflationary pressures here regarding labor rates.
Healthcare costs and the like but we believe we can achieve operating leverage nonetheless.
Our GAAP operating income grew from 164.7 million to $209.9 million.
For an increase of 27.4%, reflecting 250 basis points of operating margin expansions. Our net interest expense is roughly flat year over year.
At approximately $4.5 million other expense slash income of $400000. In this case largely attributable to currency gains offset by losses from certain non consolidated equity positions of ours.
Our second quarter income tax of $36.4 million reflects a $14.8 million tax benefits on the exercise employee stock options, which has been reflected as such in the non-GAAP earnings included in our release from yesterday GAAP net income increased from 131.4 million 268.7.
$1 billion for the second quarter, this year or an increase of 28.4% year over year.
And finally on the piano, our non-GAAP net income decreased from 124.9.
3.5 growth of 22.9% year over year.
Turning then to the balance sheet and cash flow statements. We finished the quarter with $93.5 million and cash on the balance sheet at $320 million and change of net debt, we adopted a new Snoopy standard as you likely know already this year last quarter in the.
First quarter of 2020, and we now share $104 billion as an operating lease rate of use assets, a corresponding hundred $5 million liability on the balance sheet as well.
On the cash flow statement, we generated operating cash flow of 144.5 million for the quarter, an increase of 37 billion driven principally by higher earnings year over year.
Our capital expenditures of $269 million in the quarter.
The strong majority of these capital expenditures were for capacity expansion per hour practices in the per our practice in recent years I'll note here that we continue to invest aggressively in capacity expansion to serve both industry growth as well as our market share wins as we've discussed at great length in the past.
Permitting is a complex and collaborative dialogue with the communities in which we do business. So the timing of the completion of certain purchases is always subject to lumpiness in our cash flow statement, we will invest billions in some cases tens of millions of dollars at a time for single assets single site completions.
We are delighted for ourselves and our customers that were able to achieve and to execute this past quarter's worth of capital projects that said even in this capacity growth period.
Coparts history the quarter, obviously is an outsized outside capex quarter for US we would look to the last few years as more indicative of our general run rates in a growth period.
With that I'll make a few final comments on our efforts in Germany, and then we're going to open it up or Una regarding our efforts in Germany, our strategy and approach continue unabated, we are investing very substantially in people and technology and lands, we continue to source cars as.
Principle to build liquidity and we're getting progressively better additives. However, the real long term objective remains unchanged as well, which is to earn consignment volumes, Serbia insurance industry, they're both for the carriers direct economic benefits and lower claims costs as well as their benefits and improve.
Policyholder experience indicates a total loss we have active dialogues with decision makers at major carriers and have sold cars on a consignment basis for the insurance industry in Germany, We look forward to discussing that further with you on future calls as well.
With that Samantha I'll ask you to open it up for today.
Thank you at this time, we will open the floor for question. If you would like to ask your question. Please press the star key follow up other one key on your Touchtone phone snam questions will be taken the order in which they are received if at any time you would like to remain yourself from the question can you just press star team.
To answer your question. Please press star one at this time.
Our first question will come from Bob label with CJS Securities.
Good morning.
Good.
Right.
I just wanted to start on the last call you alluded to helping some carriers optimize their claims process.
Can you talk more about that how it's going up there been any initial results or is that a long term game plan has had a 2020 2021, how should we think about that.
Bob I characterize that as a.
A 40 year journey, that's something we do literally every day, we may have spoken about it.
Somewhat greater detail on the last earnings calls, but we view it as are our principal job is to improve the claims process and economic outcomes for our insurance customers and there is in turn so there are certainly individual products.
We have MCU products, we have released products, we are already selling.
But I wouldn't do that as a discrete change per se, what we do Bob just ongoing.
Purposeful commitments to that Jerry outcome.
Got it okay. Thanks, and then you just spoke about obviously the highest I guess capex quarter you've had.
And if this was all the land in the U. assets. This international as well are you still looking to keep a similar pace for the last two years going forward can you just give us little more color on that.
Yes, the vast majority of the capital expenditures would be the U.S.
With with some internationally, but the vast majority to us so I called it out because it is obviously a much higher rate.
Incurred in recent years, we announced our 20 2020 initiatives.
April of 2016, if memory serves approximately four years ago. We began this aggressive capacity expansion phase in our history I would look to the past few years as more indicative of the run rate of our expenditures in capacity growth space more so than this past quarter.
In Asia to be Bob as you know, having both industry for a long time dead Capex is by its nature is lumpy because you closed on our property that could have been literally tens of millions of dollars and or.
Delayed by six months, so tens of millions of dollars expenditures so weak in a few quarter side. So we don't endeavor to smooth. It we are simply want to acquire and develop demand. So we haven't available to our customers and ourselves.
Sometimes it happens so once.
Got it okay, great and it sounds like it's crazy to ask this given I think 14% volume growth in the quarter in this and for several years.
Double digit volume growth, but are you currently.
Constrained on growing faster based on your capacity have you reached.
Kind of equilibrium now that you're just.
Acquiring new capacity for future growth how.
Can you talk about where you stand apart because there have been constraints before if you've reached what you need to to get for current levels.
Yes.
Yes, it's a fair question I think we.
As Jay noted at the top Weve invested in the land. So that we could we could serve our customers exceptionally well across all markets, if and when they're ready to do business with us. So thats our commitment to damage, which is also vision is referred to during the discussion there.
Within certain non insurance sellers of ours, we've made proactive decisions to free capacity in that are in that respect for these for these critical insurance customers in particular, so we I Wouldnt say, it's been a gating factor ball, but it has required us to begin all hands on Dec efforts to acquire and develop.
That land.
Got it okay Super Thank you so much.
Thank you. Our next question will come from Craig Kennison with Baird.
Good morning. Thank you for taking my questions wanted to ask about industry trends, what you're seeing in terms of claims activity and the total loss rate and how you see that unfolding in 2020.
So.
Yes.
I'll I'll take a bigger step back Craig Nick a broader observation I think we're seeing claims activity that's relatively flat year over year in terms of the nominal claim. So these are the same data points I'm sure that you track already.
Regarding certain carriers, who disclosed.
Their claims results as well as certain industry aggregate aggregators.
Over most of our 40 year history, I think we've seen claims.
Claim frequency generally decline very modestly over time as cars get safer, perhaps drivers get better the one in almost period for that trend of course was 2011 16 when smartphone penetration.
Smartphone distraction was perhaps at its peak, but otherwise for most of our 40 year history actually frequencies is generally declined over time. However, the one way tailwind in our business. As you know has been total loss frequency, which has decreased very steadily over time at the individual bumps in quarters are tough to measure I think there's always going.
Noise in that number, but I think if you take any kind of step back at all.
And continues to move up and for reasons I think that become reasonably clear once you do good perhaps that below the surface, which is at the cars are becoming our cars are becoming more sophisticated over time or technologically involved and therefore all of the sensors cameras and government or car are making more difficult to repair repair costs are rising.
Which makes repairs less compelling while at the same time, our auction liquidity is improving our international buyer base is expanding so quite literally the same time prepares our worst salvage literally better which is what is driven total loss frequency increased six fold fivefold six fold over the past 40 years and why we think it will continue to rise.
Two years to come I expect that in 2020.
A long winded answer, but I expect that this year.
Frankly for years and decades to come.
Thanks, and then looking at your European business.
And the European car Park are there is substantial differences in the.
Institution of that car park, such that we see a different.
Trend in total loss rate or claims frequency.
In a broad strokes no. There certainly are local local and country specific idiosyncrasies that can affect exactly how we how we enter how we participate but in broad strokes noted the cars are similar to the underlying drivers that make the total losses, such a compelling economic proposition.
Here in the us at in the UK are by and large true there too which is to say highway, but repair high labor cost repair costs vehicle complexity.
Thank you again.
Urging in growing international demand for those same railcars.
And lastly, how would you frame the conversations you're having today with European insurance carriers versus those conversations maybe a year or two ago now that you've got sort of assets on the ground in and an active platform working in Europe.
Fair question, Greg I'd characterize it as much more productive.
It's it's one thing to do.
Discuss analog as to the UK into us why the economic proposition can or should be compelling is another matter to have yards open people engage trucks towing cars as well as and by the way actual sales results at auction, which demonstrates the superior economic outcomes.