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Edited Transcript of CPRT earnings conference call or presentation 23-May-19 1:00pm GMT

Q3 2019 Copart Inc Earnings Call

FAIRFIELD Jun 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Copart Inc earnings conference call or presentation Thursday, May 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* A. Jayson Adair

Copart, Inc. - CEO & Director

* Jeffrey Liaw

Copart, Inc. - CFO & Senior VP of Finance

* William E. Franklin

Copart, Inc. - EVP for U.S. Operations & Shared Services

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Conference Call Participants

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* Christopher James Bottiglieri

Wolfe Research, LLC - Research Analyst

* Craig R. Kennison

Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst

* Daniel Robert Imbro

Stephens Inc., Research Division - Research Analyst

* John Michael Healy

Northcoast Research Partners, LLC - MD & Equity Research Analyst

* Robert James Labick

CJS Securities, Inc. - President & Director of Research

* Stephanie Benjamin

SunTrust Robinson Humphrey, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Copart Incorporated Third Quarter Fiscal 2019 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.

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A. Jayson Adair, Copart, Inc. - CEO & Director [2]

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Thanks so much. Good morning, everyone, and welcome to the third quarter conference call for Copart. In the room today is Will Franklin, Executive Vice President; and Jeff Liaw, Chief Financial Officer.

We are calling from a hotel. So hopefully, you can hear us, so I know it's a little echoey. We just finished a great week at our annual advisory board. This is a chance for us to invite our Canadian customers, our U.S. customers in and exchange ideas and information about the industry and items that Copart is working on, technology and process that we're working on. So it's been a great week, and I think we can share some of that with you this morning. Some of the facts that we've got are quite fresh since we just completed the conference.

So with that, let me turn it over to Jeff Liaw.

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Jeffrey Liaw, Copart, Inc. - CFO & Senior VP of Finance [3]

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Thanks, Jay. I'll start as always with a brief safe harbor. During today's call, we'll discuss certain non-GAAP measures, including non-GAAP net income per diluted share, which includes adjustments to reverse the effect of the impact of income taxes on the deemed repatriation of foreign earnings, discrete income tax items, disposals of nonoperating 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 have provided a recollection of these non-GAAP 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 the presentation of these non-GAAP measures, together with our corresponding GAAP measures, and it is relevant in assessing Copart's business trends and financial performance. We analyze our results on both a GAAP and non-GAAP basis as described above.

In addition, this call contains forward-looking statements within the meaning of federal securities laws, which are subject to substantial risks and uncertainties that could cause actual results to differ materially from those projected or implied by our statements and comments. We do not undertake to update any forward-looking statements that may be made from time to time on our behalf. For a more complete discussion of the risks that could affect our business, please review the management's discussion and analysis portions in our related periodic reports filed with the SEC.

I'll provide brief remarks on our financial performance in the third quarter before turning it over to Will Franklin for additional context. We achieved another record quarter in revenue gross profit and operating income, starting with the top line. We experienced global revenue growth of 15.7% despite an unfavorable year-over-year currency effect on revenue of $7.9 million, primarily due to the relative strength of the dollar versus the pound and the Brazilian real.

Global service revenue grew at 15.3% or $62.9 million year-over-year. Purchased cars grew at a rate 17.8%, driven principally by our increasing activity levels in Germany but also, by underlying growth in our large markets like the U.S. and the U.K. Unit sales for the company grew at 4.5% year-over-year, with U.S. units increasing 2.8% and international units rising 13.8% versus the third quarter of 2018.

Our U.S. unit growth was driven again by both insurance and noninsurance segments. Will will describe further the underlying drivers of growth, in particular in the noninsurance space. Our global inventory grew 12.2% year-over-year in comparison to the end of the third quarter of fiscal 2018.

Moving down the P&L. On gross profits, we grew 14.8% from $219 million to $251.6 million. We experienced a slight gross margin rate change from 45.8% to 45.5% or a decrease of approximately 30 basis points. This is again driven in part by a slight mix shift to purchased car volume for the reasons I described a moment ago.

As we talked about on prior calls as well, we also experienced lower purchased vehicle sales margins on a rate basis because as the average purchase price and sales price of our purchased vehicles rises, we expect a contraction in percentage margin. Some of the drivers are on mix shift to purchase vehicles, Germany in particular, are higher value on average and, therefore, can cause lower percentage margins.

Overall, then turning to average selling prices. So this is literally what vehicles at Copart auctions sell for. We experienced the year-over-year increase of 10.1%. Will will also provide more context on the cars, the nature of the cars, in terms of what sells, as well as our efforts to continue to expand Copart's member base. Again, moving down the P&L, our general and administrative expenditures, ex stock comp and depreciation, it was down slightly from $34.2 million a year ago to $34.1 million and up approximately, $1 million sequentially versus the second quarter.

As we say in quarters in which G&A rises or declines, generally speaking, G&A expenditures will rise over time for Copart as we experience inflation, but we continue to believe that we can achieve operating leverage given the top line growth that we have experienced.

Our GAAP operating income grew from $174.6 million to $207.5 million, with a growth of 18.8%, overcoming the currency effect of $1.4 million decline in and of itself, year-over-year relative to the third quarter. Our net interest expense was up slightly from $4 million to $5 million given a slightly higher average net debt balance as we grew on our revolver late in the second quarter in connection with our Q2 stock repurchases.

We repaid the vast majority of our revolver balance during the third quarter nonetheless and ended the quarter with $70 million drawn revolver balance.

Turning to taxes, momentarily. Our third quarter income tax rate -- GAAP income tax rate of 5.6% is in part a reflection of the lower U.S. federal tax rate that we've discussed on prior calls of 21% for fiscal '19 and beyond. You may recall that fiscal '18 was the straddle period in which we had months that we're both pre and post the tax reform bill implemented at the end of calendar 2017. The third quarter income tax rate benefits as well from certain stock option exercises as well as discrete income tax items, related to benefits recognized as a result of amending previously filed income tax returns. The onetime benefits from those stock option exercises and discrete income tax items you'll see reflected in our non-GAAP earnings reconciliation.

Our GAAP net income debt increased from $127.4 million to $192.7 million or a 51% increase year-over-year. Our non-GAAP net income, we grew from $125.0 million to $154.9 million, growth of 23.9%. As I mentioned a moment ago, this -- these adjustments include excess tax deduction for stock option exercises and related payroll taxes. Discrete tax items of $10.2 million that are excluded from our non-GAAP net income, these were again generated by amendments to previously filed income tax returns. We believe that excluding these benefits from our non-GAAP earnings is an appropriate reflection of the underlying performance of the business in the current period as well as our run rate tax burden.

The last note I'll mention on our international businesses, for further background, in particular on Germany, we encourage you to review the transcript of our first and second quarter earnings calls where we described in much greater detail the nature of the markets and our approach to it. We have continued our substantial progress in Germany and are investing in our future growth there as well. We've experienced more than tenfold increase in volume in Germany year-over-year in the third quarter of '19 in comparison to the third quarter of 2018.

We have continued our practice of acquiring vehicles through our listing service and selling them at our Copart's Germany auctions. Our experience continues to support our thesis generally that today's listing service model is sure changing German insurance carriers and policy holders, for that matter, and that ultimately a model similar to Copart, we know in other developed economies will prevail in Germany as well. We're pleased with our progress on multiple fronts, including the development of technology, our logistics processes, land and the recruitment of high quality talent to support our operations there. Leveraging the power of Copart internationally, our German auctions have seen very strong participation, particularly with buyers outside of Germany. Excluding Germany, our international or non-U. S. businesses continue to perform well despite currency translation headwinds. Those headwinds, of course, are most pronounced in our British and Brazilian businesses. Will Franklin will provide additional color on the underlying performance here, collectively excluding Germany, our international businesses have experienced year-over-year unit growth, revenue growth, profit growth and the like.

Then to the balance sheet before I turn it to Will. Cash flow for the quarter, we generated operating cash flow of $238.3 million with CapEx of $122.6 million, well over 90% of this CapEx was attributable to capacity expansion and lease buyouts, a continuation of a theme now you've heard for several years. We also repaid $86 million of our revolving debt facility during the third quarter. We consumed $33.5 million of cash related to the stock option exercises, think of those as de facto buybacks in connection with taxes owed on the exercise of stock options.

With that, I will turn it over to our EVP, Will Franklin.

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William E. Franklin, Copart, Inc. - EVP for U.S. Operations & Shared Services [4]

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Thank you, Jeff. Let me provide some more insights into our third quarter performance. Our worldwide sales volume grew by 4.5%, and our worldwide inventory grew by 12.2%. Hurricane volume activity was immaterial for both this quarter and the same quarter last year. In the U.S., our sales volume grew by 2.8% and our inventory increased by 14.5%. Our volume growth continues to be driven by organic growth within the insurance market -- market wins within insurance market and our continued expansion into the noninsurance segments. Organic growth in the salvage market is driven, we believe, by an increase in total loss frequency. Published statistics suggest that total loss frequency of 19.9% for the first quarter of calendar of '19, an increase of 2.6% over the same quarter last year. This metric measures the percentage of estimates written that result in total losses. What is not reflected in this metric is the increase in the instances in which insurance companies salvage cars without ever writing a repair estimate. Our conversations with insurance company executives as well as the current trends and assignments lead us to believe that the growth in total loss frequency is higher than that published. Repair costs, particularly for new cars, are trending up at a rate exceeding that of inflation, an increase in the number and the average cost replacement parts, the growth in pre- and post-repair scans, and the supplemental damages they identify. The lack of trained and capitalized repair capacity and the consolidation of the repair market by the 3 major MSOs were all leading to a rise in repair cost.

We believe the industry is simply trending to less repairable cars. While repair costs are increasing, so too are the returns that we're generating for our sellers. The combination of our marketing efforts and efficiency of our auction platform, the VB3, continues to generate returns to our sellers are exceeding overall industry returns as represented by the Manheim Used Car Index. Compared to the same quarter last year, our ASPs are up over 10% while the Manheim used car index is up 3.9%. As worldwide demand for rebuildable cars continues to outpace the available supply.

Our marketing focus on internal -- excuse me, international buyers has led to a significant growth and bidding activity from those buyers. Our full U.S. website is translated into 7 languages, with certain elements of the website translated to languages native to 135 countries. And from the U.S. we sell in to 147 countries.

In terms of volume, nearly 40% of all the units sold to our U.S. auctions. Sellers are now international buyers, increases both year-over-year and sequentially. Because international buyers generally purchase rebuildable and, therefore, higher value vehicles, they represent a still higher share of the value of the car sold at our U.S. auctions. Approaching 50%, again an increase both year-over-year and sequentially. Approximately 3 out of 4 of all vehicles sold on our U.S. website received a bid from an international buyer. We continue to grow our buyer base. While we saw a 22% increase in unique international bidders on a year-over-year basis, we also saw 14% increase in unique domestic bidders, which we believe is remarkable growth rate for what some might consider a large and already mature buyer base. The growth in ASPs has been a primary driver in the increase in our revenue per car in the U.S. In addition, we continue to provide more services to our insurance customers. There are certain tasks between those who know the laws, and auctioning of salvaged car that we can contribute to or perform more efficiently because of our broad industry knowledge, our skill and our technology.

The noninsurance markets continue to be a focus of our growth strategy in the U.S. It represented 23% of our overall U.S. volume this quarter compared to 21%, same quarter last year and 17%, same quarter 2 years ago. These markets include franchise-independent dealers, finance and leasing companies, fleets, charities, heavy equipment, wholesalers. Excluding the charity market in the U.S., our noninsurance line grew by 18% and 93% over the same quarter last year and the same quarter 2 years ago, respectively. The growth in volume was spread broadly across multiple seller segments. Volume from dealers was up 14%; wholesalers, 39%; rental car companies, 79%; and fleets and industrial equipment, 7%. We attribute this growth to our increased marketing, sales and operational focus and the growth and returns generated for these segments.

Turning to our international operation. The performance of the U.K. and Canada remained relatively consistent with the same quarter last year in terms of volume, revenue and EBIT after adjusting for currency fluctuation. In Brazil, however, we continue to see meaningful growth as the value we offer in terms of technology, process and land has allowed us to expand our market share in the country. In Brazil, our volume and local currency revenue and EBIT grew by 43%, 55% and 61%, respectively. This is remarkable growth considering the declining number of auto insurance policies written due to the economic condition in that country.

Additionally, in Brazil, like the U.S., we are growing our noninsurance business, which represented 9.8% of the total volume sold compared to 3.6% in the same quarter last year. Jeff has already provided his commentary on Germany. Our other operations outside of the Americas, the U.K. and Germany for the quarter remain immaterial in both revenue and EBIT. In the U.S. and globally, we're seeing rising labor, health insurance and supplemental cost, all of which have led to an increase in our average cost to process each car. Year-over-year, our U.S. inventory was up 14.5%, which is significantly higher than the growth in sales volume of 2.8%. We attribute the difference to an unusually mild winter that affected assignments at the beginning of the quarter. However, assignments after the first month of the quarter have been and continue to be robust.

The year-over-year growth in our U.S. inventory over the last 16 quarters has averaged over 12% and we expect this trend to continue. To accommodate this growth and to provide stand-alone capacity along the Gulf of Mexico and the East Coast, we continue our land expansion activities. Since the last earnings call, we have announced the opening of 4 new facilities. 3 new Copart facilities in Fredericksburg, Virginia; Greensburg, Kentucky; and West Mifflin, Pennsylvania. And one new NPA facility is Sacramento, California. And additionally, we're expanding the existing facilities in Atlanta, Chicago, Boston and Newburgh, New York. In total, these 3 new Copart yards, and 4 yard expansions have added over 150 acres of storage capacity. So for this year, we have announced 22 new facilities, 12 in the U.S., one each in Brazil and Canada and 8 in Germany, as well as 10 yard expansions in the U.S. Currently, in the U.S. and Canada, we have over 21 new yard and expansion projects in the construction phase and 33 projects in the engineering phase. These projects alone represent thousands of acres of capacity and will consume hundreds of millions of dollars in capital. That concludes my comments.

We'll now proceed to the Q&A session of this call.

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A. Jayson Adair, Copart, Inc. - CEO & Director [5]

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Operator. You could open it up for questions, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Bob Labick with CJS Securities.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [2]

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Congratulations on the nice stock quarter. I wanted to follow up on Will's comments on the international buyer base first. You may or may not have this with you but I was just wondering, if you could give us a sense of where that was or the percentage of sales for that base 3 or 5 years ago would be one part of the question. And then the second part, which is probably more important anyway is, talk about some of the drivers that have changed in the U.S. just in the salvage market that have led to more international buyers getting into this market?

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Jeffrey Liaw, Copart, Inc. - CFO & Senior VP of Finance [3]

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Got it. Much appreciate your questions, Bob. And this is actually a topic we addressed and discussed to some length with our customers this week. As for the underlying drivers of that shift over time, I think there are 2 major ones worth mentioning. The first is that, of course, we're observing higher economic growth in a lot of countries outside the huge developed economies like the U.S. and the U.K., and therefore, there is just more natural demand for vehicles, including rebuildable cars that come from Copart auctions. The second is the nature of total loss frequency, I think you've been following industry for a long time, Bob. So you know that even what was a 50% damaged car 20 years ago looks very different from one today. Because the cars today are much more easily rebuilt that you -- some of the damage may be technological modules that could be fixed more simply in places outside the U.S. So that's been the 30-, 40-year trend really starting with airbags many years ago, about more recently with the arrival of newer technologies in the cars as well. So a combination of growing economic activity and, therefore, demand for cars in these countries with higher economic growth but much lower vehicle penetration, number one. And number two, the changing nature of the cars as well as they total more easily, those cars had value not just as dismantled parts, that's probably one fundamental misunderstanding of this business is to assume that the cars really go only to dismantlers. Over time, there are increasingly going to rebuilders, many of them international in nature.

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William E. Franklin, Copart, Inc. - EVP for U.S. Operations & Shared Services [4]

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Let me add one more element to that growth and that is that the cars we built in foreign markets are generally not held at the same standards that cars that are rebuilt in domestic markets. For example, the car in Eastern Europe may or may not have their airbags replaced at all. So that gives them an advantage in terms of lowering the cost of converting that car to a drivable vehicle.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [5]

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Okay. Great. And then just kind of sticking with the trend of technology going in to cars, the sensors, et cetera and what you've talked about over several calls that younger and less damaged cars are being totaled. Just wondering if you could give us a sense of where you believe we are in that process? And this is -- are we early innings, middle, late? Where do you think the trend to more younger and less damaged cars being totaled stands?

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Jeffrey Liaw, Copart, Inc. - CFO & Senior VP of Finance [6]

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I think as a general matter, Bob, the nature of total loss frequency is big and slow moving in the sense that it reflects the installed base of cars on the road, right? So our business principally serves those cars that are literally being driven or the insurance carriers, of course, you insure them. And therefore, there aren't step function changes in any given month or quarter or year. We're talking were 250 million or 300 million cars on the road, registered vehicle in the United States, for example. So I don't think those are spiky sudden changes. I think it's a gradual change that has generally been a favorable one for decades now. As for the precise age of the fleet, the precise age of vehicles that are involved in accidents and, therefore, totaled, I don't think we expect dramatic changes. But collectively the changes will ultimately be favorable to total loss frequency.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [7]

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Got it. Great. And then one last quick one, if I could. Just on Germany, I know you went on it -- about it quickly, the tenfold increase in volumes is tremendous. But could you just give us a sense of the feedback you're getting from the insurers right now as to what's holding them out from switching to the Copart model if there is any specific things that still need to be worked on or addressed? Or if they just need a year or 2 of data? Or what do you think is the, kind of, I guess last or hopefully near the end of impediments towards switching over to the Copart model?

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A. Jayson Adair, Copart, Inc. - CEO & Director [8]

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Sure. I mean it's a great question. Right now, Bob, what we're focused on for this fiscal year was getting the network built. So we've got the network of facilities in place. We've got the trucks now and carriers in place to tow vehicles, and I would say, the best way I can explain is, we're pressure testing the team now. We're achieving the results that we have in the U.K. that we have in the U.S. that we have in Brazil, where our vehicle can be assigned and picked up in sometimes hours, but within a day or 2 as opposed to a longer period of time. So we're getting all of the operational performance in place. And we do have a couple of accounts already, but we are not going out and hitting -- swinging big or swinging for the fences with some very large carriers until we've got everything working the way it should. So it's a process of building the team, the network, pressure testing and then this year, we will be going out and speaking with some carriers about switching over to the model. But we want to have everything working perfectly before we do that. You get really one shot at success.

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Operator [9]

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Our next question comes from John Healy with Northcoast Research.

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John Michael Healy, Northcoast Research Partners, LLC - MD & Equity Research Analyst [10]

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Continue to be really impressed with the noninsurance business that you guys are putting up. When I first started covering the company, I used to think noninsurance business was all about charity, and clearly, it's not anymore. And I was hoping you guys could talk a little bit about what's the value proposition? Or what's the message that you are sending and allowing you to win that share from dealers? And then even more specifically, the growth that you cited in the rental car industry is really interesting. Here is to know, how you're getting that business? And kind of how you are convincing some of these fairly decent-sized consigners to work with you?

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Jeffrey Liaw, Copart, Inc. - CFO & Senior VP of Finance [11]

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So thanks for your question, John. I think in short, it's not particularly about messages or marketing, it's just fundamentally about returns. So we offer a buyer based, including large quantities of international active buyers of rebuildable and drivable vehicles. And so it's really the net option results that we can deliver to the noninsurance segment. And I think you're mentioning dealers in particular that has proved you're persuasive. So it's not particularly any silver tongued communications on our part, it's really just that we demonstrate week after week and month after month that we can generate better returns for them on their vehicles and to do so quickly with the logistics and the infrastructures to deliver those outcomes. Once we -- yes, let me just add a couple of more comments there. On the returns, it is, obviously, a huge part of our ability to be successful in that market. I think another thing that we don't ignore is the operational aspects and the ability to eliminate any friction to send us these cars. So every one of these segments is significantly different, a charity car is completely different than a piece of heavy equipment, which is completely different than a car coming from a franchise or independent dealership. So to the -- and each of them have their own operating systems. So to the extent that we can integrate our operations into their systems, to the extent that we need to change our process to accommodate their specific needs, it makes it more likely that they'll be testing us on their volume. And the results of the tests have been such that they continue to increase the volume that they send to us.

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John Michael Healy, Northcoast Research Partners, LLC - MD & Equity Research Analyst [12]

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Great. And then just wanted to ask about the real estate investment. I think last call, you guys noted 45 or 46 to -- projects, kind of, under underway. And you thought maybe 24 months to, kind of, tie that up. Any updated thoughts on the real estate investment? Do you expect to do more than that? Or you had a pace there? Just kind of how you're thinking about that investment?

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William E. Franklin, Copart, Inc. - EVP for U.S. Operations & Shared Services [13]

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Yes. There's no car slowing down our expansion with -- we project out 5 years in terms of volume need. And the reason we project out so far is because the gestation period for some of these new properties can be 2 or 3 years very easily, especially in these high -- expensive markets. And so our activity, I don't see decelerating at any point in the next 2 or 3 years.

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John Michael Healy, Northcoast Research Partners, LLC - MD & Equity Research Analyst [14]

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Great. And I guess I'm going to hook in on that 5-year forecast that you just, kind of, mentioned there, Will. When you, kind of, are billing out that 5-year forecast for your needs in terms of real estate, obviously it's going to correlate to the volume and the capacity. So when you look at those forecasts, are the forecasts meaningfully different than the volume numbers globally that you're seeing today? So I know you guys don't have long-term growth targets but as you think about those needs what you're buying for, does the year-in, year-out kind of movement look a lot like what you've put up the last few quarters? Or do you guys think the growth in the market accelerates or decelerates in -- thus far in your business?

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William E. Franklin, Copart, Inc. - EVP for U.S. Operations & Shared Services [15]

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So I'm not really motivated to share our exact projection numbers. I could tell you this though, we have a couple of absolutes in our business. One is that auctions have to run every day. And our auctions do. And our auctions do. Our KTLO on our auctions sites is 3 to 4 5,9s. The other absolute is land. We have land. So we really can't risk under projecting our land needs going forward. And so once again, we're very aggressive in our pursuit of that land capacity to accommodate the growth that we're anticipating.

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Operator [16]

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Our next question comes from Stephanie Benjamin with SunTrust.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [17]

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My first question is just a clarification, and I apologize if I missed it. Did you give the revenue per unit that you saw during the quarter, I don't know both in the U.S. or internationally or in total?

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William E. Franklin, Copart, Inc. - EVP for U.S. Operations & Shared Services [18]

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No. We don't generally provide that metric. We did talk about a couple of these leverage that are driving up that revenue per car, primarily our higher ASPs, and secondarily, the increase in services that were brought into our sellers and our buyers.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [19]

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Great. And then you talked a little bit in your opening remarks in terms of the comments you've heard the last week and some that -- may be the technology investments that you're looking at or potential investments. So maybe if you could speak a little bit more about the technology side of your business, and what can be done as we move forward?

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William E. Franklin, Copart, Inc. - EVP for U.S. Operations & Shared Services [20]

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Sure. So the settlement process that the insurance companies go through sounds very simple. But in reality it's fairly complex. I mean you have a lot of constituents in that whole process. You've got the insurance company, you've got the policyholder, you're going to need an appraisal and a repair estimate, both of which can be provided by different people, you can have a lien payoff, you're dealing with the DMV and all these activities and transfer of information need to be coordinated and sequenced in the right order. And we work with virtually every insurance company in the United States. And so we're able to identify best practices and develop technology around those best practices and offer that technology and those best practices to all the insurance companies, but in general, smaller insurance companies will take advantage of that. The large ones will too. So we're -- so to answer your question, we're generating a technology that allows us to integrate the flow of information, the flow of documents, build a process around that total loss process.

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Jeffrey Liaw, Copart, Inc. - CFO & Senior VP of Finance [21]

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Stephanie, wait. The only thing I'd add there is when I think about technology at Copart, find a framework for, let's say, think of it in 3 pieces. The first is the importance of technology in helping our customers perform better and faster from their side, and that's the integration that Will talked about, providing data at the right time to better enable their own decision-making processes. Second aspect of technology for us is to help us perform better. So we have different applications, different technologies, for example, that help us mange our towing network better to dispatch trucks more efficiently. And then thirdly, of course, technology enhances our own reliability. You've heard Will talk about investing for KTLO, which -- our province is to keep the lights on and auction reliability. And so a good part of our technology investment as well is to prepare us for the growth that we are serving to make sure that we continue to serve our customers well.

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Operator [22]

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Our next question comes from Craig Kennison from Baird.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [23]

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I wanted to start on the insurance side with the RFPs. I know in the past 5 years or so you've landed a handful of very large national contracts with insurers. With that in mind, has the trend stabilized? Are there any upcoming renewals or RFPs with new prospects? And then additionally, what's the dynamic in Germany? And are there any big RFPs that would be a national contract there?

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Jeffrey Liaw, Copart, Inc. - CFO & Senior VP of Finance [24]

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Got it. Craig, thanks for the question. After your question, if we don't -- we're not like a subscriptions business that has a bunch of customers coming due or upon their contract expiration at the same time. Our dialogue with our customers is literally on a daily basis. So no there is not a particularly lumpy either opportunity or risk for us to win or lose a big chunk of business, simply by the nature of contract expiration in and of itself. That said, we think our -- all what you've heard today about our auction platform, the returns that we generate, technology, et cetera, generally enables us to win market share over time, which we have done now for decades and believe we will continue into the future as well.

As for Germany, the issue is in principally RFPs, as someone posed the question earlier. It's principally about changing the way business is done altogether by the German insurance carriers. So it's a shift in the way they think not the contract expiration per se or an RFP that triggers the opportunity for us. Copart certainly is a well-known enough and obviously a very successful enterprise in salvage auctions around the world generally. So those dialogues are available to us when we are ready and when they are ready for that. But that is not per se an RFP.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [25]

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And then Will, I had a question for you on real estate and hoping you can share some metrics to frame that spend. But maybe, what are the economics of the typical real estate project, either the average cost of an acre or the range you might pay depending upon the market. What kind of capacity do you get in terms of car volume on a project like that? And then what's the path to breakeven or to corporate average returns on that investment? Anything you can shed light on would be helpful.

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William E. Franklin, Copart, Inc. - EVP for U.S. Operations & Shared Services [26]

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Sure. Let me start by saying there is no typical transaction. So we can buy land for $50,000 an acre in some parts of the country. We just bid on land to the equivalent over $3 million an acre and didn't get into the second round of bidding of that plant. You can't -- just continuing on some of your questions, you can't look at the economic output from one yard because we don't service one insurance company at one yard. We service insurance companies nationwide. So you can't really ignore these very expensive markets because they may not be as economically profitable as the less expensive real estate markets. So that's really not even a consideration for us. We just know that we have to have the land whenever our insurance companies need it.

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Jeffrey Liaw, Copart, Inc. - CFO & Senior VP of Finance [27]

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Craig, I -- even to put it in financial terms, I think if you took snapshots, at any moment in Copart's history and said, does this next parcel of land generates an ROI in the form of its cap rate that exceedings Copart's weighted average cost of capital. The answer is almost certainly, no. But if you have the benefit of a time machine, if you go back the early 1990s and decide for Copart whether we should buy land or not, now that we have the benefit of hindsight having acquired massive parcels of real estate in the United States and the United Kingdom and elsewhere around the globe, is one of the key economic enablers of our business. It's proven to be critically strategically valuable. We believe that will be true going forward as well. So as Will noted, it's not about the cap rate on any different parcel of land, it's about building the network that allows you then to amass a global liquid market of buyers as well. So it's a two-sided auction and owning our land has been a critical enabler of that two-sided auction.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [28]

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That is super helpful. And maybe just a follow up, Will, with your point on the property where you didn't make the second round, what is the consequence of that? Does that mean longer towing distances? Or higher costs? I mean what is your backup plan given you need to service customers in that market?

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William E. Franklin, Copart, Inc. - EVP for U.S. Operations & Shared Services [29]

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Well, there's a number of ways to approach markets like that, typically we like to have 1 large yard, certain situations will settle for multiple smaller sites. We'll also look at trucking and we'll do that trucking in a manner that is not negatively impactful to our sellers. For example, a truck in the evening. We can operationally address some of the yard constraints by taking older inventory and moving it off-site. There are ways around it but ultimately, land will continue to become more expensive and the development cost will become more expensive as well.

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A. Jayson Adair, Copart, Inc. - CEO & Director [30]

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And Craig, let me add to that, Will talked about 5-year plan. We get bumped on land all the time. That example he gave is just another example of land that we've tried to buy, we couldn't buy and there will be another piece of land we can buy but we can't get zoning. Because we are working on this 5 years out, we're not out of capacity. We've got room and we can service customers. And specifically in the market he's talking about, we've got plenty of room, we can service customers, but we've eventually got to get land in that market and if we didn't then we would do some of the things that Will just spoke of.

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Operator [31]

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Our next question comes from Daniel Imbro with Stephens Inc.

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Daniel Robert Imbro, Stephens Inc., Research Division - Research Analyst [32]

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I wanted to start on a comment you made on ASP strength and the growing number of bidders in the U.S. despite it being a more mature market. I think in recent quarters, you've noted that you've increased your international marketing to bring more international bidders to auction but there -- are there any initiatives you can point to that you guys are doing to help bring domestic buyers to auction? Or what do you attribute that strength in bidders to?

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William E. Franklin, Copart, Inc. - EVP for U.S. Operations & Shared Services [33]

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Yes. So yes. We have specific initiatives for both domestic and international buyers. We work with buyer profiles and do our marketing efforts whether they're social or PBC or SEO, we're targeting those buyers and more aware of our option and particularly the cars are available. So when we introduce or we go on to a new segment that may not be a familiar segment to our existing buyer base, we'll spend an extra amount of time and resources to identify that segment and to those particular buyers. And Jay just handed me some of my call notes. Obviously, we've been successful. We increased our unique bidders on the domestic side by 14%. As I say, that's 14% of a very large buyers numbers. International is more segmented because it's country by country. So 2 of the countries that are growing are Georgia and Jordan. And in Georgia, for whatever reason, they're buying electric cars. So Teslas and Priuses are finding their way to Georgia to very, very high ASPs. And so we're, obviously, promoting that. And in China, they're buying Harley-Davidsons. In Mexico, they're buying pickup trucks. In the Netherlands, they're buying sports cars. So we're getting to know the demand in these particular regions. In Nigeria, the just want affordable transportation and our marketing efforts reflect that knowledge that we're gaining.

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Daniel Robert Imbro, Stephens Inc., Research Division - Research Analyst [34]

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Got it. Jeff, switching gears a little bit, looking at the revenue growth in the quarter kind of the implied revenue per unit remaining strong, and especially considering the scrap steel headwinds that was not during in the quarter, can you maybe just give us the reminder on how scrap steel impacts your business and your ASPs? I feel like a few years ago, it felt like a bigger driver of ARPU, but has anything changed? Or can you just give us a refresher as to how that impacts your business?

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Jeffrey Liaw, Copart, Inc. - CFO & Senior VP of Finance [35]

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That's a great question. And I think the answer is a strong yes, that the nature of scrap and its influence on our business has shrunken over time. It declined very meaningfully. And it's the flip side of the coin of the issue we talked about a few moments ago that a car -- imagine a car has a spectrum of potential values and at the very low end, it is literally worked its way to being steel and its metal content and if the other extreme end of the spectrum, it's a drivable car the next day, a perfectly intact automobile. As our -- as the nature of technology and the increasing complexity of cars has made more of the totals -- about more of the totaled cars at the end of -- closer to the end of spectrum of drivable cars, they're more rebuildable, they're more drivable, they're certainly worth more as parts than they are as the metal. And therefore, scrap is not something -- by the way operationally, we particularly focus on day-to-day at all, it's really about finding the right buyers cars and the high value -- the higher value cars for us assuredly are not being sold for scrap. The international buyers are obviously not shipping a car several thousand miles to melt it down. So scrap matters but increasingly less over time.

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Daniel Robert Imbro, Stephens Inc., Research Division - Research Analyst [36]

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That's helpful. So yes, we should change how we're thinking about it. That helpful. And then may be last one internationally, we've touched a lot on Germany but looking, it looks like you're growing -- scaling your offering in Spain pretty nicely, although it's still pretty small. Can you just update us on how you're thinking about that opportunity? Or any kind of feedback or learning on that market as we think about what's next beyond Germany in Europe?

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A. Jayson Adair, Copart, Inc. - CEO & Director [37]

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Sure. So we implemented a new playbook, if you will, in Germany to build the network out. And we're letting the team in Europe basically take that playbook and implement it in Spain. So they've added locations. And they're in many ways mimicking what we're doing in Germany to achieve their own success. There's focus in both markets but clearly, we're putting the vast majority of our efforts right now into Germany to get that market to see a big win in terms of volume and a switchover. And this has been a continued investment in the market in terms of people, process, technology, land, et cetera and once we start to see that transition over, it will be even further growth into expanding locations. Will's example of the U.S. for land is what we're doing right now in Germany. We've got a dozen sites we're looking at and we're trying to purchase and then we'll develop those sites. So the ability to build that network and to achieve success takes time. And so Spain is doing the exact same thing. They're in a much smaller way than Germany but nonetheless doing the exact same thing in that market. And they are seeing success. So we're excited about that.

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Operator [38]

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(Operator Instructions) Our next question comes from Chris Bottiglieri with Wolfe Research.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [39]

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This is Chris Bottiglieri. So first of all, did I hear correctly that international buyers are 40% of units but 50% of revenue?

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William E. Franklin, Copart, Inc. - EVP for U.S. Operations & Shared Services [40]

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Yes. It's 40% of units, it's 50% of the value of everything that we auction. And that's because they're buying the rebuildable cars and not the cars that are being parted out.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [41]

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Got it. That make sense. And could I -- as a rule of thumb that would suggest that the selling price of those cars is 25% higher than the non-international bidders. So would it be fair to kind of use that as a rule of thumb for the impact on ARPU growth, the 25% premium as the international mix grows?

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Jeffrey Liaw, Copart, Inc. - CFO & Senior VP of Finance [42]

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Yes. I've got to validate that precise arithmetic, but directionally, yes, for they are buying meaningfully higher value cars on average, in part because of that scrap phenomenon you heard a few moments ago that the very low end cars, of course, none of them go internationally, many of the high end cars do.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [43]

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Got you. That's what I figured. Okay. The next question I had was, can you -- I don't think you've had to talk to us a lot recently but you talk about kind of within the U.S, the mix of fees, and excluding purchase vehicles that just makes the math fuzzy, but can you give us a sense of what percentage of revenue is fee based versus ancillary service based? And kind of like to what extent that's contributed to ARPU growth over the last couple of years?

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Jeffrey Liaw, Copart, Inc. - CFO & Senior VP of Finance [44]

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I think Chris, you know by -- on fee schedule, we tend not discuss them in any great substance. I think we have delivered additional service, as you heard Will talk about a few of them, including our tighter procurement services, loan payoff amounts, and so forth. But we -- our fee schedules are competitive and incentive matters for us. We deliver, we believe very strong value to both our sellers and buyers.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [45]

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Got you. Then just a quick question on rent expense that's doubled over the past years. I was wondering if this is driven entirely by international expansion. Or you've had a change in philosophy on rent versus own or cap rates or what not? And -- but is there a way to bifurcate the rent expense between U.S. International business, of course?

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Jeffrey Liaw, Copart, Inc. - CFO & Senior VP of Finance [46]

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You are posing the question about the lease versus owning decision on real estate?

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [47]

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Well, yes. Like if you look at the facilities' rent expense, and for the company, it's doubled over the last 2 years. So trying to figure out what's driving that? Is it all international? Or is it something else going on that's driving the doubling of rent expense?

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Jeffrey Liaw, Copart, Inc. - CFO & Senior VP of Finance [48]

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I would think of rent expense a little bit like purchase cars for Copart. They are -- it's a number that you will see and therefore, -- and we reported publicly and therefore, it draws attention. But in practice, we buy what we can or we buy anything we can. And we lease when it's operationally necessary, we intend to -- when we enter a particular market, when we are adding capacity to a metro area in our existing markets, our expectation, if we're there for decades, and so we're always better off buying. There are some circumstances in which the land that is available can't be bought and therefore has to be leased. There are some circumstances, for example, in Germany, as you mentioned a moment ago in which our desire to be up and running very quickly compels us to pursue actionable properties in some cases or in many cases lease properties is better purchasing them. But our preference fundamentally in almost every case would be to buy not to lease, and any additional rental properties are by necessity, not by desire.

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Operator [49]

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At this time, that concludes today's question-and-answer session. I will now turn the call back over to Mr. Adair.

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A. Jayson Adair, Copart, Inc. - CEO & Director [50]

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Thanks so much. We appreciate you all attending the call. And we look forward to reporting on the end of the year and the fourth quarter on the next call. Thanks so much. Bye-bye.

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Operator [51]

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