The Operator welcomes everyone to the Copart Incorporated First Quarter Fiscal 2024 Earnings Call and reminds them that it is being recorded. The company's comments may include forward-looking statements and involve risks and uncertainties. Co-CEO Jeff Liaw briefly discusses the rebound in total loss frequency in the insurance business, which has increased from 17% in the second quarter of 2022 to 19.3% in the third quarter of 2023, but is still below pre-COVID levels. The call will continue with a more detailed look at the first quarter from Leah Stearns and then questions will be taken.

The company believes that the current high total loss frequency will eventually return to historical levels due to stabilization or decrease in vehicle prices, which will drive a recovery in total loss frequency. Despite a 4% decline in used vehicle prices and a 4% increase in accident severity, total loss volumes remain lower than historical norms. The long-term drivers of total loss frequency include rising repair costs and increasing demand for mobility. The storm season was predicted to be active, but ultimately had little impact on vehicular losses.

The company faced unpredictable storms during the storm season, leading to substantial costs and deployment of resources. However, they view these costs as necessary for providing excellent service to customers. The company also saw growth in their non-insurance customer segments, such as their Blue Car business and dealer sales. They also continue to expand their specialty equipment business and made a strategic investment in Purple Wave.

The author discusses their admiration for the business of Aaron and Suzy McKee, who have built a successful company called Purple Wave. They also mention their commitment to sustainability and their upcoming ESG report, which will highlight their contributions to environmental sustainability, economic empowerment, and workplace diversity. The author also notes the significant impact their business has on reducing carbon emissions through vehicle recycling and reuse. They estimate that they have helped avoid over 11 million metric tons of carbon dioxide equivalents in 2023. The paragraph concludes by mentioning that Leah will discuss the company's sales trends for the first quarter.

During the quarter, Copart experienced a 13% increase in global unit sales and a 3% increase in inventory, driven by a partial recovery in total loss frequency and share gain. In the U.S., there was strong unit growth of over 10%, with fee units and purchase units both seeing significant increases. However, there was a decline in low value units from wholesalers and charities. In the international market, unit growth was over 24%, with fee units and purchase units also increasing. Inventory levels in both markets saw significant increases compared to the prior year. Despite a decrease in ASPs in the U.S., Copart's auctions continue to provide strong returns for insurance customers and the company is investing in expanding its products and services to serve a diverse mix of sellers and unit types.

In the first quarter, the company's global revenue increased by $127 million, with a 1% boost from currency. Service revenue also saw a significant increase, with U.S. service revenue growing by 17% and international service revenue growing by 29%. However, purchased vehicle sales decreased by $6 million, with a decline in the power sports business and PA being offset by an increase in Copart's direct cash-for-cars purchased vehicle revenue. The company's gross profit increased by $94 million, with a 400 basis point increase in gross margin percentage. This was driven by a mix shift in the U.S., while international margins decreased.

In the first quarter of last year, the company incurred cap costs related to Hurricane Ian, but these did not recur. They are focusing on standardizing processes and using technology to mitigate inflationary impacts. General and administrative expenditures increased by $13 million due to various factors, but they expect operating leverage as they grow. GAAP operating income increased by 27% to $395 million. Income tax expense was $91 million and GAAP net income increased by 35% to $332 million. Liquidity was $3.9 billion, with cash and investments and a credit facility. Operating cash flow increased by 20% to $375 million.

During the first quarter, the company invested $162 million in capital expenditures, with the majority going towards physical infrastructure and capacity expansion. They generated $213 million in free cash flow and remain focused on investing in their core business and corporate development. Their capital allocation strategy prioritizes growth in their core business, diversification through partnerships and expansions, and investing in technology and innovation to support their customers' needs. They also recently announced a strategic partnership in InsureTech. This approach provides ample opportunities for growth and diversification.

The speaker thanks the questioner and mentions that they will now take questions. The first question is from Bob Labick, who congratulates the speaker on their strong performance. Labick asks about the recent announcement of Copart's investment in Purple Wave, and the speaker explains that they are looking to expand their expertise in managing digital auctions to other industries. They have known the owners of Purple Wave for a long time and see potential for growth and profitability in the future. Success will be measured by the ability to serve more buyers and sellers over the next few decades.

The speaker discusses the company's success and ongoing initiatives, such as gaining market share in the insurance and salvage market, whole car acceleration, Purple Wave, and international growth. They prioritize time and capital to serve their sellers and buyers better, reduce advance charges for insurance companies, and focus on international markets. They maintain a conservative balance sheet to have the flexibility to pursue these initiatives and acquire real estate. The ultimate constraint is their own bandwidth, or ability to successfully pursue these initiatives.

The speaker acknowledges that using one word to describe countries like Canada, Brazil, Germany, and the U.K. is an oversimplification, as they are all different. However, growth in these countries is a priority. The company also sees potential for growth in the non-insurance sector, which they believe will benefit their insurance companies. The speaker mentions the recent investment in Purple Wave and notes that the company's real estate may bring additional value to the platform, but the main focus is on supporting the exceptional team behind the business. The company is open to exploring potential partnerships and opportunities with Purple Wave, including in areas such as customer relationships, technology, and real estate. Finally, the speaker mentions that the company is now in a position to bid on large liquidations, such as the recent one for Yellow.

Jeff Liaw and Leah Stearns discuss the ability of the company to help clients bid on deals and their cost structure. Liaw mentions that while they are able to bid on deals, it is not always the best option for customer service. Stearns mentions incurring costs in anticipation of hurricane season, but did not experience the expected volume of business this year. They do not provide a specific amount, but state that it is a substantial amount.

Jeff Liaw and Craig Kennison discussed the success of the insurance side of the business during a recent conference call. They were asked about market share and how they measure their comparative returns to the industry and peers. Liaw did not comment on specific clients, but did mention five general principles that insurance companies use when deciding who to use for their salvage remarketing services. These principles include delivered auction outcomes, ongoing maintenance of available land, quantifying elevated tow expenses, accepting necessary costs of doing business, and being positioned to handle sudden spikes in volume.

The company believes it is differentiated by its global buyer base and auction platform. They define their competition broadly and have five priorities: delivered auction returns, service to sellers, efficient title processing, service to clients' clients, and ability to manage extreme events. They believe the gap in auction returns is substantial and growing, but it is difficult to quantify.

The speaker explains that it is difficult to make a direct comparison between the sales of cars at different locations, but based on seller behavior over the years, they believe they provide better economic outcomes. They also mention that there may be some differences in compliance and processes when serving different types of sellers, but overall the contribution economics are not significantly different. The company has been developing capabilities to address the needs of new sellers, such as implementing an arbitration policy for Copart's Blue Car members.

The company has been preparing for potential future demand by focusing on international markets, particularly in the EU. Finland and the UK have been performing well, while Germany and Spain are still in the process of building their businesses. The company has different service propositions for each market.

The company continues to maintain good relationships with its insurance company clients and is constantly striving to innovate and experiment with them. The non-insurance businesses, Blue Car and Dealer, are both significant contributors to the company's revenue, with Dealer being the larger and more mature of the two. The company recently converted its treasury position to cash, which was a reflection of the movement in the yield curve.

John Healy from Northcoast Research asks about the company's growth in the finance business, specifically in regards to repo cars. Jeff Liaw explains that repo cars are a major source of their business and they have unique capabilities in navigating the vehicle retrieval process. They also generate strong returns through their auction platform. Healy asks for clarification on the Purple Wave investment, which the company had previously announced in a press release.

The speaker is asking about the non-insurance mix and the 35% growth in Blue Car. They are curious about the current state of non-insurance and how the growth in Blue Car is possible given the current market conditions.

The speaker is discussing the growth of their business and the mix of clients they have acquired. They mention that 25% of their business comes from non-insurance clients, and that both their insurance and Blue Car segments have been growing significantly. They also mention that their growth in the Blue Car segment is not due to one large client, but rather a mix of different sellers. The second question addresses the impact of onboarding a larger insurance client on expenses and the P&L before the volume arrives. The speaker explains that this impact is highly variable and depends on the specific insurance carrier.

The startup costs for Copart depend on their clients' technology platforms and business processes. If they already have existing customers, the costs are more modest. They hire additional staff to handle the physical movement and processing of cars, and they scale up operations before the customer turns on their new business. The company regularly evaluates their auction fees and may increase them as needed, but they have not necessarily followed the lead of their peers in the industry.

The speaker explains that their company does not have a set schedule for changes, but instead evaluates the market, competitors, and their own value proposition. They do not plan to comment on this matter anytime soon. They believe their company's value proposition is their efficiency in retrieving and finding the best use for vehicles, and they are investing in their international buyer base. They do not expect any major changes, but will continue to enhance their capabilities. The speaker thanks the audience and ends the call.

The operator concludes the teleconference and webcast, thanking participants for their participation and wishing them a wonderful day.

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