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

Good day, everyone, and welcome to the Copart, Inc. conference call. Just a reminder, today's conference is being recorded. Before turning the call over to management, I will share Copart's safe harbor statement. The company's comments today include forward-looking statements within the meaning of the federal securities laws, including management's current views with respect to trends, opportunities and uncertainties in the company's industry. These forward-looking statements involve substantial risks and uncertainties. And for more detail on the risks associated with the company's business, we refer you to the section titled Risk Factors in the company's annual report on Form 10-K for the year ended July 31, 2025, and each of the company's subsequent quarterly reports on Form 10-Q. Any forward-looking statements are made as of today, and the company has no obligation to update or revise any forward-looking statements. I will now turn the call over to the company's Executive Chairman and incoming Chief Executive Officer, Jay Adair.

Thank you, Joe. Well, good morning, everyone. I was reflecting and the last time that I did analyst calls it was a couple of years ago, but I started doing analyst calls in 1996. So I thought I'd give you a little background on myself. I know most of -- I think I know most of the people on this call. But for those who don't know me, I started with Copart 37 years ago in the summer of 1989 when Copart was a relatively small business. And we went through a private equity or private fundraising period in 1993. And by 1994, we were publicly held. I had the pleasure of going on that road show. And it was the first time that I've been to New York. So it was -- to say it was an interesting experience was an understatement. It was an amazing experience. Within a couple of years, we were reserving copart.com, and I was building out and spending most of my time building out web pages and web products for copart.com. By 1998, we had done with online. We had invented, I should say, the first online bidding product by 1999. We had vehicle images, and I remember getting a phone call from Scott McNealy, who worked down in Silicon Valley and wanted to see what we were doing and came up to Fairfield to see what company was taking so many images and changing the industry the way we work. By 2003, we had moved everything completely to online. I built that product with our team. We patented that product, and we would effectively be the only digital -- fully digital auction for the next 20 years. In 2004, we decided we wanted to expand and go outside the U.S. by going to Canada, followed that in '06 by going to the U.K. and then followed that by going to Spain and Germany and Brazil and the Middle East and Ireland, and so I'll talk more about our growth, but I've got a lot of background in international expansion with the company as well. SP999 I guess, first, I'll start by talking about the CEO transition. Let me just make it very, very clear. Jeff and I worked together for 11 years, and I consider them a dear friend. I'm thankful to him for everything that he did for this company as CFO as President as Co-CEO and as CEO. My return back to CEO is something that Jeff and I decided on together. We both agreed that it was the right thing for Copart and my intent is to lead the company for the next 10-plus years. This is not an interim arrangement and I won't be going through a process of finding my successor. I'm just going to focus and double down on all of our initiatives to build Copart and to grow Copart, and we'll talk about that. There's really three growth pillars that we focus on, international expansion on insurance, whole car expansion domestically and then technology services. for our customers. I want to be very, very clear. This is a growth company. And there is a lot of noise and a lot of rhetoric out there, and I have a pretty good history of saying, "I don't listen to the noise, and I don't respond and things, and I'm going to continue that. So I might be asked questions that I won't answer or that I don't want to answer. But at the end of the day, it's because we're going to focus on what it takes to win, and I don't plan to put my playbook for winning out there publicly from a competitor to see. I believe -- I mean I know our customers personally, and I believe our customer relationships are stronger than ever. The idea that is not the case, I believe, is just false. During our Q3 earnings call, we shared that total loss frequency reached approximately 23.6% in the most recent period, up nearly 5 points over the past 4 years. driven by repair costs and by the record auction returns we generate, which make the total loss decision more attractive to carriers. When I started, total loss frequency was 8%. And we've watched that continue to improve and continue to increase over the decades, and we believe that will continue. Another point on our Q3 earnings call was that U.S. insurance ASPs reached an all-time high in the most recent quarter, up approximately 4.1% year-over-year. And international buyers, crossover buyers and finance buyers continue to be critical drivers of our auction returns. Our global buyer network now spans more than 160 countries. I'll talk a little bit about the cyclical headwinds that we're facing. But I think it's very important to realize that we are not only the largest, but you can look at all the activity that comes on to our website, and you will see that we have the best auction liquidity in the industry. On cyclical headwinds, we are experiencing the impact of cyclical and, in our view, unprecedented dislocation across the U.S. industry, the U.S. insurance industry. The 2022 to 2024 inflationary cycle pushed carrier combined ratios out of balance. Driving rate increases, which drove consumers to pull back their level of insurance coverage, which was observed through a shift toward higher deductibles and liability-only policies. I believe that is now softening, and we are starting to see insurance companies become more aggressive again. And much of this is from 2020, COVID, the impact of that the impact of insurers cutting dividends back and reducing insurance rates. And now we've seen kind of the flip side of that, as we have seen in the past year or 2, and I think we're now going to see things kind of normalize. We believe the consumer retrenchment is cyclical, not structural. So I want to make that very clear. On international momentum, we are going to be firing that machine back up again. We have slowed that historically as we were figuring out different models to the Copart model in Germany. We have figured that out now. We are profitable, and we know how to grow in that market, and so we'll be expanding in other international markets in Europe and other locations as well. International unit volumes grew 5.9% and international revenue grew 14.1% year-over-year in Q3 2026. I with both insurance and noninsurance channels contributing. So it's an area of significant focus for us as a team, and we will be, for lack of a better term, speeding that up as we go forward. Looking at our balance sheet. As of Q3 fiscal year '26, we have nearly $4.2 billion of cash. This is after recently deploying $1.6 billion into share repurchases. We have no debt on the balance sheet to speak of. We believe we have the liquidity to continue to look at all strategic options available to us. Before I open it up to questions, I'll point out that Leah Stearns is here in the room with me, our CFO. So if there's some questions that are financially focused. I'm going to let her answer those. I'll say this. We continue to deliver for our customers. We will continue to focus and beat customer-centric company. We'll continue to provide the best liquidity in the industry. And I will tell you after -- I'm not saying I was ever left because I've been Executive Chairman, I've been involved and Jeff and I, over the last 2 years, 2-plus years, we speak regularly, if not daily, multiple times a week, but I have dug in heavily in just the last week and I'm excited, and I'm looking forward to the changes we're going to make, and I'm back. So it's not like I'm here temporary. I'm here to stay, and I'm excited for everything that we plan to do for this company. On that note, I'd like to open it up for questions.

[Operator Instructions] [indiscernible] Robert Labick, [indiscernible].

Good morning, and welcome back to the calls, Jay.

Thanks, Bob.

I'm doing well, thank you. It's great to hear your voice. I know you've stayed active with the company, but we haven't talked in quite a while. So it's really nice.

Jeff was really good at Investor Relations. So you are correct. I was not that engaged in that component, but good to hear your voice as well.

So thanks for the background. Obviously, we've known you guys for ever. I wanted to get your thoughts on how AI is shaping the industry and how Copart is positioned and positioning yourselves to excel. And how you see the industry evolving over the next 5 to 10 years. with the understanding that you don't want to give away too much of your playbook, but kind of big picture on that stuff, if you could.

It won't be 5 to 10. It's less than 5. We think of AI in quarters, not years. And it might be the only time in my life that I've thought in quarters and not years. But it's happening that quick. AI is something that if you're not doing it, you're missing out. We often refer to it we've actually given guidance to our team on what tools are the best. And we often refer to AI as if you're not utilizing it, you're doing the company at your service. So, there's a big focus internally. We have a head of AI. And so that's something that we'll continue to -- the obvious things are efficiencies, and we'll do -- we're doing that already. the less obvious is strategic and that I won't comment on, but we are looking at strategic availabilities in AI as well.

Okay. Great. And then just kind of also big picture. Just remind us in terms of -- you outlined your priorities for growth. But how do you think about build versus buy given the fortress balance sheet that you have? And what are your thoughts there?

We're going to do both. We will be doing M&A obviously, and we'll be building as well. And as you all know, we're sitting on a ton of cash, and we have the ability to do both. So we will.

Super. And then maybe last one, and I'll certainly jump back in queue. But kind of in your mind, what do you think investors are missing on the Copart story now, and how can you guys get that best out there?

I think -- and I never like to one, Wall Street's fickle. And two, I never like to predict what investors are going to do and how they're going to think. But I think they're hearing a narrative potentially that's out there in the industry, potentially from a competitor. And there's always two sides of the story. And at the end of the day, we're a phenomenal company. We've got amazing people. We've got phenomenal relationships with our customers. And we're going to do what Copart has always done. We're just going to execute. We're not going to talk about it. We're not going to tell people what we're about to do. And then when we do win, we're not going to tell people that we want. We're just going to do it. Let the results speak for themselves.

So next question comes from the line of Gary Prestopino with Barrington Research.

Jay, how are you?

I'm good, Gary. How are you?

No, just fine. It's been a while. A couple of questions and welcome back. I'm really looking forward to working with you again. A couple of questions to you. Well, one question. You talked about the changes that you're going to implement. And does that really revolve around the growth pillars, the international salvage, whole car U.S. and tech services customers.

It does. Yes. We're going to be speeding up some of those initiatives. And so to do that, we've got to have a more robust team.

Okay. So in terms of starting that whole process, I mean, how long does it take you? I realize that you've been in your leadership in there for about a week. Now how long does it take for you to reinvigorate that growth engine?

No, I think that everyone in the company is excited. I think they're already feeling like let's to do some of these things. And so, it's going to take me time to -- we're promoting people already, but it's going to take time to hire people. And so it's not years, it's quarters, but it's going to take some time.

Okay. That's great. And then just in terms of what's going on in the industry, the cyclical headwinds. In terms of the consumers actually repairing their cars versus just getting a check or whatever, do you think that if the premiums just continue to stabilize, you'll see a shift? Or do we have to see more down trend in the policy cost for consumers for them to step up to the plate and get a car repaired.

I think as things normalize, people will get coverage again. I just think when insurance rates get that outrageous that it causes people to drop their coverage and go with liability only. And I think as rates come back down and things normalize, you'll see people saying, okay, yes, that's only x a year more. Go ahead and get me collision or comprehensive coverage.

Okay. And then one last quick question, and I'll jump up. You've gone through a pretty strong exercise of buying land over the last couple of years. Are you at the point now where you don't need to buy any more land particularly for catastrophic events, and you can shift resources to your 3 growth pillars in a bigger way?

Yes. We've got an amazing network of locations and not just the number of locations but the number of acres per location. So I think we're in a good spot. We'll have to do a little bit of development still and we've got a little bit of add-on. So nothing like you saw over the last 10 years. The last 10 years was just $0.5 billion a year in buying land and developing those locations. That's definitely going to slow down.

The next question comes from the line of Chris Bottiglieri with BNP Paribas.

This is Ian Davis on for Chris. Thanks for the time here. I wanted to ask you one on Purple Wave. So I know that Jeff and had sounded constructive on the expansion there. How are you thinking about the go-forward strategy for this segment? Is it reasonable to think that some of your more recently acquired land is going to perhaps be targeted more towards supporting heavy equipment? Just want to get some of your thoughts on thinking there.

Yes. I mean we've already got access to our locations for Purple Wave. I think I am focused right now on international and domestic Copart. I'll focus on that next. I can give you a better answer in the quarter. Leah is here, she's happy to give you her response. I just have not been that close to it.

So Ian, I think what we've primarily focused on with respect to Purple Wave has been the expansion of the territory sales force, and that was foundational to our ability to serve enterprise accounts. So as we think about the continuation of the expansion strategy for Purple Wave, it will be principally focused on the execution on that front. And again, ProVis domestically focused. So we're effectively taking sales team with territory coverage, primarily in the central time zone of the U.S. and pushing it out to the coast, initially focused on the areas where the highest GMV exists. And as we're successful in those markets, continuing to further penetrate into some of the secondary and tertiary markets. So that is our current strategic road map that we're executing on with respect to Purple Wave and would expect that to continue through 2017.

Got it. That's helpful. And then I know you spoke to it a whole car domestically. Maybe just some brief thoughts on where you're most excited. Some of the unturned stones that you think are going to help support the next leg of growth? Just maybe 1 or 2 pieces or thoughts there.

Well, it's historically been a nice growth engine for Copart. I'd like to see that increase dramatically to do that. We're looking at restructuring and we're looking at some other strategic moves that would help that. But the intent. I'm not going to tell you exactly how we're going to get there, but I'll tell you that the goal is that it looks very different in 3 to 4 quarters.

The next question comes from the line of Craig Kennison with Baird.

Jay, good to hear from you as well.

Craig, good to hear you.