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Edited Transcript of CPRT earnings conference call or presentation 22-Feb-17 8:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Copart Inc Earnings Call

FAIRFIELD Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Copart Inc earnings conference call or presentation Wednesday, February 22, 2017 at 8:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jay Adair

Copart - CEO

* Jeff Liaw

Copart - CFO

* Will Franklin

Copart - EVP

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Conference Call Participants

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* Robert Majek

CJS Securities - Analyst

* Ben Bienvenu

Stephens - Analyst

* Ryan Brinkman

JPMorgan - Analyst

* Matthew Paige

Gabelli & Co. - Analyst

* Bret Jordan

Jefferies - Analyst

* Elizabeth Suzuki

Bank of America Merrill Lynch - Analyst

* Gary Prestopino

Barrington Research Associates - Analyst

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Presentation

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Operator [1]

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Good day everyone, welcome to the Copart, Incorporated second quarter fiscal 2017 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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Jay Adair, Copart - CEO [2]

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Thank you Shantel. Good morning everyone, welcome to the second quarter earnings call for Copart. With me in the room is Will Franklin, our Executive Vice President, and Jeff Liaw, our Chief Financial Officer. I am going to turn it over to Jeff for the Safe Harbor and financial review. Will will give an update on the Company, and then we'll be happy to answer any questions after that. With that, Jeff.

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Jeff Liaw, Copart - CFO [3]

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Thank you Jay. I'll start the 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 foreign currency related gains and losses on our cash balances, and the adoption of an accounting pronouncement regarding the tax treatment of executive stock option exercise. We have provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our website under the Investor Relations link, and in our press release issued yesterday.

We believe the presentation of these non-GAAP measures together with our corresponding GAAP measures is relevant in assessing Copart's business trends and financial performance. We analyze our results on both GAAP and non-GAAP basis described above. In addition this call contains forward-looking statements within the meaning of Federal security 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. 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. We do not undertake to update any forward-looking statements that may be made from time to time on our behalf.

Now to the second quarter, we continue to base our presentation consistent with what we showed you for the first quarter, with non-GAAP net income adjusted to excluded effect of foreign currency related gains and losses on cash balances, as well as the adoption of an accounting pronouncement regarding the tax treatment of stock option exercises. For the cleanest look at the business, we continue to encourage you to focus on revenue gross profit and operating income measures, I will describe in greater detail the currency fluctuations which effected Other Income, and then in turn net income on a GAAP basis. Starting with the top line, we experienced global revenue growth of approximately 17% year-over-year for the second quarter, from just under $300 million to just under $350 million in the current quarter.

We did experience a detrimental year-over-year currency effect on revenue of approximately $9.5 million. This is due of course primarily to weakness in the British pound relative to the dollar. The pound for the quarter was down 17% year-over-year. We did experience global unit sales growth of 18%, consistent across the United States, as well as our international segment. US unit growth was driven by a combination of factors, principally growth through our existing insurance customers, due to driving activity and total loss frequency, consistent with themes we have discussed with you in the past, as well as account wins and catastrophic weather events. Approximately 3% of our growth was attributable to CAT events in the second quarter, or for units sold in the second quarter of 2017 in comparison to the second quarter of 2016.

We grew global inventory at 17.7% year-over-year, a modest portion of this between 1% and 2% is attributable to catastrophic weather events as well. Service revenue growth of 19.1% in comparison to purchased-car revenue growth of just $0.2 million, is 0.5% a continuation of the theme we described to you in the past regarding our proactive shift of units away from purchase arrangements to service arrangements when we can so do. We grew gross profit from $124.6 million in the second quarter last year to $146.8 million this year, with a slight increase in gross margin from 41.6% to 42%.

A few notes on average selling prices, ASPs were up slightly year-over-year for the second quarter. A function really of a few different things. First is, we did experience year-over-year scrap increases of just shy of 40%. That is we cite American Recyclers crushed car body index, averaging their index across the five regions. The improvement in scrap rates was offset of course by a much stronger United States dollar, which all else equal can reduce selling prices for cars in our US auctions. For example, the USD was nearly 20% stronger this year in this quarter than it was a year ago. Used car values not a particular driver of change in the quarter. Manheim's index indicates plus or minus flat used car values for the two periods.

We did experience an increase in general and administrative expenditures of just over $3.3 million, ex D&A. Also G&A was down sequentially versus the prior quarter. We incurred certain adjustments for certain indirect tax expenses, also experienced some modest increases in professional services expenses. Regarding D&A within the general and administrative expenditures, our increases were due primarily to assets in information technology that were placed into service, as well as changes to certain useful lives of our technology. As we continue to say G&A will continue to grow on an absolute dollar-basis. as the size of our business, the complexity of our business increases over time, though with reasonable top-line growth rates we expect to continue to achieve operating leverage. We experienced EBIT growth of just over 18%, growing from $92.1 million for the second quarter last year, to $108.9 million this year. That is despite a currency related drag of approximately $2.9 million for the quarter, due again to weakness in the British pound.

Our net interest expense for the quarter was up slightly from $5 million to $5.8 million, due to a higher funded debt balance, offset by somewhat lower drawn rates. The Other Income line includes a loss of $3 million, largely due to currency fluctuations on our cash balances. A year ago Other Income was a positive $4.4 million, also due to the same currency fluctuations. GAAP net income for the period grew at 12% from $59 million to $66.1 million.

Non-GAAP net income, which I'll walk you through in a little bit greater detail, grew from $55.5 million to $67.4 million this year, growth of 21.6%. The non-GAAP net income excludes after-tax foreign currency related losses of $2.7 million in this current quarter, and reverses as well the prior year gain of $3.5 million. So that line item alone is a $6 million unfavorable swing, which is adjusted for in our non-GAAP net income. Our non-GAAP net income also excludes the booked tax effect of our adoption of ASU 2016-09 regarding the GAAP tax treatment of stock option exercises. Our year-over-year share count has decreased, due largely to share buybacks, including the effective share buybacks from tax withholdings for executive option exercises On balance then, our non-GAAP EPS grew at 29% year-over-year for the second quarter.

Let's turn our attention to the balance sheet as well as the cash flow statement. A few highlights on cash flow. Operating cash flow for the quarter was $81 million, a function of increased EBIT, offset by AR growth. With Accounts Receivable consuming $45 million of cash. You know already that the Accounts Receivable are primarily advanced charges paid out on behalf of our customers when a lot is picked up, so our Accounts Receivable tends to grow with the inventory that we have in our yards.

We did experience a $32 million reduction in deferred and current income taxes, you may remember from the prior call that we incurred a large tax bill in effect regarding the stock option exercises by our executives, which effectively prepaid the majority of our federal income taxes for this fiscal year. This $32 million reduction is that cash benefit coming to fruition in the second quarter. The second quarter as you know is customarily the quarter in which we build inventory, which was the case again this year. Our capital expenditures for the quarter were $54 million, of which approximately 80% is for land development and lease buyouts. Our diluted shares outstanding again decreased from a little north of 124 million to 117.8 million, due largely to share buybacks including open market purchases, as well as the effective buybacks for tax withholdings. With that, I'll turn it over to our Executive Vice President, Will Franklin.

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Will Franklin, Copart - EVP [4]

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Thank you Jeff. I would like to add a few more brief comments, and then we'll turn it over for Q&A. The story for the quarter for both North America and the UK is the continuation of the growth in volume, driven by market wins, by organic growth within the market, and by expansion of our non-insurance businesses. In North America sales volume was up 18.4% over the same quarter last year. And 34% over the same quarter two years ago.

In the UK we have similar trends, with volume up 15.4% and 27.5% over the same quarters of fiscal 2016 and fiscal 2015. In both North America and the UK drivers of the organic growth are the same, and consistent with prior discussions that we have had on this call. We are seeing increases in the car park, increases in accident frequency, and of most importance increases in salvage frequency. In North America revenue grew 20.5%, which outpaced the volume growth as revenue per car increased marginally due to higher ASPs, and the performance of additional services. While non-insurance volume grew, as a percentage of total volume it declined from 19.8% to 17.8%.

Growth in non-insurance volume came primarily from additional dealer cars. Accommodating the tremendous growth in North American volume while at the same time ensuring that we continue to provide the best service to our sellers and our members, has presented opportunities to our operations in our facilities teams. Our facilities teams have been successful in obtaining additional capacity in very difficult environments. Over the course of the last few years we have noted the increasing difficulty, and the increase in expense of obtaining new storage capacity.

In the US during the 4.5 year period ending Q2 of 2016, we opened only three Greenfield yards. In the last four quarters alone we have announced and opened ten new Greenfield yards. In the last four quarters alone, we have announced and opened 10 new Greenfield yards. In addition we have opened ten sub lots and expanded 16 existing facilities. During the current quarter alone, we opened five yards, six sub lots, and expanded five existing locations, increasing capacity by 463 acres. Even with these additions and expansions, we will need more land to address the expected future growth, and to be better prepared to address the sudden storage demands created by catastrophes.

Last week we opened a 162-acre site in Okeechobee, Florida. This site will not be operated as a standalone yard at this time. But will serve as stand by storage capacity, ready for immediate access should a CAT occur in the Miami, Tampa, or Orlando, Florida areas. A similar strategy has been implemented in north Florida, Louisiana, Georgia, and North and South Carolina, and is being rolled out in other CAT regions.

In the UK and expressed in Pounds, our revenue was up 15.5%, very consistent with UK volume growth. In addition to growth in the insurance market, the non-insurance volume increased by over 36%. And as a percentage of total volume, non-insurance cars grew from 15.4% to 18.2%. However, the change in the Pound to USD exchange rate had a severe impact on UK revenue of over $10 million, and resulted in a recognized decline in UK revenue expressed in dollars of 3.5%. Overall our growth of revenue of 16.6% was slightly below our growth in volume of 18.3%, primarily due to the detrimental quarter-over-quarter change in the foreign currency exchange rates.

At the end of the quarter our North America and our UK inventories were up 19.1 and 4.1% respectively. Global inventory was up 17.7%. On a consolidated basis our average cost to process each car increased marginally over the same quarter last year. In normal environments increased volume yield reductions in the average cost to process a car, due to greater fixed cost absorption. However in the current environment, new volume was frequently addressed with new capacity, not idle existing capacity. Further, we incurred extraordinary operating costs associated with temporary leases, additional trucking to move cars between locations after hours, and with staffing that was well in excess of our normal operating models.

We remain focused on G&A expense, and are pleased with our efforts to gain leverage by controlling this growth. While we saw a spike this quarter, it resulted primarily from unique expenses, and we expect G&A expense to continue to decline as a percentage of revenue. Now let me conclude with a final comment. In a business the nature of Copart, in which land very specific in nature and very difficult to find is required, and where scale is achieved through the construction of new facilities that can take 12 to 24 months, it's very difficult to maintain operational leverage with worldwide growth volume of 33.6% over the last two years, and 18.3% over the last 12 months. Yet in this environment we expanding our EBIT margin by 210 basis points over Q2 of 2015, and 50 bips over Q2 of 2016. And we expect to see better operational leverage as we begin to complete our facilities expansion, and to process volume growth through the excess capacity that we are currently creating. That concludes my comments. Shantel we'll turn the call over to you to manage the Q&A portion of it.

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Questions and Answers

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Operator [1]

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Thank you very much. (Operator Instructions). Our first question will come from Bob Labick, CJS Securities.

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Robert Majek, CJS Securities - Analyst [2]

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Good afternoon. This is actually Robert in for Bob today.

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Jeff Liaw, Copart - CFO [3]

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Hi Robert.

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Robert Majek, CJS Securities - Analyst [4]

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Can you update us on capacity additions, as in how many acres you have added, and how many more are to come?

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Will Franklin, Copart - EVP [5]

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Yes. It depends on what period you're talking about. We have on our board over 60 expansion targets that we're looking at and, that's worldwide. And it's impossible to predict exactly the number of acres that those efforts will yield, or the timing of those efforts, because like I said in my remarks, it's very difficult to get a contract on new land. I would expect it to be in the high hundreds of acres within the next 24 months.

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Robert Majek, CJS Securities - Analyst [6]

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That is helpful. And are you able to quantify CAT costs in the quarter?

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Will Franklin, Copart - EVP [7]

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No. Not specifically. We still did have remaining CAT costs. We did process between 8,000 and 10,000 CAT cars during the quarter, but the CAT wasn't the sole driver of the increase in cost. It was just the overall volume that affected almost every yard.

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Robert Majek, CJS Securities - Analyst [8]

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Got it. And can you provide some update on Germany and Spain with auctions taking place there yesterday and today? What are you learning there?

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Will Franklin, Copart - EVP [9]

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So the auctions are test in nature, and the results have been very promising. The auctions are yielding returns that are much higher than the current process employed. What we are also understanding is that we need to have a broader footprint in yards, to be able to offer this to the insurance companies in Germany, and so we're somewhat subject to the pace of the expansion of those yards. Currently we have seven yards that we're targeting to open. One of which has already been opened. That is in Hamburg. We have four other yards that we are negotiating the contracts on, and two that we're still addressing the zoning issues. So like I said the roll out in Germany will be somewhat subject to our ability to open those yards.

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Robert Majek, CJS Securities - Analyst [10]

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Thank you. That is very helpful. And just lastly from me. Typically how long does it take for new yards to reach mature margins?

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Will Franklin, Copart - EVP [11]

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There's no any one yard that's, they're all different. They're all snowflakes, it depends on how much capacity you can shift from other yards. It can be as short as a year, and it can be as long as three or four years.

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Robert Majek, CJS Securities - Analyst [12]

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Got it. Thank you.

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Operator [13]

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Thank you very much. Our next question will come from Ben Bienvenu from Stephens & Company.

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Ben Bienvenu, Stephens - Analyst [14]

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Thanks. Good afternoon.

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Will Franklin, Copart - EVP [15]

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Hi Ben.

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Jeff Liaw, Copart - CFO [16]

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Hi Ben.

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Ben Bienvenu, Stephens - Analyst [17]

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I'm curious you highlighted some of the FX headwinds on the revenue from a translational perspective. Your volume growth and inventory builds continue to be really strong. I am curious are you seeing any implications or dampened appetite from a strong dollar from your foreign buyers' appetite to buy vehicles at auctions?

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Will Franklin, Copart - EVP [18]

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So Ben, I think what I heard you, I think you probably linked two relatively unconnected concepts. The first is, that we continue to experience meaningful inventory growth and volume growth, and that is a reflection of the factors we have talked about really for a while now, regarding driving activity, accident rates, and total loss frequency. That appears to be continuing unabated as far as we can tell.

The second question you raise which is the foreign currency effect on our foreign buyers, I mentioned that in my comments as well. That certainly affect the average selling prices for our vehicles. On balance we're still flatter up slightly year-over-year. There are a handful of things that kind of go into that, that contribute to the question of SAPs, of which foreign currency is one. The others are scrap used car values, mix, et cetera, but all else equal, certainly the US dollar being 20% stronger year-over-year versus the Mexican Peso for the second quarter does affect ASPs.

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Ben Bienvenu, Stephens - Analyst [19]

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Okay. Thanks. You highlighted your recent capacity additions in CAT-prone geographies. We have seen more flooding in California. I'm curious, how has the additional capacity that you have brought online better positioned you in those markets, and can you give us any sense of what kind of volume is being generated as a function of some of the recent flooding activity we have seen out West?

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Will Franklin, Copart - EVP [20]

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No. With respect to the last question, we really can't give you any kind of guidance on the volume that it will generate. We have opened up two new yards in Southern California, which I don't know what we would do without those. We also have sub lots in the high desert area. So when I talked about the additional cost, what we'll do is we will use some the of the yards in southern California as marshalling yards. We will bring the cars in during the day, and during the night we will load those up on eight-car haulers, and take them up to our sub lots up in Palmdale, which once again, significantly adds to the cost of processing the cars.

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Ben Bienvenu, Stephens - Analyst [21]

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That is great, thanks so much.

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Operator [22]

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Thank you. Our next question will come from Ryan Brinkman, JPMorgan.

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Ryan Brinkman, JPMorgan - Analyst [23]

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Hi. Thanks for taking my question. Can you please remind us of the drivers of the seasonal leverage of yard and expense cost as a percentage of revenue, as we walk from your fiscal second to fiscal third quarter? The last couple of years you appear to have leveraged these expenses, 13 bips, 300 bips, maybe should we expect that type of leverage to repeat this year, benefiting margins again?

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Will Franklin, Copart - EVP [24]

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Ryan, as a general matter we don't provide forward guidance, but let me provide what I think could be relevant color. So when we receive a unit, we incur the majority of the expenses. We however don't recognize most of the revenue until we sell it. So depending on whether the receipt of a given unit crosses, receipt and sale of that unit crosses a reporting period, that can cause us to incur the expenses up front, and not recognize the revenue, most of the revenue until later. This is all a function of course of GAAP guidelines. And so in a period like the second quarter in which we receive many more units than we sell, we have borne a substantial portion of the costs already, for which the units will be sold later. That can explain some of the seasonal fluctuations in our gross margin rate.

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Ryan Brinkman, JPMorgan - Analyst [25]

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That is helpful. Thanks. And then just when you talk about insurance versus non-insurance cars, you're not really talking about salvage versus whole car, right? Because I think a large portion of your non-insurance cars are actually like non-insuranced salvage cars picked up from junk yards. Is that the case? I ask because I have gotten some questions today, about how you might be negatively impacted by some of the headwinds that car auction services has discussed, regarding fewer dealer consignment sales on the whole car side, and I didn't think you had much exposure there. Are you able to say how large Copart dealer services is now as a percent of your total business?

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Jeff Liaw, Copart - CFO [26]

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No. I won't express it as percentage, but I will tell you that most of our non-insurance cars are truly non-insurance cars. They're not salvage cars that came to us through an owner retained process.

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Ryan Brinkman, JPMorgan - Analyst [27]

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So there is some fair amount of exposure there?

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Jeff Liaw, Copart - CFO [28]

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Tell me what you mean by exposure?

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Ryan Brinkman, JPMorgan - Analyst [29]

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I don't know. 10% of your unit volume? I don't know.

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Jay Adair, Copart - CEO [30]

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No. I'm going to jump in just because I want to make sure that I understand the question. Are you stating that they are referring to dealer auctions as having slower dealer consignments?

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Ryan Brinkman, JPMorgan - Analyst [31]

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That is right. On the whole car side there are fewer dealer consignment sales, and I was just wondering, well some clients are wondering, is there implication for your volume from that? How to think about, I think it's small. How to think about the magnitudes of your exposure to whole cars being sold by dealers, because I know you had that Copart dealer services business you launched a while back?

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Will Franklin, Copart - EVP [32]

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Yes. So while we won't provide a percentage, we will tell you this that in the last three quarters that number has been growing.

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Ryan Brinkman, JPMorgan - Analyst [33]

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Been growing. Okay. So maybe that is one of the reasons they are calling me. Okay. Fine. That is very helpful. Just last question on the opportunity to repatriate cash back to the US, if tax laws were to change, is that material enough of an opportunity to drive any different capital allocation decision, or would you even look to because you need to invest organically in Germany, or pursue other inorganic growth overseas?

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Jay Adair, Copart - CEO [34]

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Hey Ryan. Jay here, I just want to jump in on this point that you're making about the consignment. They are two very different types of cars. You have got a dealer consignment in the whole car. A lot of those vehicles are coming from franchise dealerships, and when you have got a dealer consignment in our world, most of those are coming from non-franchise dealerships. So they're really not comparative cars, and then to Will's point, besides the fact that segment is growing to Will's point, all of non-insurance then, we start to look at institutions and charities and other companies that assign cars, and they have absolutely nothing to do with trade-ins or insurance.

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Ryan Brinkman, JPMorgan - Analyst [35]

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Okay.

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Will Franklin, Copart - EVP [36]

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And, Ryan, to your next question then about cash repatriation, our expectation, as you note the majority of our cash is actually held in non-US accounts. Our expectations are to invest and deploy that capital outside of the US, if there is a substantial change to the tax code here in the US, we of course, would re-evaluate and consider those parameters as well.

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Ryan Brinkman, JPMorgan - Analyst [37]

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Okay. Thanks for all of these answers.

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Will Franklin, Copart - EVP [38]

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Thank you, Ryan.

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Operator [39]

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Thank you. Our next question will come from Matthew Paige, Gabelli & Company.

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Matthew Paige, Gabelli & Co. - Analyst [40]

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Hey. Good afternoon. As you speak about gaining additional capacity, in the past you have mentioned also moving into adjacent market as potential areas of interest. Is this still the case, and where does that fit on your list of priorities?

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Will Franklin, Copart - EVP [41]

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And what do you mean by adjacent?

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Matthew Paige, Gabelli & Co. - Analyst [42]

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Like equipment, equipment auctions or even in more whole car auctions?

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Will Franklin, Copart - EVP [43]

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The investments you have heard us talk about today are for our core business, hard stock. As for considering our strength and strategic capabilities, and whether they would enable us to extend our franchise into other spaces, that's something we consider over the long-term, but nothing you have heard us talk about today is relevant for that consideration.

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Jeff Liaw, Copart - CFO [44]

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Let me just add to that. We keep waiting or expecting this trend of growth to subside in salvage cars, and I got the most recent numbers from ISS, Independent Statistical Services, which is an information provider to most of the insurance industry. And the last quarter that they provided information, which is third quarter of last year, salvage frequency actually went up. We have been expecting that to go down, and in terms of total claims on a year-over-year basis up 3.5%, but in total paid losses it was up 10%. If you look back 24 months, claims was up 8%, but total paid losses was up 20%. And that's kind of the basis for the increase in the salvage frequency. The cost of repair is growing, accident frequency is growing, and so we're very comfortable with our expansion process as needed to address this expected volume.

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Matthew Paige, Gabelli & Co. - Analyst [45]

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Got it. That's really helpful. And my second question is for Jeff. You have now been head of the company for a little over a year, has there been anything that's surprising to you, or do you view anything differently now than when you first joined?

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Jeff Liaw, Copart - CFO [46]

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I think of course before you join a company you just understand so much less about it, and what I was able to see from the outside of course respected and admired from afar, and now that I'm plugged in and appreciate the complexity of the business, and how hard it is to manage the network of facilities, the buyers outstanding, and while providing outstanding service to sellers, including in cash throughout the times, I think I have a better appreciation for just how hard it is to do what we do, but in terms of Copart no, no meaningful surprises. I did spend a lot of time with Jay and Will and others before joining the Company, so it's been relatively smooth sailing.

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Matthew Paige, Gabelli & Co. - Analyst [47]

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Great. Well, thanks for taking my call, and good luck.

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Jeff Liaw, Copart - CFO [48]

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Thank you.

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Operator [49]

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Thank you. Our next question will come from Bret Jordan, Jefferies.

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Bret Jordan, Jefferies - Analyst [50]

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Good afternoon, guys.

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Jeff Liaw, Copart - CFO [51]

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Hi Bret.

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Will Franklin, Copart - EVP [52]

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Hi Bret.

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Bret Jordan, Jefferies - Analyst [53]

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Hey is there a way to think about capacity utilization? I mean obviously you have add a fair amount of acreage in the last 12 months, and you are adding a fair amount more. it sounds like maybe your utilization was too high to be efficient previously, but is there a way that we should be thinking about this relative to the cycle as well, because obviously we're having a pretty strong inflow of volume, is there a point at which you have acreage that would become inefficient if we had a slow down? I guess how do you do the math around the incremental real estate decision?

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Will Franklin, Copart - EVP [54]

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Well, first off the conversations arranged expansion aren't that broad. They're generally fairly narrow in terms of geographical regions. So we can't look at our total capacity nationwide, and there's a lot of factors that enter into what our targets are for the capacity that we need. We have even come up with, recognized a new phenomenon, that is certain yards are actually get less efficient in their size, and we get yards that store 8,000 to 10,000 cars that are actually less efficient than the smaller yards, so that is also part of the consideration.

I think the biggest change that we have seen is that previously we tried to operate our yards at 100%, or over 100% capacity during the peak season. And now we have decided that creates too much risk for our sellers, and we have changed that model to now we're targeting 85% of capacity during the peak season, and 70% of capacity in those areas that are subject to CATs. And without answering your question specifically, because I'm not sure how to, these are the drivers that we look at when we're going through our expansion processes.

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Bret Jordan, Jefferies - Analyst [55]

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Okay. And then one question on market share. Obviously, there was one insurance company that shifted some share to you guys a year ago. Is anything else changing out there, is there anything in the pipeline as far as major RFP activity, as we look out?

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Jeff Liaw, Copart - CFO [56]

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There's always RFP activity and we compete very aggressively with every other player in the industry. We think we have done very well in the last couple of years, but it's impossible to predict what the next couple of years will look like.

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Bret Jordan, Jefferies - Analyst [57]

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Okay. Great. Thank you, guys.

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Jeff Liaw, Copart - CFO [58]

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Thanks, Bret.

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Operator [59]

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Thank you very much. Our next question will come from Elizabeth Suzuki, Bank of America.

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Elizabeth Suzuki, Bank of America Merrill Lynch - Analyst [60]

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Hey guys. Just a question on operating leverage and efficiency here. Is there a good rule of thumb for the level of ideal revenue growth you would need in order to achieve operating leverage with the capacity you have in place now? Because it seems like if volume growth is too high, you have to add capacity, which is costly, but obviously if it's too low you can't leverage your fixed costs, so what do you think is the sweet spot there for volume growth?

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Will Franklin, Copart - EVP [61]

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Without a lot of analytics behind it, I would say 8% would be really nice. That gives us time to like I said it takes a couple of years to get, to acquire new capacity, and that would afford us the time to do so, especially if we are operating at 85% capacity, based on current volume.

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Jeff Liaw, Copart - CFO [62]

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Elizabeth, I can say that the growth is affirmatively good for us, and ultimately the more we grow the more we achieve operating leverage over the long-term. I think what can create near-term noise is surprises or volatility. Meaning if you told me we would for sure grow at 15% a year forever, we could plan accordingly higher, accordingly build land, accordingly et cetera. It's that there is some natural volatility in any industry including ours that can create spikes. If we suddenly have catastrophic weather events in a really busy summer, that can cause over time excess sub haul expenses, et cetera. If you had perfect visibility, which we will never have, and robust growth, that would of course be ideal.

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Elizabeth Suzuki, Bank of America Merrill Lynch - Analyst [63]

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Right. Makes sense. And just looking at the potential for tax reform, Car mentioned today that they think a 1% reduction in the corporate tax rate would be about a $4 million benefit to their net income. Have you done any similar sensitivity analysis? Obviously, there could be a lot of moving parts, interest deductibility, and other nuance, but just assuming a straight reduction in US corporate rate, how much of a benefit do you think that would be for Copart?

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Jeff Liaw, Copart - CFO [64]

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A good question, Elizabeth, and I think we're not prepared to comment quite as specifically as they did. I would say when we look at the various pillars of the corporate tax reform being contemplated today, big picture they affect both your taxable income, so the base upon which taxes are calculated, as well as the rate. We're relatively unaffected on the base side of the equation. We have interest, but we're relatively unlevered, so we're not affected much by interest deductibility considerations.

We do invest in capital, so to the extent that we are permitted to deduct those expenditures right away, that could in fact reduce our base. So I think the base for which taxes are calculated is relatively unaffected. We are substantially US tax cash payers however, so if the rate changes, that likely does accrue to our benefit, and as that crystallizes and becomes more real, we'll certainly have more specific things to say about it.

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Elizabeth Suzuki, Bank of America Merrill Lynch - Analyst [65]

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Great. Thanks very much.

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Will Franklin, Copart - EVP [66]

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Thank you, Elizabeth.

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Operator [67]

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Thank you very much. (Operator Instructions). Our next question will come from Gary Prestopino, Barrington Research.

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Gary Prestopino, Barrington Research Associates - Analyst [68]

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Good afternoon everyone.

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Jeff Liaw, Copart - CFO [69]

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Hey Gary.

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Will Franklin, Copart - EVP [70]

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Hey Gary.

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Gary Prestopino, Barrington Research Associates - Analyst [71]

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A couple of questions here. In terms of the GAAP tax rate going forward, what should we use, my model I am looking at from last quarter, I think we had said something around 36%, it looks like it came in at 34% this quarter, so what kind of numbers should be he be using on a go-forward basis?

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Jeff Liaw, Copart - CFO [72]

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So setting aside the topic we just talked about, right, which is a more radical overhaul to the tax code I think Will said probably 4 to 6 quarters ago we generally expect 35% to 36% effective rates, and that's still the right long-term starting point.

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Gary Prestopino, Barrington Research Associates - Analyst [73]

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Okay. And then I couldn't write down fast enough, Will. You gave a breakdown of what the global inventory growth and then UK and US. Could you just repeat that?

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Will Franklin, Copart - EVP [74]

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Sure. Global was 17.7%, and then on a regional basis North America was 19.1%, and the UK was 4.1%.

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Gary Prestopino, Barrington Research Associates - Analyst [75]

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4.1%. Okay. Great. Thanks.

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Will Franklin, Copart - EVP [76]

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You're welcome.

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Gary Prestopino, Barrington Research Associates - Analyst [77]

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And then -- I'm sorry. Was there something is else?

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Will Franklin, Copart - EVP [78]

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No. Go ahead.

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Gary Prestopino, Barrington Research Associates - Analyst [79]

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Oh, okay. And then in terms of these temporary standby storage sites that you're putting up, land is land obviously, it's going to cost you to do that, but in terms of capital improvements, putting facilities there, do you have to do a lot there, besides maybe just putting a fence around the land, and maybe putting some gravel there? I mean do you need to staff it, do you need to have a physical building on the site?

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Will Franklin, Copart - EVP [80]

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We do not and in these, and in our strategy we won't do much to these. So every yard is unique. The question whether we fence it is even one that's subject to discussion. If we don't fence it, that means in times of use, we need to have security. So then it's just a math equation, of how many times do you think you will use it and need security versus the cost of a fence. Generally in these temporary, they're not temporary, but these standby locations we'll put in roads, we'll rock some roads, and that's about it. So beyond the cost of the land there's very little capital necessary to put them in a stand by state.

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Gary Prestopino, Barrington Research Associates - Analyst [81]

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Okay. And then the last question as it pertains to what your doing in Germany, my understanding is that cars were basically owner retained in Germany. So is there prior to doing these auctions and continuing on, is there still some kind of an educational process that you have to, with the insurance companies to get help to understand just what you're doing, to get them to want to pool the cars, and then you obviously have got to get a buyer base as well, right?

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Will Franklin, Copart - EVP [82]

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Yes. We have a buyer base. No, I don't think there's really any educational process yet to take place. I think that they are aware of the value that we provide, and I think they're anxious to be able to utilize that value. The hold back is moving one region in the country, one area of the country, which is not attractive to the larger insurance companies. This is a complete change of paradigm to them, and a change of process. They would rather not have two processes ongoing at one time, and therefore, they would like to see our ability to handle their volume more broadly within the country.

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Gary Prestopino, Barrington Research Associates - Analyst [83]

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Okay. Thanks.

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Will Franklin, Copart - EVP [84]

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You are welcome.

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Operator [85]

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Thank you. Our next question will come from Bret Jordan, Jefferies.

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Bret Jordan, Jefferies - Analyst [86]

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Hey, Will. This is just a follow-up to your ISS data. If you could throw that out again the salvage frequency versus total claims, and I guess is ISS using the similar data that CCC uses from an industry standpoint in time as they report repairable claims growth?

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Will Franklin, Copart - EVP [87]

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I believe it is. And this doesn't provide salvage frequency. It provides the drivers to that decision.

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Bret Jordan, Jefferies - Analyst [88]

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Okay.

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Will Franklin, Copart - EVP [89]

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And so this is more focused on accident frequency. So the numbers I cited were that the number of paid claims on a year-over-year basis, and this is based on the third quarter of last calendar year, we're up 3.5%, and on a two-year period we're up almost 8%. While at the same time the paid losses were up 10% and 20%. And I guess I will also note that accident frequency reached 6% for the first time. I don't know if it's the first time. I only go back to 2011. And it's never been 6%. So the effect of accident avoidance systems, and some of the new technology isn't being demonstrated in the numbers at least at this point.

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Bret Jordan, Jefferies - Analyst [90]

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Smartphones are beating accident avoidance technology so far.

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Will Franklin, Copart - EVP [91]

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Yes.

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Bret Jordan, Jefferies - Analyst [92]

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So the take-away here is claims, the percentage of claims that are losses are increasing as a percentage of crashes?

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Will Franklin, Copart - EVP [93]

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That's correct.

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Bret Jordan, Jefferies - Analyst [94]

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Yes. Thank you.

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Will Franklin, Copart - EVP [95]

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You are welcome.

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Operator [96]

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Thank you. At this time we have no further questions in the queue.

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Jay Adair, Copart - CEO [97]

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I would just add some closing remarks from listening to some of the questions. One is that you may want to look into the use of adaptive headlights, and the multiple component bumpers today that exist in the market. There is plenty of research out there that you can find, you named off CCC and some of the other sources that are out there, but there's no doubt that bumper covers being three components, and now being 15 components, and all the complexity in headlights, headlights are now as high as $5,000 for a headlight. Coming from the days when they were less than $100. So we're seeing some big increases there. You may want to research on some of the carriers as well, because they're reporting that in their claims costs, and why their claims costs are up because of that. That increase in cost is increasing severity, and that severity going up causes total loss frequency, or salvage frequency as we call it, to go up.

The other thing that I'm not sure that the analysts maybe you understand it, I'm not positive that you fully understand it, is this cost that we have associated with building yards, and asking questions about what would be normal. Right now we have got people in advance of all of this growth, that are finding locations, developing locations, and it takes a number of resources to do that, and then once those yards are ready, we have got to staff them, and turn them on completely before we ever assign one car.

And so you have got all of this cost when you go from adding I think Will stated three locations over four years, to ten locations this year, and we believe we'll open up in addition in the calendar year we are in, another plus ten or more. So there are a lot of costs that's associated with that, and then once we start to see some normalcy in total loss frequency and the total losses that are coming in, those yards will have excess capacity. So we don't build those yards for 85% capacity. We'll build those yards for 30% or 40% utilization, and a much higher number of capacity, so that they have room to grow into that. As Will stated, we want to operate the Company at 85% on an average for our locations. So these new stores are being built, these new yards are being built with significantly more capacity than that, and so that, you're going to see some of these costs.

And then finally I would just mention in addition there was the towing component that Will outlined, could be a pretty significant component when you're out of a space in a market. You may have to shuttle cars and we have had a few scenarios like that, we're okay with that, we're handling those cars, we're moving them to areas where we have room, and then when we expand all of that cost goes away. So we looking all of this as a upside, we're getting a lot of volume.

In the history of my career I have not seen where the volume increases like this, and then goes the other direction. So at some point this may start to shrink. As Jeff stated, we don't see that currently, but at the point that we start to see volume normalize, we don't think it goes into a negative situation. So we slow down at that point. The adding of yards, we slow down the expansion of facilities, and we process those vehicles as incremental units. So that was it. Just wanted to add that color. Thank you all for attending the call, and we look forward to reporting third quarter. Thank you much.

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Operator [98]

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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.