Copart, Inc. (CPRT) Earnings Call Transcript & Summary

I'm Craig Kennen, Copart operates purely online auctions for used wholesale and repairable vehicles. The company has wide moats based on vast property ownership, that is needed to store and process vehicles and also a global network of buyers and sellers. We're pleased to welcome Leah Stearns, who is the Chief Financial Officer; and Owen Sweetenberg, who is the Manager of Strategic Analytics. This will be a fireside chat format, so have your questions ready. Maybe just to open up, Leah, I'd ask you to give a summary of what Copart is and how you operate.

Thanks, Craig. I think you did a really great job actually tuning that up. I think for the crowd here, to the extent that you're not familiar with Copart, what's really important to understand is that we operate a global marketplace for salvage and used vehicles. Those units are primarily sold and consigned through Coport by insurance carriers and Copart was founded 40 years ago, really with the premise of helping to facilitate the disposal, storage and monetization of salvage automotive units. And we've been able to build a 2-sided marketplace really on the back of taking Copart online over 20 years ago, that really facilitated the growth that Copart has experienced over the last 20 years as we've built out both sides of that marketplace. So today, we have customers buyers in a 160 countries. We have a more diverse mix of sellers and consignors. And so Copart continues to benefit from the evolution of the units that are being sold through our marketplace every day. We see that from the diversification of our seller base. So it's no longer primarily insurance customers. It's also fleet, repo and rental car companies as they have damaged units -- they know they have buyers at Copart that will be able to monetize those units effectively. We also have dealers who sell through Copart, and we also have a small and growing direct business for consumers for lower-value units. And so our business has evolved over time. Initially, the primary driver of the average sale price ASP of the unit at Copart was based on the value for recyclers or dismantlers to take those units and repurpose. The parts or ultimately recycle the salvage steel into rebar and other purposes. As we were able to develop a broader buyer base, particularly when the marketplace went online. We built out, and this has taken 20 years. We've built out a very large and vast rebuilder both domestic and international buyer base. And that buyer base has incrementally looked to Copart to provide higher value units and that has provided a nice benefit to our ASP over the last several years. So we're excited to see what the next decade brings. Copart is still primarily run like an entrepreneurial business. Our founder, Willis Johnson is still actively involved. He's our Chairman. And I would say from a culture perspective, one of the things that truly stands out and I believe differentiates Copart is our culture. When I joined 6 months ago, one of the most important things in my search was to find a company where the team environment was such that we could really jointly collaborate and create more as a whole than individually. And so it's been really fun over the last 6 months to get a chance to see that. Get a chance to see Willis still engaged with the team and finding ways to grow Copart, seeing Jay and Jeff, our co-CEOs partner together and work very collaboratively to drive the business forward. So I'm very excited. We continue to have a very long-term view for where we want to take the business, and we run the business for decades, not quarters. So that is also a luxury for a CFO because I get to make big long-term strategic decisions alongside my peers, and that's really exciting.

Willis wrote a book called Junk to Gold. I'd love to plug that book if you're interested in the culture of Copart and what separates it. I think that's a good place to start. So what I'd hope to do is maybe kind of walk through your business a bit slowly. Let's talk about, first, what drives volume, what drives vehicles through your platform? I'm assuming you -- I believe you sell over 4 million cars a year.

So volume at Copart is really driven by the insurance side of the business, we'll start there as carriers make decisions to total a vehicle as opposed to repair a vehicle. So if you get into an accident today, the insurance company will take a look at the value of the car, the moment before you got in an accident and compare that to the total cost of the claim. And that will include repair costs, supplementals cost for rental cars, any advanced charges they may accrue and the potential risk associated with that claim taking longer than it was initially forecasted. And typically, if that cost is more than 70% of the pre-accident value. The decision historically has been that, that car is likely deemed a total loss. And so for Copart as the value of used cars, precipitously increased over the last couple of years, we actually saw an attenuation in volume because the relative benchmark for how they made that decision was significantly inflated relative to past prior periods. And repair costs have continued to increase at a rapid pace, but really used car pricing had outpaced that level. As we're seeing used car prices attenuate and really moderate within the space, we're actually seeing total loss frequency begin to increase. And we believe that over the long term, because we've seen significant increase in repair costs, we're seeing supplementals substantial increase on a relative basis as a percent of overall repairs in addition to the underlying cost of the supplemental. We're seeing the duration for rental car subsidies increase, and we're also seeing advanced charges. So if you get into an accident, your car is typically stored at a repair shop until the parts are available until labor is available to address it. All those costs are now increasing faster than what we saw on the used car pricing side. And so we believe those are all tailwinds to the ultimate total loss frequency trend over the next several years.

So to put a number on it, I think the total loss rate before the pandemic was 21% of vehicles on which a claim was filed that dropped to 17% or so. Can you remind us where that is today?

So it's back up over 19%. We saw really the last 3 quarters were the effectively the trough to now the resumption of an increase in total loss frequency. And so we believe that we don't forecast for the near term or long term, but we're -- we have a strong conviction that over the long term, that frequency rate will increase.

And then maybe talk just about accident trends, if you will. We know about ADAS technology and lots of tools to maybe prevent an accident from happening. We know lives have changed and people don't drive to the office as much. What are the big trends in accident frequency today? .

So while frequency gone down, severity has continued to increase, and part of that is driven by distracted driving -- and while there have been safety features embedded in cars, what that is actually driving as a higher cost of pair. So if you do get in an accident, a lower level of damage actually could effectively result in the car being totaled. If you think about the number of sensors, cameras and the technology embedded in vehicles today, that is driving a significant increase in the underlying cost to repair and the complexity for consumers to get their cars repaired. Sometimes it even requires a certified technician to address that. So we see the overall ecosystem around Revera becoming more complex. And that is ultimately, even though frequency is coming down, seas severity increases and the cost of repairing complexity of repair increases is also effectively throwing more units into a total loss decision.

Could you talk about the role that land plays in your moat and the service that you offer? And then maybe as part of that conversation, talk about catastrophes and what role that plays. .

Sure. Land is critically important to our business. We effectively provide storage for our customers as we process auction and then distribute the units to our buyers and effectively land today, we look at it across multiple different strategic directions. One is simply to address the growing capacity needs that we see from the sellers that are consigning at Copart. Because we have that embedded capacity, sellers know they can rely on Copart to serve their needs in the future. And it also allows us to grow in other areas of our business like our Blue Car initiative, where we have both salvage and wholesale sellers coming to Copart. So it allows us the ability to look into other adjacencies to expand our business. So that's capacity. From a cost perspective, we're constantly looking at ways to bring down the distance of that initial tow. So when a unit comes to Copart, we're typically picking that up from a repair shop or storage facility, that distance is a meaningful cost for us. And so we think about it like an incremental node in the distribution network and ultimately look at the underlying cost of our logistics and transportation and think about it on a return basis on that front. And then finally, from a catastrophic event perspective, we need to have excess capacity to serve our customers. particularly when there are large hurricanes, floods and hail storms. And so to the extent that we have that additional existing capacity to serve that need, it allows us to respond rapidly and that allows our customers to not have to have as much resources dedicated to those one-off events. And we've really, I think, done a phenomenal job of building up our capability on that front.

It feels like your particular capacity to handle vehicles during a catastrophe has been a differentiator, what's the pitch to the insurance industry that differentiates Copart from your competitors with respect to a Cat?

Well, so Copart, and one thing I love about this business is that everyone rolls up their sleeves. And so it's not just a team that flies out into the part of the storm recovery process. Jeff, Jay myself included Owen, who's here with me, will go out and spend time and really roll up our sleeves and drive and help the business get those outcomes for our customers. we have been continuously improving our cat response over the last -- over a decade. And that really started when we responded, I think, to Hurricane Sandy in the Northeast. And ultimately, what happens is we have logistics capabilities. We have large storage facilities, and we engaged before the storm even hit. So we are deploying capacity capability, whether it's putting loaders into yards, deploying temporary shelter, ensuring that we have all of the necessary components to support our teams to receive thousands and thousands, tens of thousands of units over the next several days as we recover that for our customers on the insurance side. And what we found is that it used to be that insurers would send large teams into the recovery process at a cat. And today, they send very few, if any. And so they've effectively outsourced that project to Copart. And I think it's just demonstrative of the value that we provide to them. It helps them reduce the variability of their labor needs and we've demonstrated our capability to do that.

So we've been really bullish on this volume driver, this total loss rate, which we think is recovering from a cyclical standpoint, but there's secular growth, as you talked about. But we had been maybe a little concerned that the flip side would be average selling prices are coming down. Therefore, maybe your fees would come down what's driving average selling price to be -- to hang in there when we see used car prices down double digits?

So we've seen ASP be quite resilient. I think there are several drivers for that. as I indicated at the outset, volume on the insurance side is the initial metric that insurance carriers look to is the pre-accident value of the unit. And so I think a lot of people think of the Manheim Index or other other industry indexes that track these car values as being an indicator of the likelihood of a unit being totaled or the underlying value of that -- the unit that may be totaled. But what's also important to appreciate is that underlying that is that we have built a large international buyer base of rebuilders. And so they're naturally as we have built over decades, more volume of lighter damaged higher-value units, we naturally have buyers who know they can find those at Copart. So first and foremost, it's our global buyer base, I think, is driving the resiliency in our ASP. Next is the fact that we have intentionally leaned into areas of clean title and some other higher value, what we call blue car seller units. And those are specific units that are coming from, say, a rental car company that might have some level of damage to a unit. Some of them are wholesale traditional clean title units. but because we have that international and really global rebuilder base, those units are in high demand, and those are much higher ASP than a traditional salvage unit. So we're bringing those higher ASP units naturally into the mix. And then finally, there was some intentional pivot away from some of the lower value charity units that we had previously. So I'd say those are all helping to drive resiliency for ASP. And then maybe finally, the point that I think is kind of a new phenomenon is the fact that as we saw the used car pricing in the U.S. really escalated at a high pace, the units that fell out of the total loss process were the most valuable ways. So they were the ones where they would be the most expensive from a pre-accident value perspective. And because repair costs continue to increase and used car pricing has come down. Those higher value units are likely to be the ones that come back into the mix. So I think that's another element of benefit that we'll see from a mix perspective.

So you mentioned Copart blue. Most of these conversations about your salvage business, but Copart's a nice new driver for you among many. Talk of what's your pitch to potential consignors. .

So we, first and foremost, start from our position of strength. We want to make sure we're leveraging the capability and the buyer base that we have today to serve new and additional sellers who can sign units at Copart. And so Blue Car was really born out of our sales team's efforts around our rental customers, our fleet customers and ultimately, banking institutions who have large repo volumes. And really, the initial pitches, if you have a unit that's damaged, it's likely going to command a better return at Copart than it will in a traditional wholesale auction. And that's on a net basis because ultimately, if it's damage you're likely going to need to repair it in some way, shape or form or recondition it prior to auction, if it's not at Copart. So from where we stand, I think there's a real opportunity for us as we continue to increase the quality of units that we have at Copart, so these are light damage, higher-quality units. We're also, on the other side, nurturing our buyer base and helping them find those units. So today, we have multiple rental-only auctions twice a week. We have a specialty auction. So we naturally from our traditional consignors have medium- and heavy-duty trucks and also some farm equipment that we received. And so helping our buyers now find those units at Copart we're naturally developing both sides of the marketplace. And so I think that's an area where we'll continue to lean in, and it's an exciting opportunity for us because, again, we're starting with the strength that Copart brings, which is helping our consignors manage units that they may not get full value for in a traditional auction context.

With respect to that particular channel, do you ever see an opportunity in the off-lease market for Copart? That seems like an untapped area for you. .

That part of the market is so depressed today. I think it certainly, in the future, could be an area of opportunity. But given the fact that leasing volumes are down more than 30% from 30%, I think, sub-15% today. It's quite small given the fact that it will take time to ramp back up, and then it will obviously take time for those units to season off from their lease cycle.

So I wanted to spend a minute then on Copart Dealer Services here, you're sourcing vehicles from dealers, not other institutions, what's the pitch to dealers? .

Yes. It's very similar to Blue Car. So again, these are units that are not frontline ready. Copart I think we've earned the right to participate in that sub-$10,000 ASP market. We're not aiming for a $20,000 to $30,000 ASP unit across the board. What we ultimately want to do is meet the objectives of our sellers, which is to provide them a strong return for the units that they're consigning at Copart. And because we have natural buyers for those units within that ASP range, I think we can be successful in that respect. And then over time, we've begun to build up our capabilities to increase the level of ASP that we can command and that we can sell through the auction marketplace. But ultimately, I think there's a real opportunity for dealers as they have units that they are seeing traded in that are not frontline ready that they can naturally sell them through Copart and achieve a better return.

So when we think about one aspect of your moat, it's the network effect. You might measure that in terms of the number of buyers you have internationally or overall globally. You might measure that in the yield, the return that you earn for your consignors. What's the best way knowing you don't share a lot of metrics to convey the moat and the quality of your service there? .

So ultimately, I look at how Copart is providing value to our customers through the retention and the growth that we're seeing on a volume and ASP basis. I think we've -- we continue to set a high bar for the industry. Our operational processes are constantly being enhanced. I think it's, again, a really special part of our culture, is the fact that from a day-to-day perspective, there's no complacency within the organization. So in addition to the yields we can generate an additional to the real estate mode that we have, we have an incredible focus on tech and product within our organization to serve the needs of our customers. And I think that's something that's quite special about how we address that area of future development. We recently had an advisory board in California where we brought together some of our largest insurance customers. And what was really impressive to me was being able to see the list of items that we heard from our customers, they needed us to address to help them and that we had green checks next to each one of them. a year later. And so it just shows that there is a consistent process to listen and engage with our customers in a way that will help them be more productive. And that ultimately creates a level of connectivity with us, whether it's through them outsourcing their cat needs, whether it's us providing them greater speed through the title processing process. whether it's enabling us to reduce transportation costs, which ultimately will benefit them long term. And all of those areas are things that we continue to focus on at Copart and I think continue to create significant value around the ecosystem.

So Copart has made a strategic decision to own property. Talk about that strategic decision, why philosophically, you believe that's the right call. And then help us understand the permitting process involved in the land that you own?

Sure. So real estate is really fundamental, and I think you highlighted that at the outset and how important it is to the day-to-day operations of our business. It is extremely difficult to replicate a site that we would have today in any jurisdiction, let alone, I think, nearly impossible to replicate the network of locations that we have across the country. And that goes back to the zoning, permitting, not my backyard challenges that we see even as we try to expand the network of locations in the U.S. And I would just say it's -- each location is unique. It's a bit of a unicorn. And so I wouldn't be able to characterize the entitlement process as being a standard one, it is going to be different in every jurisdiction. We have to be very careful around ensuring we've maintained those entitlements. So we have a clear process around what entitlements we have and ensuring that our operations teams are aware of any steps we need to take to maintain those rights to operate in our locations. But that is a real differentiator for Copart. We've made a strategic commitment to continuing our real estate ownership, and we deploy hundreds of millions of dollars a year into that. And ultimately, it's in support of our customers. It's in support of our long-term industry capabilities. And so I think of it as our role as an industry -- as a steward of our industry.

So we had a question from the audience. I'm going to merge it with one of my questions. but it's really to address the current credit environment and the elevated level of delinquencies and ultimately, whether we're seeing more repossession. So I'd like to ask about just general automotive repossessions and whether that impacts your buyer network, which is the question here. And then maybe you can also talk about NPA and the role you play in Powersports. .

Sure. So from -- maybe I'll answer it in reverse. So NPA was born actually out of a repossession business, which is probably why you're asking on that front. It is certainly an area that we have expanded within Copart. Again, it's 1 of the natural entrepreneurial characteristics of the organization to identify ways to expand our capabilities more broadly. And so NPS has a repossession business. I think in the current credit environment, you would expect that in areas of repossession, particularly for whether it's recreational vehicles or traditional automotive, we would tend to see an uptick. We are seeing a higher level of underwater loans particularly for units that are being totaled. And I think it's just representative of the broader macro environment. And then I think as we try to find ways to have a stickier customer experience, find ways to truly differentiate that repossession business has been an area of just that. It's been a spot where we can really differentiate on behalf of our customers and the services we provide.

So I see a lot of our European friends in the audience, and so it's a good opportunity to tell them what you do in the European market. Talk about maybe the addressable market there. how the market is different for the service that you offer and where you've had some success so far?

So our European business, and I'll include U.K., Ireland, Finland, Germany and Spain as kind of our core presence in that region. We've seen tremendous success in our U.K. business. That's a business that's very similar to the U.S. in terms of the process that insurance carriers go through to settle a total loss claim. And we continue to invest in real estate and our capabilities and expanding our consumer direct business and other areas for that part of our business. Germany has been more challenging, particularly given the fact that there is no salvage title, and there is also a different process that insurance carriers follow to settle a total loss claim. And so that's a market where I would say our progress has been less advanced, but it is an area where, from an overall addressable market perspective, it is very large and actually larger than the U.K. So it's an opportunity for us to think creatively about how to lean into the strengths that market could present, and that's what we're doing today.

Can you talk about the differences in the German market in particular, and that's a good illustration, I think.

Sure. So maybe just to start, one of the reasons why the industry was started was because in the U.S., you have to -- if you get into an accident, your cars total, do you have to change title from clean to salvage. Every state is different in terms of the process that you go through to do that. And there is storage requirements associated with that. So you have anywhere from 45 to upwards of 70-plus days that some states take to process that title change. In Germany, there is no salvage title process. And so there's less friction for insurance carriers to settle a claim and those insurance carriers can't technically take because there is no sales, they can't take title. In addition, from a pure process perspective, I would say, the gross settlement model. So if you get into an exit in the U.S., you get a check for the pre-accident value of your car if they total it, and then they deal with the residual return that they get from the auction or if they decide not total it, they'll obviously give you a check for the repair costs. If in Germany, you get into an accident, you get a check for the difference in what the high bid at an auction marketplace is from the insurance carrier and then that piece of paper that says for 21 days that is valid. And in most cases, consumers actually don't take that offer, they go somewhere else. And what that implies is that there's adverse selection, people are actually using other avenues to get better economics for those units. And therefore, insurance carriers are inherently paying more than they should. So we think there's a real opportunity there. There's a lot of logic to it. It's just been a longer process to transition that market and that's why we're excited to continue to lean in.

So you joined as a CFO of a company that now has $2.1 billion in cash and virtually no debt. That's a nice job to have as CFO, a probably rooting for higher interest rates, maybe the only one here doing that. But talk about your plans for cash in the context of your stock price, your land needs and other acquisition opportunities.

Absolutely. So you are very correct in that it's a luxurious position to be in from a CFO perspective to have the balance sheet that I have and to have the long-term vision that our founder and co-CEOs continue to bring to the table, which is that we run this business for the next decade, 2 decades, it's not for each quarter. So we're not being reactive to any one specific market condition. Our balance sheet reflects that. We have been very disciplined around how we pursue investments investing in land, investing in our technology, investing in logistics. All of that is on behalf of our customers, and we're making sure that we're doing that in a programmatic way that is very focused on long-term value creation. We believe there are multiple avenues of growth for us, and that can be both on an organic and inorganic basis. So we're investing in building out our broader international and global buyer base. focusing on expanding our tech offerings for customers. And so all those areas of organic investment, we think we can also enhance with some inorganic opportunities, but we'll be very disciplined around that as well. And ultimately, to the extent that we can't find opportunities to deploy that capital into investments that would enhance our operational capabilities, we would look to ultimately return that to shareholders in the form of but it's certainly an exciting time at Copart, and we have a lot of levers to pull for long-term value creation, and I extend to be part of the team.

Leah and Owen, thank you very much. .

Thank you, Craig.