Copart, Inc.
Q4 2020 Earnings Call Transcript

Published: 3 Sep 2020

[Operator:]

Good day, everyone, and welcome to the Copart Incorporated Fourth Quarter Fiscal 2020 Earnings Call. Just a reminder, today's conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Jay Adair, Chief Executive Officer of Copart Incorporated. Please, go ahead, sir.

[Jay Adair:]

Thank you, Casey. Good morning, everyone, and welcome to our fourth quarter call. I'd like to pass over to Jeff Liaw, our President, to do the safe harbor and then we'll go ahead and give you an update on the quarter. Jeff?

[Jeff Liaw:]

Thanks, Jay. During today's call, we'll discuss certain non-GAAP measures, which include adjustments to reverse the effect of certain discrete income tax items, disposal of non-operating assets, foreign currency-related gains and losses, certain income tax benefits and payroll taxes related to accounting for stock option exercises and the effect on common equivalent shares from ASU 2016-09. We've provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our website under the Investor Relations link and in our press release issued yesterday. We believe these non-GAAP measures, together with our corresponding GAAP measures, are relevant in assessing our business trends and performance. We analyze our results on both GAAP and non-GAAP basis.

[Jay Adair:]

Thank you, Jeff. Well, recently I was discussing with Willis the accomplishments achieved in 2020, and to say it was a unique year would be an understatement on so many fronts. The year started very strong, no No question about that. August was ahead of the prior year both in assignments, in units sold, and in per car yield. The great people that make Copart perform across the organization worked executing both internationally and domestically in existing operations from picking up vehicles, imaging those vehicles, doing -- receiving inventory, processing title, and eventually auctioning and selling off those vehicles. But also we were executing on future opportunities like finding land for capacity, making technological improvements to our internal platforms and our website, creating pipeline supply both through our marketing efforts and our sales team, and really the list of accomplishments goes on and on. We had no reason to see 2020 as anything other than being our best year yet where Copart would achieve record financial performance in an over 26-year history of filing Ks as a public company. By mid-year, we didn't believe that was going to be the case. The world was changing by the hour and the government was actually contemplating and eventually would implement a policy of shutting down nonessential businesses and restricting how frequently and where people drive. This was not just in the U.S. but we were seeing this globally in markets where Copart does business. Today, we have the benefit of hindsight, and despite all the challenges of 2020, it was a year where we actually did put down record performance both from an operational standpoint, but also record financial performance that outdid every year prior to 2020. And I will tell you in the past, we have had many great years where we questioned whether we could raise the bar again after such performance.

[Jeff Liaw:]

Thank you, Jay. Before turning to our financial performance for the quarter, which will provide the metrics we do customarily, a handful of observations about of course the COVID-19 crisis specifically. We anticipate many questions about recent trends, for which we'll provide you our most informed perspectives of course. We also want to draw you back, as Jay just did, to the strategic and operational principles that guide our decision-making. And have guided us through the pandemic, including investing in people, technology, and process, as Jay just articulated. We are immensely proud of our people for delivering our essential service to the communities we work in around the world. We elaborated in more detail on our last call about how important it is that we do what we do to enable the roads and our society's infrastructure to function as it does. We've done so while adapting on the fly to keep our employees members and customers safe. History has shown that, we distinguish ourselves in a time of crisis and investing in our people, processes, technology, and land against the backdrop of arguably the biggest economic disruption of our lifetimes. We think, we've done so again. Our aspiration throughout the crisis has been to deliver much, much more than business as usual. We have adapted real-time to our customers', workflow, modifications, their process changes. We've deployed new technology that has enhanced what we do. And what they do as well. I wanted to make a handful of observations about, some of the key industry drivers that we talk about regularly, including miles driven, accident frequency, total loss frequency, and matters like that before talking about the details of the quarter. As we noted on our last call, and in Jay's overview, we'd observed substantial declines in driving activity, in March and April. And therefore, assignments and inventory as well.

[Operator:]

Thank you. We'll take our first question from Robert Labick with CJS Securities.

[Robert Labick:]

Morning. Congratulations on strong operating performance in a uniquely difficult environment.

[Jeff Liaw:]

Thank you, Bob.

[Robert Labick:]

I wanted to start -- you mentioned obviously used car pricing is opposite at all-time highs according to Manheim, pretty much anywhere you look. So, two questions related to that. I'm just trying to tease out the drivers for your strong ASPs -- your record ASPs. Can you talk a little bit about, is it more from the dealer or drivable cars or more from the insurance cars being bought by dismantlers, which was a bigger component in driving the ASP growth?

[Jeff Liaw:]

Just the sheer volume of the cars, Bob would just mathematically make it so that it has to be the insurance volume driving the 26% increases year-over-year. As you know, the non-insurance cars in the aggregate only comprise about a quarter of our units sold. So it is like-for-like insurance vehicles.

[Robert Labick:]

Got it. Okay. And those were generally speaking, close to the 26% I guess, it probably would have been a better way to ask it in terms of the overall ASPs were 26%, were insurance close to that as well?

[Jay Adair:]

Yes. Correct. Yes.

[Robert Labick:]

Okay. Got it. Great. And then generally speaking as used car pricing rises there may be an offsetting impact to total loss frequency, but obviously we're in a different or unique world, and it's a short time period, but has there been any suppression on total losses or is there -- how is that dynamic working out in the current environment?

[Jeff Liaw:]

Well, the dynamic is -- it's the relative value of the cars when it comes to that total loss equation Bob that you know well from having tracked us forever. But it is the relative value of the intact car versus the wrecked cars that drives total loss frequency. And while certainly yes, used car prices are high and all else equal, those used car prices being that robust suppresses volumes that would come to Copart increasing salvage returns by as much as we have arguably drive total loss frequency on a net basis up nevertheless, right? So yes, if our salvage returns were going up 25%, while used car prices were flat or down, that would drive still more volume. The point is that at least for the quarter, used car prices were very strong but salvage returns almost certainly were stronger still.

[Robert Labick:]

Got it. Okay. Great. And then has there been any change in the supply dynamics because of the higher proceeds you're receiving? Meaning, are you getting different sellers coming into the market that before maybe weren't interested in using Copart, but seeing the record proceeds are starting to either give you more cars or any kind of change in supply?

[Jeff Liaw:]

That's been true within the non-insurance space for years Bob that as our cars gravitate more from back in the day 40 years ago, 35 years ago selling metal by the pounds to selling parts 20 years ago to selling intact drivable cars today even within our insurance cars themselves, that liquidity has naturally invited more and more participants to the auction, and that's certainly been true over the past quarter and the past year and the past five years as well. So yes, in short but not disruptively so in the last 90 days.

[Robert Labick:]

Got it. Okay, great. Last one for me, I promise. Just curious about -- I know in the past certainly cars that went to auction sold but that was mostly when it was all insurance cars, and as you've had more dealer or non-insurance, I know conversion rates are very high. But has there been any change in conversion rates given the scarcity of vehicles during the quarter so that maybe you even benefited from even higher conversion rates than in the not-too-distant past?

[Jeff Liaw:]

Not unusually so Bob. I think conversion rates are very robust and we track and manage carefully, but I would -- again wouldn't say there was an unusual disruption in the quarter.

[Robert Labick:]

Got it. Okay, super. Thanks so much.

[Operator:]

And our next question comes from Craig Kennison with Robert W. Baird & Company.

[Craig Kennison:]

Thanks. Thanks for taking my questions. Congratulations. Wanted to follow-up on the non-insurance market. I mean you've got this all digital platform. You've had it for a long time now. That should have been an ideal platform for you during the pandemic when a lot of the physical competitors were closed. I'm curious to what extent Copart was able to capitalize on this opportunity specifically to grow in the used car market?

[Jeff Liaw:]

Fair question Craig. I think the math we do isn't any different what you would. So, when you track the other publicly-traded auction houses for whole cars, I think you can see what relative performance would have been. I think we've noted that others have experienced declines in a period and meaningful declines in a period where we actually experienced growth. So, I think that's about all we know directionally, so we don't have any insider perspective in particular on those other companies, but we do believe against a backdrop of generally declining wholesale dealer volume that we have increased year-over-year.

[Craig Kennison:]

Am I right that this was a unique opportunity for you to really pitch the service to potential sellers and maybe you’ve got a better look this time than in past pitches?

[Jeff Liaw:]

I'd say yes and no. COVID-19 certainly has underscored how powerful Copart's natively digital platform, which has been exclusively digital since 2003. And having lived that way for 17 years means that we have honed that platform and understand it well. And other competitors had to do so at the tip of the spear had to virtualize overnight. And yes, I think Copart is distinct in that regard. So, on the margin, surely, it has enhanced our value proposition. In COVID-19, of course, it's also across any walk of life difficult to meet new people. So, it has reduced what otherwise might be the natural selling cadence as you get to know new parties, dealers, and otherwise, but I think on balance it has been a very positive force for Copart.

[Craig Kennison:]

And then circling back on the ASP commentary, I mean it's just an incredible number. To what extent do you think that reverses over time knowing that the pandemic was a factor? I know the long-term trend has been up, but for those of us who have to build a model should we bake in some year-over-year decline as we lap that next year?

[Jeff Liaw:]

The short answer Craig is that I don't know. There are -- as I noted in those comments a moment ago certainly some near-term technical factors to consider. The underlying drivers I think are still very long-term favorable. But as for predicting precisely what happens next quarter next year, I think that remains challenging. I would say that there's been some -- as one tidbit here. When we look at the buyers non-U.S. buyers of Copart cars at U.S. auctions we note that the currencies declined very meaningfully year-over-year. So, their purchasing power was meaningfully compromised relative to a year ago. But nonetheless the value of the cars they purchased increased substantially plus or minus in proportion with our overall ASP increase which meant that in their local currency, they're spending still more and dramatically more. So, I think the power of that liquidity is never going away. There is the flywheel effects now of driving more total loss frequency with outstanding returns we get lighter damaged cars which brings more buyers. But we do think that this is a productive period for us in further spinning that flywheel. Exactly what the year-over-year comparison will look like Craig we don't know.

[Craig Kennison:]

Great. Thank you so much.

[Jeff Liaw:]

Thanks Craig.

[Operator:]

We'll take our next question from Daniel Imbro with Stephens Inc.

[Daniel Imbro:]

Good morning guys. I wanted to start on the G&A side, really impressive control. I think probably one of the biggest surprises in the composition of the quarter to us. You mentioned travel being down. But can you provide any more color on kind of where you did remove costs? You mentioned, I think there wasn't any furlough employee removal. So, how do you think about like the sustainability of the cost cuts? Has anything changed there in your thinking?

[Jeff Liaw:]

No. Nothing has changed in our thinking. We did not furlough employees and continued to invest in our people. We continued to hire, to train, to promote, because that's what it takes to build a successful business over the next 20 years hard stop. On G&A, I'll be militantly consistent right in quarters where it's up a couple of million or down a couple of million. I'll ask you to use many quarters to draw your trend lines. No individual quarter is the right predictive model for future trends.

[Daniel Imbro:]

That's helpful. And then, maybe a follow-up on Craig's dealer question. You clearly gained share in the quarter. When you talk to the dealers on your platform, are you seeing them stay on Copart as some of the competitors reopen? And if they are, does that change you guys' long-term strategy around how much of your business could be dealer or should be dealer? I think in the past you've mentioned, you don't want that to be a majority of your business. But, yes, how has the success in that during the pandemic maybe impacted those long-term thoughts?

[Jeff Liaw:]

We've grown that dealer business in very steadily and very consistently for years. So, I don't -- we don't perceive this as a temporary one-time pickup. We invest in that business, because it is an excellent and profitable business for us and we invested it, because it's an excellent and profitable addition to our auction liquidity, which ultimately benefits our insurance customers as well as we draw evermore buyers to our platform we also will drive salvage returns upwards. So, I would say even before COVID-19, the whole car auction business is as competitive as it has ever been with very strong incumbents, with strong venture-backed new entrants into the business as well. And even against that backdrop, we continue to grow our volume virtually every quarter for, as many years as I've been here certainly, and we don't expect. We believe that competitive advantage is that is the auction liquidity point. And if anything our liquidity will improve as a result of COVID-19.

[Daniel Imbro:]

Got it. That's helpful. And then last one for me, touching on the balance sheet. As we think about uses for cash, I wanted to hear your thoughts on capacity. I mean to handle more volume and continued growth we kind of have two choices. You add capacity or you improve your throughput pretty hard. Is there a meaningful opportunity to really improve throughput from here? Or as we think about long-term CapEx, is that going to have to -- should that continue to grow to support future volume growth? Thanks.

[Jeff Liaw:]

Thanks, Daniel. We will do both and have to do both. So we focus very much on improving cycle times and turning cars more quickly, both because it is capital-efficient for us, but also because it is a better outcome for our customers, who can settle claims and close files more quickly who can achieve better auction returns with less depreciation with the cars sitting on our properties. So, that is an evergreen initiative on the part of Copart and has been forever. So yes, we will invest in reducing cycle times and can improve. But also, yes, we will continue to invest in our land and capacity, because it is absolutely necessary to serve our customers well, both in the ordinary course and in catastrophic times. We have to be prepared to absorb volatility. So, we are happily investing and have invested through the pandemic in additional capacity and expect to do so for years to come.

[Daniel Imbro:]

Great. Thanks so much guys, and best of luck.

[Jeff Liaw:]

Thank you.

[Operator:]

We'll take our next question from Bret Jordan with Jefferies.

[Bret Jordan:]

Hi. Good morning, guys.

[Jeff Liaw:]

Good morning.

[Bret Jordan:]

I got cut off for a second. So hopefully, I'm not going to ask this question twice. But, I guess, if you think about pricing and its role in the quarter, could you talk year-over-year about maybe what you've seen from a pricing increase? And as you look at the whole cars, as you get into the dealer space and you're competing with some legacy players, is there any bias to move prices lower as people will compete for share in that space?

[Jeff Liaw:]

I want to make sure I understand precisely your question Bret. You mean the prices we achieved at auction for the vehicles or the prices -- the fee...

[Bret Jordan:]

The fee -- the buyers -- yeah, the rate on buyer fees year-over-year in the insurance space, and then whether or not there's any bias to be increasingly competitive on the fees charged as you get into the dealer cars?

[Jeff Liaw:]

On fees, we don't comment, Bret. Publicly available of course on our website is a fee schedule that our members incur when they purchase cars at Copart and for other services that we provide.

[Bret Jordan:]

Okay. Anything that you're seeing as far as dealer volumes and pricing?

[Jeff Liaw:]

Dealer volume noted -- you may have clicked off the call at that moment, but we have experienced increases year-over-year in dealer volumes for the quarter, and that's against what we believe our competitors who have experienced very meaningful declines in dealer consigned volumes for the quarter. So, we believe that we have grown our dealer business relatively speaking much faster than the rest of the industry. That is not a reflection of, of course, aggressive fees on our part. We believe that we have a very competitive offering, and ultimately deliver the best possible returns to our dealers. But that's easy to say. But, we think the very consistent growth in our Copart dealer services volume is a reflection of the actual reality in practice.

[Bret Jordan:]

Okay. And I guess did you comment on capacity utilization? I think you said, you've added over 2000 acres. Did you talk about what your average utilization is?

[Jeff Liaw:]

Yeah. Average utilization I think not super meaningful, because the land isn't fungible and each yard is its own -- certainly each metropolitan area is its own island. And even though Dallas and Texas are in -- Dallas and Houston are in the same state, you can't really use one city's facilities as fungible capacity for the other. So, we certainly monitor our metropolitan areas very carefully and invest accordingly based on our baseline expectations over the next five or 10 years. Certainly capacity utilization is lower during the pandemic than it otherwise would be, for all the reasons you already know about, inventory and driving activity and so forth. But capacity utilization is a microeconomic evaluation, which then drives our investment decisions on a micro basis. But in the aggregate, we will continue to invest in land for years to come.

[Bret Jordan:]

Okay. Thank you.

[Jeff Liaw:]

Thanks, Bret.

[Operator:]

Our next question comes from Ryan Brinkman with JPMorgan.

[Ryan Brinkman:]

Hey, great. Thanks for taking my question. I think it's really incredible the increase in average selling prices that you reported. Can you just help us think about the ways that that helps Copart? Is it the case that you generally charge buyers a fixed percentage of the transaction price in agency model transactions anyway such that the revenue from higher prices falls just pretty well through to profit? And then also it'd be great if you could comment on the reasons for such a large increase in prices and the sustainability of the various factors driving prices higher?

[Jeff Liaw:]

Got it. On your former question Ryan that member fee schedule is readily available online. So we encourage you to look there and you can see what happens to the fees that our buyers incur based on changes in the selling prices of vehicles. As for the pricing changes and the actual pricing at our auction or the selling prices for cars that are auctioned they are high for a combination of technical, but also fundamental reasons. The technical reasons you heard us comment on are the used car prices are robust against the supply-constrained new car environment. But the fundamental reasons are rising total loss frequency new or less damaged cars being totaled better auction liquidity we have driven more bids per vehicle by far than we did a year ago in the fourth quarter of 2020 than 2019. So those are the fundamental drivers which we think ultimately are the most important ones. There will be near-term technical changes certainly some of which we are benefiting from today, but others of which are unfavorable including volumes for example. But over the long-haul, the flywheel of auction liquidity the recruitment of international -- recruitment and retention and cultivation of international buyers we think will continue to drive selling prices upwards, total loss frequency upwards which in turn of course is self reinforcing, self reinforcing bringing ASPs up as well.

[Ryan Brinkman:]

Okay, thanks. And then just finally are you able to comment on the trend in assignments here in 1Q? Do you have a timeframe in mind for when miles driven or assignments will return to pre-pandemic levels? Thanks.

[Jeff Liaw:]

Appreciate the question. That remains I think largely unknowable. We have generally seen a continuation of the trends that we were marked on in the fourth quarter and the first quarter, but we'll talk much more about the first quarter of course including storms and so forth on our first quarter call. But we've generally seen a continuation as for when society returns to normal practices we'll leave that to the experts.

[Ryan Brinkman:]

Okay. Thank you.

[Operator:]

Our next question comes from Gary Prestopino with Barrington Research.

[Gary Prestopino:]

Hey good morning everyone. Just looking at the change in the purchase margin -- gross margin sequentially and year-over-year you mentioned it was being -- some of that was driven by a move from a purchase to a consignment agreement. Are we to assume that that move in and of itself, was that agreement that you had on a purchase pretty detrimental to the margins overall? And that getting that out of the mix just led to those vehicle sales margins going up pretty dramatically? And is that gross margin sustainable?

[Jeff Liaw:]

The answer to your first question is, no. It's not that the purchase vehicles of that particular customer were very, very unprofitable somehow and we removed them. We don't much these days Gary about -- we prefer consignment arrangements because we think it generally is a better alignment of interest between us and our customers, but it's not per se a profitability decision. The purchased vehicle changes year-over-year the decline in revenue is in part attributable to this shift in that customer because now instead of showing up as purchased vehicle sales and purchased vehicle COGS, it now shows up instead as service fees. But otherwise no that was not any meaningful driver for the change in purchased vehicle profitability.

[Gary Prestopino:]

Well was it ASPs? And...

[Jeff Liaw:]

Yes. In short, yes.

[Gary Prestopino:]

Okay. And then could you give us some idea. I know you said your dealer business was up, but could you put a number on that in terms of the growth in units year-over-year?

[Jeff Liaw:]

It's up meaningfully. I think we've historically said -- disclosed we've been up double digits. In this case it wasn't double digits but meaningfully so.

[Gary Prestopino:]

Okay. And then just getting back to my other question, I'm sorry about the sustainability of that gross margin. Is that something that again that's going to really be driven by what the ASPs do in the future?

[Jeff Liaw:]

Yes. And I forgot that third or that quarter of your prior question. We don't manage the business to gross margin rate per se Gary, we're of course optimizing for service and returns and profitability and so forth. So the margin rate is really just a byproduct metric that we track at the end of the month and the quarter as a matter of visibility but it's not -- we think about the business on a per car basis and how much profit and contribution we generate per unit. So the rate is not something we consider, but your point about ASPs very strong average selling price performance contributing to our profitability, yes that's certainly true. To the point about consignments, we want to work with our customers on that basis to drive the highest possible returns which yield the very best outcomes for them and for us.

[Gary Prestopino:]

Okay. And then last question just on your dealer business. I would assume that most of your dealer customers are independent. So is that correct?

[Jeff Liaw:]

Yes.

[Gary Prestopino:]

So, is the assignment from the independent dealers of a car, is that driving a lot of the growth? Or are you finding a lot of the independents are also buying cars from you?

[Jeff Liaw:]

Don't follow -- didn't follow the question. Meaning, yes, we are growing go ahead.

[Gary Prestopino:]

Yes, I guess, what I'm trying to get at is that, if an independent takes in a trade that they don't want to keep on their lot. Are they handing it off to you to sell? Or are you seeing more of the usage of the platform, the independent dealer buying cars to replenish inventory?

[Jeff Liaw:]

Well, they certainly participate on both sides. So, yes, we are growing the consignment volume. And yes, we are also a viable purchase channel for dealers as well.

[Gary Prestopino:]

Okay. But you have very few franchise dealers that are using your platform right now.

[Jeff Liaw:]

We have a good variety of non-insurance consignment sources including dealers of all types.

[Gary Prestopino:]

Okay. Thank you.

[Jeff Liaw:]

Thank you.

[Operator:]

Our next question comes from Joseph Hafling with Truist Securities.

[Joseph Hafling:]

This is Joe on for Stephanie. How are you guys doing?

[Jeff Liaw:]

Good. How are you Joe?

[Joseph Hafling:]

I just had a couple of quick questions maybe quickly shifting back to the non-insurance business. I was wondering if everything which is going on with rental, if you guys could talk about maybe how that was going, if you had any opportunities on the rental side of non-insurance?

[Jeff Liaw:]

In short, that's a relevant target segment for us. We have served that segment of the market for some time. Plenty of disruptions as you know Joe in that corner of the universe given what's happened to travel trends over time. So, for all the same reasons that we are increasingly a compelling offering to the dealer universe, we think that's also true for the rentals and financial institutions and otherwise.

[Joseph Hafling:]

Okay. Great. And then maybe just another one from me. I was wondering, if you can give an update on Germany, particularly with maybe some of the problems with some pandemic maybe causing that to accelerate the insurance company there?

[Jeff Liaw:]

Yes. We remain very excited about our long-term prospects in Germany and continue to invest in our business there, including all the dimensions we've talked about before which is in people and technology, and land capacity, in trucks and equipments and certainly in customer relationship building as well. I think we noted a couple of calls ago that we are selling cars for insurance carriers on a consignment basis. We're delivering some very strong returns and remain very optimistic about Germany and frankly about Western Europe in general.

[Joseph Hafling:]

Okay. But -- you haven't seen anything as far as like the productivity of this conversation increasing because of the disruptions the pandemic caused over there?

[Jeff Liaw:]

I think, it's too early to tell. I think, there's some -- your intuition is probably reasonable in that if there is a -- I think we have demonstrated that the Copart Germany model is economically superior and frankly even experientially superior for policyholders than the status quo. We talked about that at length in the past, so I won't rehash that entire narrative. But one of the big barriers to out converting the market is just inertia. And so yes to the extent that COVID-19 has forced us all to confront inertia and has up ended a lot of what we consider the ordinary course. I think in that respect yes, this can cause customers to contemplate radical changes in their business.

[Joseph Hafling:]

Okay. Great. Thank you. That was everything I had. Congrats on the quarter.

[Jeff Liaw:]

Thank you.

[Operator:]

At this time, there are no further questions. I'll now turn it back to today's speakers for closing remarks.

[Jay Adair:]

All right. We appreciate everyone showing up for the call and we look forward to reporting Q1 in the future. Thanks again. Bye-bye.

[Jeff Liaw:]

Thanks everyone.

[Operator:]

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day.