Q2 2023 Copart Inc Earnings Call
Yeah.
Good day, everyone and welcome to the KOL part incorporated second 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 Jeff the alcohol CEO of <unk> incorporated. Please go ahead Sir.
Thank you Maria good morning, everyone and welcome to our second quarter call and thanks for joining us I'll actually start briefly with the safe Harbor.
During today's call, we'll 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 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.
<unk> involve substantial risks and uncertainties and uncertainties.
For more detail on the risks associated with our business. We refer you to the section entitled 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 and any.
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 wanted to start today by introducing our new Chief Financial Officer, Leah Stearns, who will provide additional data in context in a few minutes as well we're very excited to have her join the leadership team here at co part after an extensive search we hired Leah for the richness and relevance of her prior experience.
Both at CBRE at American Tower, two industry leaders and public companies in their own right. She has experienced with institutional customers complex regulatory environments real estate, certainly as well and brings exceptional analytical capabilities and leadership skills as well. So we're very quite excited to have her on board.
I'll start my comments today, starting with our customers, we aspire to be a customer centric organization first and foremost and I'll start with our insurance business. Our insurance customers certainly have experienced a rapidly changing industry environment now for three years with remote work volatility in driving patterns that occur.
The board cost inflation.
They've made a number of business process and personnel adaptations that in many cases have proven more durable than initially expected and now we think may persist forever. We have likewise adapted our business processes to help them navigate this environment, including providing more virtual inspection loan payoff and title services and the like.
For the quarter in terms of unit volume, we achieved U S insurance volume growth of 9% year over year in large part attributable to the sell through of volume from Hurricane in.
The single most unexpected change as most of you know for our insurance customers has been the suspension and reversal of the rising total loss frequency trend that we had experienced almost completely uninterrupted for the past 40 years.
According to CCC total loss frequency increased from 17, 4% in the third calendar quarter of 2022 to 19, 7% in the fourth quarter. We think approximately half of this increase was attributable to flood vehicles from hurricane Ian.
As has always as has nearly always been true total loss frequency is rising due to a combination of two forces.
Repairs are more expensive and less attractive due to increasing accidents severity vehicle complexity labor costs and rental car costs.
And secondly, salvage economics are more attractive because the fastest growing economies in the world and Central and South America Africa and Eastern Europe .
<unk> on our damage to vehicles to provide mobility they need.
We've discussed on prior calls what would happen if and when used vehicle prices were to decline and we've said that we think are selling prices may compress somewhat but will be offset by increasing volume, we're seeing the beginnings of that phenomenon unfold today.
In the fourth quarter of pardon me and the second our second fiscal quarter. If total loss frequency had been at historical levels. We think our insurance volume sold would have been 10% to 20% higher than it was.
Now turning our attention to the non insurance space, we've made a proactive effort to grow our business in the bank and finance fleet and rental car segments, a group, we collectively call Blue car Blue.
Blue car volume for the quarter and the first half of the year has grown approximately 20% versus the prior year. Despite a still supply constrained environment. We believe we have outperformed the overall wholesale vehicle auction industry.
The technology and service offerings required to support these customers is different and we have invested meaningfully in our capabilities to enable us to serve these sellers and our auction returns have enabled us to grow with them.
Finally, I wanted to.
Wanted to mentioned our members in a supply constrained inflation inflationary environment. Our buyers have certainly seen co part as a valuable source of increasingly newer lower damaged and whole cars and we have noted often that the fastest growing economies in the world generally have the fewest vehicles per capita we invest significantly in our staff.
In traditional and digital marketing and in our global Lounge network to expand our member base, we remain committed to empowering more buyers driving auction returns, which in turn enabled our sellers to consign still more vehicles through us.
In closing I wanted to note the bedrock principles that have guided us.
And are the foundation of our success. These principles certainly long predates both Lea and meet and there's nothing particularly magical about them.
We continue to make decisions for the 30 year prosperity of our customers and our shareholders. We will invest in the technology of today and tomorrow to enable us to serve both our members and our sellers, we will invest to recruit members to engage them and to expand the marketplace of services available to them to continue to expand the buyer universe.
For every vehicle we sell we are committed to finding the highest and best use of that vehicle anywhere in the world.
And finally, we will invest in land, we will own our land whenever possible to ensure that our ability to serve our customers is never compromised by the wins are economic optimizations of third party landlords.
With that I'll turn it over to our CFO Leah Stearns to provide some additional commentary and data and to walk through some key statistics and then we'll turn it over open it up for Q&A.
Thank you, Jeff and good morning, everyone I'd like to start by saying how excited I am to join co part for me the opportunity with compelling for a number of reasons.
Including the collaborative and entrepreneurial culture.
Co parts enduring focus on delivering best in class service to our customers.
As natural position at the center of the circular economy in automotive as well as our solid financial Foundation I believe that with these factors co part is positioned to deliver exceptional results for our customers.
And during value for our shareholders over the long term.
And I couldnt be more energized to help drive these objective flooring.
Turning to the quarter Global unit sales increased four 7% year over year.
<unk>, an increase of nearly 4% in the U S and over 10% internationally.
In the U S. RC units grew about 5% price.
Primarily due to growth across our insurance business and our purchase units declined 23%.
Internationally, our unit growth came from a mix of fee and purchase units, which increased nearly 9% and over 23% respectively.
During the quarter, our U S insurance business grew relative to its one and two year comp of 9% and 35% respectively.
This was primarily due to the continued recovery in driving activity, increasing accident frequency and severity total loss frequency and share gain.
Our auction returns remained strong as we continue to invest in growing our global buyer base by driving member recruitment recruitment registration and retention.
As a result co parts auctions provider insurance customers with best in class liquidity in return.
Intimately, providing a more cost effective way to manage growing claims cost.
Making it a more cost effective way to deem vehicles, a total loss.
Turning to our financial results.
For the second quarter global revenue increased $89 million or just over 10%, including a nearly 2% or $15 million headwind due to currency.
Global service revenue increased $79 million or over 11% for the second quarter, primarily due to a higher average revenue per unit and increase volume.
U S and international service revenue grew nearly 12% and 5% respectively for the quarter.
Asps were flat year over year for the quarter with USA asps up nearly 1% compared to nearly 13% decline in the Manheim index ending January at.
$224 eight.
Purchased vehicle sales for the quarter increased $11 million or nearly 7% with U S purchased vehicle revenue for the quarter down, 15% and international up 42% for the quarter.
A reduced purchase unit activity in the U S. During the quarter was a result of our proactive approach to mitigate our principal unit exposure and a softening vehicle pricing environment.
We continue to believe that this portion of our business provides an opportunity for future growth and is an important enabler for us and new adjacent asset classes and geographies.
Purchased vehicle cost of sales grew more than $14 million or 10% in the second quarter.
As a result purchase vehicle gross profit decreased by $4 million or approximately 24% during the quarter.
Global gross profit in the second quarter increased by more than $23 million or five 7%, while our gross margin percentage decreased by approximately 200 basis points to 44, 6%.
U S margins decreased to 48, 9% and international margins decreased to 24, 3%.
The year over year margin decline on a consolidated basis was driven primarily by cost inflation and towing and labor of about 200 to 250 basis points.
Over the last two years, our direct costs have seen pressures from inflation, primarily related to labor and fuel.
We will continue to manage these costs with a long term perspective, we view the increase in labor costs as a direct investment in our people, which will translate into best in class service for our customers.
We constantly seek to optimize our operational processes through technology and automation.
Finally, we are committed to investing in our real estate logistics and technology assets to ensure we are positioned to scale appropriately.
The demand of our customers.
We believe with this approach, we can increase margins and returns on capital over time.
Turning to general and administrative expenses, excluding stock based compensation and depreciation G&A spend in the quarter increased $5 million or 12%.
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 benefit from the scale of our corporate infrastructure.
As a result of our strong revenue growth offset by the cost increases experienced in our business. Our GAAP operating income increased by more than 5% to $366 million for the second quarter.
Our second quarter income tax expense was $83 million, which reflects a 22, 1% effective tax rate and finally second quarter GAAP net income increased about 2% to $294 million or <unk> 61 per diluted common share.
Our global inventory at the end of January decreased 1% from last year, and when excluding low value units like wholesalers and charities global inventory increased by 1%.
That is compromised of a year over year decrease of 3% for U S inventory, which is actually down less than 1% when excluding low value units and an increase of 12% for our international inventory.
Turning to our liquidity and financial position.
We remain in a solid position with respect to liquidity, which stands at $2 9 billion as of the end of the quarter, which is comprised of $1 7 billion in cash and cash equivalents and an undrawn revolving credit facility with capacity of over $1 2 billion.
Year to date, we have generated operating cash flow of $500 million, which is an increase of nearly 12% from the prior year period. In addition, we have invested nearly $257 million in capital expenditures with over 80% of this amount attributable to our physical infrastructure primarily capacity expansion.
Finally year to date, if you take our operating cash flow less capex, we generated more than $243 million of free cash flow.
Given the strong financial position, we intend on continuing to invest in our business to meet our customers' needs. These.
These investments include yard expansion, new yard acquisition, our logistics and technology platform.
We believe that these types of historical investments have differentiated co part as a service provider, while ensuring that we have the capacity necessary to serve our industry's future growth.
With that I've concluded my prepared remarks, and I'll turn the call over to Maria and we're happy to take your questions.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please pull for questions.
Our first question comes from Bob <unk> with CJS Securities. Please proceed with your question.
Good morning. This is stefanos crist, calling in for Bob Thanks for taking my questions. Good morning.
You touched on this during the call, but could you provide a little more detail on the cost structure of the yards, how it's changed since pre COVID-19 and maybe how much of those changes are permanent versus temporary.
Sure I can take that one in terms of.
Our yard expenses the majority of that cost comes from our labor as well as the costs associated with our sub haul and towing. So as we think about how that how those costs are either permanent or temporarily impacted as a result of the overall economic environment post COVID-19 labor costs certainly.
Have increased and we don't expect those to abate, although we do focus on technology investments will which will over time make us more efficient in our processes and and hopefully help to mitigate future growth on that line item and from a sub haul perspective, a portion of that is directly attributable to fuel cost and that is certainly something that we do see.
Fluctuate so that could be more of a temporary phenomenon.
Those really account for the majority of the increase that we've seen from a yard ops expense over the last couple of years.
That's great. Thank you.
Just a follow up.
You just talk about what co parts sweet spot is for non salvage cars in terms of age in miles driven and if you see that evolving any direction over the next five years.
Yes.
I think it's fair to say it has evolved and very steadily so since the company's inception. So if you look at the cars. If somehow they were website 1982 and you can see all the quarters, we had for sale. They would look markedly different from the cars that were available five years later five years later five years later and so on so over time, the sweet spot for us is expanding in scale.
I think it's safe to say it includes.
Vehicles, you would customarily see at dealerships and so forth that are very very much coal cars that are drivable off the law. So I think that the sweet.
Sweet spot does move and shift over time. So I think we will expect to continued expansion. It's not a it's not a static view right definitely expands progressively over time.
Great. Thanks, so much.
Our next question comes from Craig Kennison with Baird. Please proceed with your question.
Hey, good morning, Thanks for taking my questions and congratulations Leah.
Housekeeping question first what was the U S insurance volume growth ex Ian.
Approximately flat so thereabouts flatter thereabouts group.
I think you mentioned, Ian with 70000 cars, but did you get more cars post the quarter last time.
In terms of.
Posted this quarter you mean.
Post the last conference call. When you said you had about 70000 assignments.
Few more.
But that was the strong majority of them.
Okay.
And then sort of a big picture question for you on AI, making headlines across many industries I'm just curious.
Your World, how you see AI impacting co part.
Since you guys like to think in decades.
Yes, I think we are.
Certainly following it closely and think that AI will be deployed.
Well in some respects if you if you are.
We're viewing the AI and machine learning all collectively.
The future of technology in neural computing and so forth, we do deploy some of those tools and our systems today, most notably for our vehicle valuation guide pro quo, which helps insurance carriers make.
The optimal real time decisions about total losses, when and when not to total vehicles, but I think youre, referring specifically to I think the notion of.
Automated chat and so forth.
The evolution of course it <unk>. Eventually go you end up with a smarter and more informed answers on some of the questions. You. Most frequently get your co part I'd say today with our sellers and members.
The questions are often nuanced enough specific enough to individual circumstances lots of purchases and so forth, but it's not a not a ready solution for us today, but we follow this space.
Certainly our avid students of this space as well, so if and when relevant for our business to deploy much more broadly we will certainly do so.
Great. Thank you.
Our next question comes from Chris <unk> with BNP Paribas. Please proceed with your question.
Hey, Thanks for taking the question.
First of all I wanted to follow up on kind of what's the non CBB bifurcate the non insurance a little bit further.
You're right, it's a 20% now.
Now define as co part Blue which is.
The combination of our dealer consignment in the commercial channels.
I assume you're kind of historical legacy charity Mr. <unk>. It sounds like there's a bad actor competes on price there that might be offsetting some of that growth could you just give us a sense for like the bifurcation of the two that would be the first question.
Directionally speaking, what we characterize as non insurance includes blue those blue car sales, which are rental cars.
<unk> and <unk>.
Financial solutions fleets rental car companies and the like that.
That's a meaningful portion of our non insurance volume cohort dealer services, we didn't talk about specifics today Thats also a sizable portion of our non insurance business. They are also performing well and growing the business in a difficult and challenging environment. The other elements of our non insurance business and group co parts direct which is our cash for cars business in which we.
Buy cars directly from consumers and sell them at auction.
But you had mentioned that in her comments as well as one.
One of the elements of our principal business.
<unk> has proven very successful for us over the years, but we also want to be thoughtful about about how aggressive we are buying cars in a volatile price environment.
Then the portion you mentioned as well, which is the charities and wholesalers business relatively lower value vehicles.
We have in some cases optimize our business to serve insurance companies Blue card cohort direct cash.
Cope our dealer services and the like and have foregone some of the volume.
Those lower value segments.
Got you Okay. That's helpful and then.
Just a bigger picture question one of your closest peers with epic to merge with ochsner of heavy machinery.
This has led you to rethink the opportunity at all for Tam expansion of your business do you think this is a synergistic is there a place for co part and those types of that market is just kind of curious how you think about Tam expansion, yes generally speaking.
It's a fair question, Chris I don't think it's specifically the catalyst for us to consider it but it's a topic we have wrestled with ourselves.
When evaluating our own strategy and our opportunities to expand into new arenas.
Take stock first of our our core strengths, we think we are.
We excel at managing high volume online auctions and recruiting with sellers and buyers for them. We think we excel at physical infrastructure, both the development of Greenfield facilities and the acquisition of existing ones and then managing the physical logistics to and from those facilities of high volumes of physical equipment and high volumes of via.
<unk> historically.
And we the third national capability of ours that I characterize is our ability to navigate complex regulatory environments. We have 50 different <unk> in the U S alone as well as a number of other relative to the regulatory layers here and certainly worldwide tax and otherwise we think we are uniquely equipped to address.
And we've taken and looked at those capabilities and asked ourselves. The question, where can we deploy those into adjacent spaces to grow the business over time.
And have done so selectively and very conservatively as you know we've expanded with our acquisition of NPA five five years ago or thereabouts in the power Sports Arena.
We today are expanding this blue car initiative into the whole car space as well and frankly within yellow iron as you just acquired we already sell within yellow iron specialty equipment trucks, and trailers and the like and many hundreds of millions of dollars of that equipment every year without per se dedicated efforts too.
Our business there so it's something that we revisit on an ongoing basis I think this transaction.
Per se affect us negatively or positively.
In terms of our interest in the space.
That's very helpful. Thanks, Jeff.
Our next question comes from Bret Jordan with Jefferies. Please proceed with your question.
Hey, good morning, guys.
Hey, Brett on that.
Quick discussion of that other companies transaction. The buyer is certainly making a pitch that there are services that could be offered in the salvage space that would sort of add another lever on the revenue side.
Do you see that I mean is there an opportunity I mean, obviously, if youre selling scrap cars to LKQ. They don't want to wax first but are there things you could be doing as you whether its blue or dealer services, where you could attach ancillary services.
Okay.
In short I think the answer to that is yes and yes.
That there are additional services to be offered to both sides of the marketplace and we are doing that today.
And we haven't talked about them at great length on earnings calls, we find that is more relevant and discussions with our sellers and our members themselves.
And those services certainly include things like delivery financing title services and the like.
And the buyers.
That universe is expanding real time as you noted if you went back 30 years ago and the buyers are largely dismantled and so forth, they're not that interested in.
And other services, we have to offer works in or otherwise.
Today as the cars as we expand our universe into.
More drivers will vehicles lighter damaged cars I think that becomes more relevant over time I'd argue that we are the industry leaders in that regard in terms of the mix in that direction and so that that thesis is arguably more relevant for us than it is for anyone else anyone else who is loosely in our industry.
Okay, and then a quick question on the on the supply side, which sellers most dependent upon you being the purchaser as opposed to an agent does that most impact obviously cars direct is probably the most but our blue versus dealer services are those sellers expecting you to own the car as opposed to just consigning, So theyre not the print.
<unk> business is largely cohort direct.
And which we buy cars from consumers.
Some modest residual volume in the U K I think that when we entered that business in 2007.
Four out of five cars or thereabouts was.
<unk> managed on a principle basis today I think that's reversed and then some so we are largely when youre looking at principal volume for co part Youre talking about group our direct in Germany is really not as Germany is still mostly agent or Germany, Germany is a mix of both that's fair, Germany. We are doing both we're selling consignment cars on behalf of insurance companies and we are also buying cars.
<unk> directly from consumers.
On residual value platforms. So I guess does the temporary move away from.
Maybe cutting back on purchase vehicles impact, Germany in the short term or is it not meaningful enough to really move the needle. So that's the principal the principal car the moderation for its car volume is principally here in the U S. Okay. Great. Thank you. Thanks.
Thanks, Brett.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Joseph Underline with Stephens, Inc. Please proceed with your question.
Hey, guys. This is Joe <unk> on for Daniel Thanks for taking the question.
No problem.
With total raw total loss rate moving higher again, this quarter and inventory bottlenecks, improving do you expect the industry to return to historically normal unit growth rates from here.
From here, yes, precisely when and I think it is harder to forecast if thats a function of the variables, we've talked about which is the.
The value of used cars, and therefore, ACB or pre accident value as the Europeans call. It with cars worth before it didn't accident, what happened to repair costs and rental of our costs and the like so I think we have total conviction that total loss frequency, we will revert to historical levels and continue to grow from there the precise trajectory from today.
Until that point I think is more difficult to forecast, but this is an unabated 40 or 50 year trend with the exception of about 18 to 24 months and so I think we do believe that it will revert.
That's helpful. Thank you.
A follow up we wanted to ask about ASP trends during the quarter.
Did we see Asp's decline and then increase along with Manheim or was there a more consistent trend.
You mean within the quarter.
Within the quarter, yes.
I don't even know we know offhand.
I think the <unk>.
I think it will remain quite strong.
Co parts and meaningfully outperformed at least the headline numbers, we're aware of.
For the Manheim used vehicle value index.
I don't know that there was any meaningful intra quarter volatility a cohort.
Super helpful. Thank you guys. Thank you.
Our next question comes from Gary.
Mr Piano with Barrington Research. Please proceed with your question.
Hey, good morning, everyone.
Just wondering a couple of statistics go over correctly.
Units process, we were up 7% globally is that correct.
Hi.
Total units were up about 5%.
5% Okay.
And then.
Getting back to Isps I Didnt quite get what you said on Asps as you went through all these these numbers were asked what ASB is up year over year and sequentially you have that.
Yes, so at Asps in total are basically flat year over year and surely they were.
Down about 3%.
Okay.
Sure.
Okay.
And then.
Lastly, with total loss ratio as you said, Jeff They were 19, 7% in Q4.
Correct.
Yes versus $17 four but a lot of that was flood vehicles right that led to that sequential increase we think half of that half of that or thereabouts was flood related.
And I should I should have noted that we will know that there is some natural lag in between.
When cars are approached deemed a total loss and when of course, they are processed by companies like us the title process loans paid off and the cars sold.
Okay, just for comparative purposes, what were total losses. The ratio is running in Q4 'twenty. One do you have that handy.
We do.
Yes.
Yes.
Okay.
This is all straight from CCC here in the fourth COVID-19, two a year ago.
Okay.
And then is there with the non insurance business that Youre doing I mean, there's always been kind of.
At about 19%, 20% percentage of vehicles, how much has that moved up over time as you've grown this business.
There is some seasonality to it.
To be fair and so I'd say it's between.
18% to 25% just from memory youre going quarter to quarter.
And it has.
Grown over the very long term.
But to be fair over the past few years, we've grown our insurance business as well so they both grown so we don't we don't generally think in mix terms, we think in terms of growing blue car growing cohort dealer services growing corporate direct and the like so that the mix numbers not one we particularly focus on both have grown meaningfully for us over the past five years.
Okay. Thank you.
Sure.
Yes.
There are no further questions at this time I would now like to turn the floor back over to Jeff for closing comments, great. Thanks, everybody.
For joining us and we'll talk to you next quarter.
Right.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Okay.
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