Q1 2023 Copart Inc Earnings Call
[music].
Please standby.
Good day, everyone and welcome to the co part incorporated first quarter fiscal 2023 earnings call. Just a reminder, today's conference is being recorded.
Spring remarks, I would like to turn the call over to Gavin Rent-roll, Vice President of global accounting of Cobalt incorporated.
Please go ahead Sir.
Thank you and good morning.
During today's call, we will discuss certain non-GAAP measures, including adjustments to income tax benefits related to stock based compensation.
We've 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 and analyzing our results and assessing our business trends and performance in.
In addition, all 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.
More details 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.
In 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 will turn the call over to our co CEO , Jeff Leo Thank.
Thank you Kevin Good morning, and welcome everybody to our first quarter call.
I'm 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 will describe in more detail today.
Many of the unusual conditions that we've described on our previous calls persists today with some apparent stabilization, including new vehicle shipments shortages high used car prices and 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 would 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 enterprises, 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 co parts of these a keystone enabler of this circular economy, our business enabled the reuse and recycling of vehicles, there are components and materials substantially reducing what would otherwise be the carbon footprint of the transportation sector.
In fact upon tabulating, our scope, one and scope two emissions as well as the carbon emissions that are averted by our marketplace. We estimate that we saved 100 times as much in carbon dioxide equivalents as we emit in our business on.
On the second aspect of sustainability global economic empowerment are businesses instrumental in improving access to mobility for residents of developing economies and.
In fiscal 2022 alone we sold vehicles to members and 160 countries with approximately one quarter of our volume purchased by members and emerging economies as defined by the United Nations.
While those of US on this phone call today likely take both physical mobility for granted it is undoubtedly a critical enabler for access to education health care economic advancement and leisure worldwide and we're proud to play an important role increased in increasing its availability for people around the world.
On the subject of enterprise sustainability, we make strategic decisions for the 20 year horizon as a result, we own the vast majority of our real estate and <unk>.
During 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 and co parts 40 year history.
This category four 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 stormed frequency and severity, we've made proactive investments in land technology heavy equipment trucks drivers and personnel in the form of our dedicated cat response team.
In this instance of course, our investments paid off perhaps an economic efficiency, yes, but most importantly in substantially enhancing the service we can provide our clients and their customers and they are most acute times of need.
We deployed more than 800 co part employees from around the country to the affected areas. Many while the hurricanes still lingered over the state and just the first 10 days of the event. We were retrieved over 15000 units an unprecedented effort enabled both by our third party sub haul our network as well as our company owned tow trucks transporters loaders.
And cohort employed drivers.
From the first day of this event, we leveraged nearly 350 acres of co part owned a dedicated cat only storage capacity within the effected region, allowing us to quickly receive and inventory nearly 70000 units through the end of the quarter in turn expediting the settlement process for policyholders, who are eager for economic relief.
To put our catastrophic storage capacity in context there.
<unk> thousand 500 acres of land that we own for the purpose of catastrophic storage alone represent 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 responses investments and our strong and durable partnerships, we enjoy with our insurance sellers, we tend to experience operating losses in major weather events Hurricanes Ian in the first quarter is no exception with $25 million in extra.
Cost incurred by our business offset by $9 million of revenue in the period.
Our elevated cat 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 rates compression.
Finally in November we completed a two for one stock split or six such split since 19 1999. We view. This split there is 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 in industry statistics in 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 one 9% year on year for the quarter with the U S increase of one 3% and international increase of five 5%.
Excluding catastrophic events from both periods last year and this year for the first quarter U S unit sales grew by one 9% in <unk>.
<unk> business grew relative to one until we get comparison 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 attempted 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 in Asps continue to outpace the strong used car price environment from a percentage basis.
They could used vehicle values, and therefore insurance Atvs continued to reduce total loss volume relative to what otherwise be.
They were 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 with total at the same rate as in prior years, we would have observed industry total loss volumes, 10% to 15% target.
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 with inevitable inevitably revert to its 40 year historical norm of steadily rising total loss frequency.
Accident severity repair complexity and duration repair labor costs rental costs will contribute to set reversion boyd's by best in class auction liquidity and global buyer base.
As we continue with significant resource investments 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.
We appear to be experiencing a moderation of these forces now with Mannheim as used vehicle index now at its lowest point since August 2021.
A decline in wholesale auction values may cause a reduction in our asps.
It would almost certainly coincides with offsetting volume increases as well.
We anticipate that lower ACB and increased vehicle availability will inevitably reverse the observed short term total loss frequency and volume trend previously noted.
While overall U S. Non insurance unit volume is relatively flat up approximately nine 2% in the quarter.
Excluding lower value cards from sources, such as wholesale 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 dollar headwind due to currency.
Global service revenue increased $59 million or eight 8% for the first quarter, primarily due to higher average selling prices and increased volumes.
U S service revenue grew 10, 3% for the quarter and international experienced a decrease of two 4%.
We saw continued strength in Asp's, which grew 5% year over year for the quarter with U S. Asp's up six 4%.
The Manheim index has declined from the January record levels, but remains historically elevated ending October 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 VITAS business in the U S and from international expansion.
Purchased vehicle sales for the first quarter increased $24 2 million or 17% with U S purchased vehicle revenue for the quarter up 10, 8% and international up by 27% for the quarter.
It's just vehicle cost of sales grew $24 7 million or 19, 5% in the first quarter.
As a result purchased vehicle gross profit decreased slightly by <unk> 5 million or three 1% during the quarter.
Total gross profit 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%.
U S margin has decreased from 53% to 44, 1% and a domestic and international margins decreased from 33, 1% to 27, 3%.
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 and costs being directly expense in the quarter.
Balance of our margin contraction is attributable to a mix shift to purchase vehicles, a modest reduction in purchase paper margins and cost inflation in both <unk> 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 fund further operational efficiencies through technology and innovation.
Excuse me.
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 eight 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 five 6% from $330 1 million to $311 5 million.
For the first quarter, including a $4 1 million dollar headwind due to currency.
Excluding catastrophic events from both periods operating income decreased by three 3%.
First quarter income tax expense was $67 3 million, that's 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 five 6% from $264 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 four 7% from $257 $4 million last year to $245 2 million in the first quarter of FY 'twenty three.
Our global inventory at the end of October decreased three 6% from last year and was flat when excluding low value units like wholesalers and Cherokees.
It is comprised of a year over year decrease of six 3% for U S inventory down two 6% when excluding low value unit and.
With an increase of 17, 1% to 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 Nate.
That's briefly update our liquidity and cash flow highlights as of October 31, 2022, we had $2 8 billion of liquidity comprised.
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 in.
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 are suppressed unit sales relative to where they would've 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're happy to take some questions.
Thank you at this time, we'll be conducting a question and answer session if.
If you'd like to ask a question today. Please press star one from your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue.
Our position today using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please we pull for questions once again Thats star one thank you.
Thank you and our first question will be coming from the line of Bob <unk> with CJS Securities. Please proceed with your questions.
Good morning, and congratulations on the strong operating performance, Thanks, Bob and good morning.
I wanted to start two quick questions.
Related to the hurricane and thanks for all the way around.
Around it as well.
We're just trying to get a sense of the sequential costs, maybe unit cost excluding the hurricane impact in the quarter. How are you seeing changes in.
Towing fuel labor et cetera, it's obviously been elevated and rising has it.
To flatten out or is it declining as it's still rising I'm, just trying to get a sense of the trends of the cost.
Cost to process a unit given the noise of the hurricane.
<unk> 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.
View retractable proxy for some of those underlying cost diesel prices remain elevated certainly relative to a conventional gasoline.
But broadly speaking we've seen stabilization in those in those underlying verticals.
Okay, Great and then you gave us some stats here too and we know you've spent about.
Hundreds of millions of dollars on incremental land in the last few years and a lot of effort for cats and given the greater severity of hurricane forecast and whatnot. How do you feel about your current capacity their expectations to continue to add more land or where do you stand in that regard.
Yes. So we are we expect to continue investing in land.
Very substantially both for day to day operations as well as for catastrophic readiness.
<unk> seen that quota elevated.
Elevated investment profile since the spring of 2016, and we continue to aggressively pursue land to support 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 and I'll jump back queue, just switching over to Germany could you just give us an update on the volumes.
Quantitatively are they growing when did they become.
Meaningful and then also related to Germany is that site integrated to the kind of U S website.
International.
Buyers that buy on the U S site also seamlessly bid on cars in Germany, I can Kevin 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 periods.
Germany, and Spain, together and I'll be Finland, aside from Finland has.
In insurance in total loss modeling that looks a lot more like the U S and Canada U S, Canada and the U K gross settlement model in Spain, and in Germany, We continue to grow our volume with insurance, others very significantly on a year over year basis, and certainly 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.
<unk>.
The ultimate objective is to secure nationwide agreements.
And two defaults to a gross settlement model across all policyholders in those markets. We continue to advance the ball in that regard on your question of.
Remember crossover and as such we do have crossover marketing efforts. It is perhaps someday an opportunity too.
To consolidate the entire auction platform into one today to German auctions, and even frankly yard by yard auctions in the U S are still distinct online events the member basis.
Overlapping in some cases meaningful overlap, but our 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 70000 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 soon.
Got it.
Got it and then I know in the past, sometimes you take losses overall.
Catastrophes when there.
Particularly expensive like something like this is that the expectation this time around or could you see kind.
Revenue offset cost 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 <unk>.
Birds eye view of a catastrophic events certainly taken into account.
Many millions likely hundreds of millions of capital we've deployed two mill the catastrophic facilities to buy the equipment and trucks to transporters promoters and to train and deploy that people.
And the technology, specifically for cast that we've also developed as well in the aggregate by the time you consider those costs. The catastrophic events are inherently not a profitable endeavor for us, but a necessary one we don't root for catastrophic weather events, but we do believe that.
Net.
They draw. The contrast is still greater between us and others in the industry in terms of our capabilities in those times of stress so any aggregates no they're not profitable events for us.
Thank you and then we're trying to understand the impact of Asps as they are correlated with manheim.
The Manheim index in used car values is there any data you could share with us with respect to Asps, maybe in the month of November just to get a feel for what the year over year.
Declines might look like as it relates to your model.
Youll find we don't comment intra <unk>.
Intra quarter about the current quarter, but I'd say that through the end of the.
First quarter Asps were still up and some would mean for year over year or 5% of number five and number correct I was talking about heavier.
So asps fees were rising year over year, Mannheim, certainly down over that same period. So we are correlated and there are some leads and lags and so youll never see a perfect progression there between us and other such third party variables, but the market broadly speaking I think we're still we still observe vehicle shortages. If you wanted to buy a new car today.
You might not have your pick or as you do it 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 got certainly a strong U S. Dollar today and do 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 the business and you've got maybe an advantage on currency.
Not more so meaning we have an appetite for meaningful land investments to support our.
Major incumbent businesses in Europe , as well as our growing businesses in Europe and currency as it is a near term.
It's a nudge in that direction, but it's not a meaningful influence we're buying this land.
For $10 $20 50 year use some variations of a 5%, 10%, 20%, 30%, even don't know don't necessarily affect that calculus.
Got it thank you thanks Kurt.
Our next question is from the line of Bret Jordan with Jefferies. Please proceed with your questions.
Hey, Good morning, guys. This is Patrick Buckley on for Bret Jordan, Thanks for taking our questions Patrick.
If you could talk a little bit more about recent volume trends are there any signs of volume is picking up as volumes dropped or any signs of recent market share gains.
On the volume question.
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 mineral once in a lifetime suppression of total loss frequency, which we believe will eventually abate and reverse very meaningfully.
I think we would say has stabilized driving activity has picked up depending on the country. You were talking about has picked up a lot in Europe , where the driving was more suppress a year ago than it has been in the U S. So driving frequency times accident frequency times total loss frequency is plus or minus in the volume equation plus the market share question that you posed a moment.
Ago.
So in the aggregate I think we're seeing stabilization on total loss frequency, but still year over year decline and we're seeing an increase in driving frequency and accidents, certainly we're picking up as well.
The question on market share, we arent in a position in general we don't comment on <unk>.
Individual accounts, if you look at the long term our history I'd say, we generally speaking have some earn.
Earned more in 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.
Are there any synergies that you guys see.
I'd say I'll generalize a half step here, we take our competition very seriously and we view our competitors set expansively so in earnings and earning the right to sell vehicles on behalf of our clients. We compete against every other path those vehicles can take as to whether its hand selling retailing repair.
And certainly consignment through other wholesale auction platforms.
So we're constantly investing and innovating to deliver the highest possible returns. So that we win more of those head to head comparison against the alternatives and to eclipse. The rising standards, we set for ourselves as well, but to address your question specifically about another provider of auction services in the insurance space.
We don't think a change in corporate ownership, particularly affects how each of us compete in the marketplace. So weather.
And there are controlled by private equity or an activist hedge fund or one corporate holding company or another we think our annuities and founder led independent company represents a durable and distinctive competitive advantage and practice, we manage our business with a long term investment horizon, which in turn create accumulating advantage of owning our own land or technology.
Platform building, a global buyer base and our team.
Got it that's helpful and Ashwin. Thank you.
Specifically of course, but those questions are better posed to the to the buyer and seller of that specific transaction.
Fair enough thanks, guys.
As a reminder, you May press star one to ask a question at this time.
The next question is from Jesus <unk> with Jpmorgan. Please proceed with your question.
Oh, Hey, guys, Hey, this on for Ryan Brinkman.
I had a question about how are you guys looking at margin compression given declining used vehicle values commodities.
You can do just that.
Retention rate.
Does that affect that.
There is at what rate.
Your retention rate or anything you guys can do to offset margin compression.
Uh huh.
Do you mind, just rephrasing that I'm not sure I understand your question.
So given that use values used vehicle values are normalized lower along with commodities like is there anything you guys can do on your side, but I just think your retention rate to offset that or how are you guys looking at that going forward and retention rate.
Got it so.
With.
As used vehicle prices soften.
We will see.
We will eventually see perhaps a softening in the selling prices of our cars, which is itself margin dilutive. We will at the same time see an increase in volume because a big part of the suppression of total loss volume today is those higher used vehicle prices. So when we see that additional volume flow through the system that is margin.
Accretive beyond that as for other quotes actions, we can take we certainly have.
Levers in the business available to us, which we explore on a recurring basis.
Adding.
Including deploying still more technology and automation and so forth and our business. Among other things I think you know we don't comment on our fee schedules and how we manage that long term, but suffice it to say the business delivers enough value to our members and sellers to ultimately recover and generate a good return on capital.
Got you and are there any data points that you guys are looking at that we should keep track of in terms of this that will help out.
This being used car prices.
Yes. So anything you guys are like particularly keeping an eye on that we should also look at.
Besides manheim, obviously, probably nothing that nothing.
Nothing insightful so we track.
Used vehicle index at Ada.
We track anecdotally whats happening.
The auction space broadly auto retailers and the likes so nothing that's not broadly available and more attractive.
Got you helpful. Thank you.
Thank you.
The next question is from the line of Ali <unk> with Guggenheim Partners. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
What is there anything different in your Cat response that allows you to process. These cars quicker than historically I think what the storm in mid to late September I guess I was surprised to see that you're already selling through the inventory in October I think historically has taken at least 60 days, especially for <unk>.
I think it's an evolution of our capabilities, but we've invested we've invested over the years, but certainly we have and recognition of rising frequency and.
Severity of these storms.
Invested in that technology, we haven't gotten to the details of what that means but in the technology platform.
Processing titles, and receiving cars and helping insurance companies by absorbing much of the physical work that they used to do.
There are many different individual levers pool to collectively expedite the process on behalf of our soldiers.
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 grind higher from here.
A difficult forecast I'll leave because the underlying net debt is your belief about used vehicle prices in particular, the other forces I think we've got a fair bit of conviction, which is to say that the eventual rising tide views repair costs will rise and we will continue to rise because the vehicle complexity every car that rolls off.
Off.
<unk> rolled off the line today's meaningfully more complex than one five years ago, and probably one a year ago.
Anecdotally recent description of our forward focus having 300 microprocessors and afford electric vehicle 103000 of them for example.
And I think that will play itself out over the years and decades to come. So those forces I think are well known repair costs will rise international demand for co part vehicles will rise the near term to variable is what happens to used car prices.
And that forecast is difficult to make an isolation. It does appear to be softening somewhat but as for how that will play out over the next six to 12 months, that's harder for us to say.
Great. Thanks, Jack.
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 <unk> for closing remarks.
Thanks, everyone and we'll talk to you next quarter have a good day.
This.
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