Copart Incorporated has released their Fourth Quarter Fiscal 2023 Earnings Call. The call includes a statement on Safe Harbor and non-GAAP financial measures, and the company has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. The call also includes forward-looking statements, which involve risks, and these statements can be found in the company's annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. The call was then turned over to the Co-CEO, Jeff Liaw, who reported the company's strong results for the fourth quarter of fiscal 2023.

Copart has discussed various dimensions of enterprise sustainability, including environmental, financial, operational, and global socioeconomic sustainability. They have also discussed the proactive role Copart plays in assisting communities in their recovery from catastrophic weather events. The 2023 hurricane season has been forecast to be "above normal" and has already experienced 12 named storms. Copart has experienced major storms in the past 20 years, with the largest ever catastrophic event being Hurricane Ian in the 23rd of September last year.

Copart deployed hundreds of team members, tow trucks, telecommunications equipment, and generators to the region before Hurricane Idalia's landfall. They were prepared to retrieve, store, and sell thousands of vehicles in the affected areas. CCC's data from the past eight years shows that total loss frequency has a slight decrease from the first quarter to the second quarter.

Kelley Blue Book data showed that new vehicle prices were below MSRP for the first time in two years in March 2023. As repair costs increase due to accident severity, vehicle complexity, labor costs and rental car costs, total loss volume is suppressed compared to historical norms. Insurance companies are relying on partners like Copart to provide services such as virtual inspection, loan payoff and title procurement, as well as image recognition tools and machine learning algorithms to enable faster decision-making on total losses.

In the fourth quarter, Copart saw a 13.8% year-over-year growth in their Blue Car division and a 5% year-over-year increase in dealer volume. They also completed the merger of their acquisition of Hills Motor Company in July of 2023. These successes demonstrate the benefits of Copart's auction platform and global member base in providing superior salvage returns to the insurance industry and satisfying their customers' needs for recycled parts. Leah Stearns then provided additional commentary on the quarter's financial results.

Global unit sales increased significantly in 2023, with US sales increasing by 8% in the quarter and 5% for the year, and international sales increasing by 22% in the quarter and 12% for the year. Global revenue increased by $114 million in the fourth quarter and $369 million for the year, with service revenue increasing by $126 million in the fourth quarter and $345 million for the year. This growth was driven by higher average revenue per unit and increased volume.

US service revenue grew by 16% for the quarter and 12% for the year, while international service revenue grew by 36% for the quarter and 11% for the year. Average sales prices increased by 2% compared to an 11% decrease in the Manheim Index. Purchased vehicle sales decreased 7% for the quarter, with US revenue down 25% and international up 29%. For the fiscal year, purchased vehicle sales increased 4% with the US down 15% and international up 37%. Global gross profit increased 20% for the quarter and 8% for the year, with US margins increasing to 51.2% and international margins decreasing to 24.5%. The decrease in international gross margin was due to $6 million of noncash expenses related to the Hills acquisition in the UK.

The company saw an increase in margins year-over-year due to a mix shift in the US, partially offset by inflationary impacts to labor and fuel costs and a slight decline in purchase unit margins internationally. To mitigate costs, the company is leveraging technology and automation, and observing some attenuation in certain expenses, such as transportation. This resulted in an increase in GAAP operating income by 20%, income tax expense of 18%, and GAAP net income of 32%. Global inventory increased 9.5% from the previous year.

Copart has generated strong financial performance, with liquidity standing at $3.6 billion and operating cash flow of nearly $1.4 billion, an increase of 16% from the prior year. They have also invested nearly $517 million in capital expenditures and generated over $847 million of free cash flow year-to-date. Copart intends to continue to invest in their business, including yard expansion, new yard acquisition, logistics, and their technology platform.

Jeff Liaw and Bob Labick discuss the partnership between Jeff's insurance company and Hi Marley, a service provider in the insurance industry. Hi Marley aims to improve the workflow efficiency between policyholders and companies. Jeff also discusses the potential of using AI-based programs with smartphones for enhanced inspections, valuations, and damage assessments. He sees this as a mix of buy, build, and partnership opportunities.

Jeff Liaw discusses the use of AI to assess a vehicle as a total loss, and how image recognition can enhance the accuracy of the call. He explains that for total loss applications, there is a robust product ready to be deployed with insurance companies, and that they are open to plugging in with other service providers as well. He also touches on their capacity and yard efficiency, noting that they have invested $400 million in the last year and have record volumes, but still have room to run with total loss frequency.

Jeff is asked about the demand for Copart's services and whether other markets are providing similar services. He states that there are pockets of need in their system and they plan to continue investing in land and capacity to support growth. He also notes that land investments have proven to be good financial investments over time.

Jeff Liaw states that the international demand for cars from Copart has been expanding significantly in the last one, five, and ten years. He believes that the high-grade US, UK, and Canadian vehicles that can be repaired are the best instruments to address this demand. In the US, vehicle sales were up sequentially, but down year-over-year. Internationally, vehicle sales were up significantly, likely due to customers onboarding and wanting Copart to take principal risk, but the long-term strategy is to convert them to agency.

Leah Stearns and Jeff Liaw discuss Copart's strategy of purchasing cars from customers in order to offer them a certain value and sell them at a profit. They prefer to sell cars on a consignment basis, as it is a better alignment of interest with customers and they are not on the opposite side of the trade. They are considering expanding their full cash for cars business internationally, but not significantly on the insurance side.

Copart's ASPs have outperformed other sources such as Manheim Index despite the drop in used car prices. This is attributed to a mix of insurance and noninsurance units, with Copart prices jumping earlier than Manheim in the pandemic and Copart's prices holding steady or growing despite Manheim's decline year-over-year.

Jeff Liaw explains that the outperformance of Copart's auction performance is not due to a shift from insurance to noninsurance, but rather due to the increase in total loss frequency and Copart's ability to sell marginal vehicles for more than the average vehicle. He also states that the traditional metrics of auction liquidity have improved, and that the mix of foreign buyers for the Blue Car and dealer cars is similar, with buyers preferring arbitrage or repair costs.

In the first quarter of 2024, Hurricane Idalia had an impact on the quarter's costs, but to what extent this is just the cost of doing business in 2023 and beyond is yet to be seen. Jeff Liaw explains that the costs associated with the storm were largely avoided as they had previously invested in land to be prepared for it and the cars weren't there to be towed.

The company is earning more than 5.25% on short-term government T-bills and is comfortable using that until a better use is found. They are looking at opportunities to invest in technology, land, and logistics to reduce costs and enhance the broader business. In the long-term, they plan to return capital to shareholders via stock buybacks. The fortress balance sheet is of value to both the company and its clients, allowing them to act aggressively when land purchase opportunities arise or respond to a pandemic.

Jeff Liaw discusses the company's ability to capitalize on their expertise in running a high-volume digital auction platform. He explains that this expertise is what drives their strategic decisions when it comes to expanding into other adjacencies, such as the Hills Motors acquisition, and that they are open to opportunities in the US and other potential vertical integrations or adjacencies.

Copart has experience managing complex physical logistics and regulatory environments. They acquired National Powersport Auctions in 2017 but have not expanded beyond their current services since. In the US, the dismantling industry and the use of alternative parts is a well-trodden path, however in the UK and other parts of Europe, there has been less penetration in alternative parts utilization. Copart is the neutral intermediary that optimizes auction proceeds for their customers, and will find the best possible economic outcome for the car, whether it is to be dismantled or driven again.

Jeff Liaw explains that Copart Blue has the capability to assist customers in dismantling vehicles, if requested, and is happy to act as an auction intermediary. He also states that they compete with industry participants, including traditional physical auction houses, for the right to sell repossession vehicles, which can only be sold through physical auctions.

Jeff Liaw explains that in the UK, insurers prefer a more vertically integrated salvage auction provider, which would provide access to dismantle parts. This is in contrast to the US, where the auction houses, dismantlers, and repair shops are usually separate entities. Copart is responding to this request and does not intend to divest its dismantling business piece.

Jeff Liaw explains that customers' preferences are important and that they can articulate why they think the circular economy can be supported with third parties doing the dismantling. He also states that there are different forces at work in different countries, with some favouring first fit parts and others favouring recycled parts. He concludes that preferences will change over time.

This summary was generated with AI and may contain some inaccuracies.