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Edited Transcript of CPRT.OQ earnings conference call or presentation 21-May-20 3:00pm GMT

Q3 2020 Copart Inc Earnings Call

FAIRFIELD Jun 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Copart Inc earnings conference call or presentation Thursday, May 21, 2020 at 3:00:00pm 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. - President & CFO

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Conference Call Participants

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* Ali-Ahmad Faghri

Guggenheim Securities, LLC, Research Division - MD & Senior Analyst

* Bret David Jordan

Jefferies LLC, Research Division - MD & Equity 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

* Derek J. Glynn

Consumer Edge Research, LLC - Senior Equity Research Analyst & VP

* Gary Frank Prestopino

Barrington Research Associates, Inc., Research Division - MD

* Robert James Labick

CJS Securities, Inc. - President & Director of Research

* Ryan J. Brinkman

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* 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, and welcome to the Copart Conference Call. At this time. I would like to turn the conference over to Jeff Liaw, President of Copart. Please go ahead, sir.

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Jeffrey Liaw, Copart, Inc. - President & CFO [2]

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

In addition, our comments today include forward-looking statements within the meaning of applicable securities laws, including forward-looking statements concerning management's current views with respect to trends, opportunities, uncertainties, including with respect to the COVID-19 pandemic. These forward-looking statements involve risks and uncertainties. The current worldwide pandemic could adversely affect our financial results in future periods based on declines in accident volume and other pandemic-related factors, and our business and operating results are generally subject to additional uncertainties such as dependence on our major vehicles, sellers, business risks relating to our international expansion strategies, factors affecting average selling prices for auction vehicles and the additional risks identified under the caption "Risk Factors" in our annual on Form 10-K for the years ended July 31, 2019, and each of our subsequent quarterly reports on our Form 10-Q, any forward-looking statement as of today, and Copart has no obligation to update or revise any forward-looking statements.

With that, CEO, Jay Adair.

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A. Jayson Adair, Copart, Inc. - CEO & Director [3]

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Thanks, Jeff. You're breaking up just a little bit on that. So maybe we should dial in.

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Jeffrey Liaw, Copart, Inc. - President & CFO [4]

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Yes.

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

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I'll go ahead and kick off.

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Jeffrey Liaw, Copart, Inc. - President & CFO [6]

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(inaudible)

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A. Jayson Adair, Copart, Inc. - CEO & Director [7]

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Yes. Perfect. Again, welcome, everyone. Thanks for coming to the third quarter call. If I were to describe Copart, at the beginning of the quarter, I would say, full speed ahead. We were acquiring land, developing that property, winning business, selling record units, record number of units company-wide. And if I were to fast forward a month later to the beginning of March, the best way I could describe us would be unpredicted but prepared.

Clearly, looking at COVID, and it was all day, every day COVID in the first week of March, by the time we got to the second week of March, I had reached out to some friends of mine that are in the service industry, people that own hair salons, people that own restaurants. And the government had not yet told anyone to specifically not go to work or to specifically not open up their business, but just the rhetoric that was coming out of the news and out of Washington was enough to keep people from going out to dinner and to keep people from traveling, and so we saw that company-wide. We saw, overnight, our customers couldn't travel. Overnight, we had to cancel conferences and cancel events that we had planned. And this was -- we had, at this point, gone from what I would say, unpredictable to a position where who could anticipate that the government would actually be thinking of shutting down business.

And my concern was really about the behavior of people. And so I reached out to some political contacts that I've got. And I quickly came away from those meetings thinking they're going to actually shut business down. And obviously, the country has been through a number of experiences over the years, whether it be polio, whether it be Spanish flu, and we haven't been in that situation where we think business is going to be shut down. We saw that not just in the U.S. but coming out of Italy, the U.K. I think the U.S. was probably a little earlier on than the U.K. from the results I've seen. But in the end, the U.K. definitely shut down much harder than the U.S. did. But regardless, this was really, really unpredictable at that point.

But as I said, very prepared. So first thing we did, this felt a little bit like the '08 financial crisis. We weren't sure if there was going to be liquidity at banks. So the first thing Copart did, not knowing the future, not knowing exactly how we were going to have to position ourselves, we pulled down in excess of $800 million on our line. And at that point, we had over $1 billion of cash on the balance sheet. We, subsequent to that, reached out to all of our employees. We put together the first of what would be a number of phone calls that were company-wide phone calls with all of our management and all of the fields. We recorded the calls so we could play them back. And this was really about setting people's fears aside. I mean the fear of COVID is something we can't control, but your financial security is something we could control and these were precarious times. So we reached out and let everyone know that we had a lot of cash. Can you hear me okay? Okay. We reached on, let everyone know that we have a lot of cash and that -- 1 second here. Can you hear me on the call all right?

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Operator [8]

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Yes, sir. Please proceed.

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A. Jayson Adair, Copart, Inc. - CEO & Director [9]

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We've got issues there, then Jeff will come in here. Okay. All right. So I'll continue. We just -- we've got some -- Jeff and I are in 2 different locations, obviously, because of COVID. They can hear me fine. You can all hear me, but apparently Jeff's having trouble. So he's going to get on and he'll continue. But just to continue on that note, we made it very clear that Copart had a significant amount of cash on the balance sheet. We could operate for months or we could survive for months without operating, without being able to pick up cars, without being able to sell cars. Now clearly, that's going to be a problem for the nation. That's going to be a problem for the U.S., the U.K. and other markets we work, and I'll get into that. But the initial messaging to our company was that we are strong, that there will be no furloughs for 90 days, that there will be no reduction of hours and that this is about continuity. This is about Copart making sure that we can provide the services for our customers. And the way to do that is to give the people at Copart confidence so that they can deliver on that promise, and that's exactly what we did.

As I said, we started off the quarter full speed ahead, and we didn't want to change from that position. So we've continued throughout the quarter to acquire land. We've continued throughout the quarter to develop that land. We think this is necessary to the long-term success of Copart. We believe that this is a temporary reduction of volume. We're already seeing that. Jeff will talk about that a little more, but we're already seeing that volume coming back. But that was really Message 1.

Message 2 was this new concept of essential business, and this is not -- clearly, this is something none of us have thought about before. And if you were to speak to some of my friends that run businesses, if you speak to some of my friends that work at businesses, they all feel their businesses are essential. They're essential to their family. They're essential to their success. And so conceptually, it was hard to understand that the government would be, at the state level, at the federal level, at the city level, telling businesses not to operate. And I actually made an argument at that point with some of the politicians that I'm connected with or friends with, that let's look at quarantining high risk and let's look at -- if they've got preexisting conditions. And then let's look at trying to parse the population so that 1/4 of us are at work or 1/3 of us are at work or 1/2 of us are at work so we can maintain social distancing, similar to what I would say we're doing now as a company.

So throughout this experience, we had multiple times where law enforcement tried to shut down Copart locations, both in the U.S. and internationally, in the U.K., and throughout all those experiences, our team rallied, and we made the arguments that are very clear. If Copart doesn't pick up cars from tow companies, they're going to get full and the streets are going to have cars left on them. And if Copart doesn't sell vehicles, we're not going to have parts available for repair. We don't pick up cars from body shops. You're not going to have body shops able to fix cars. You're not going to have insurance companies able to pay off insureds, and it's going to stop the insurance process. So we made very strong arguments in multiple states, and there was a couple of scenarios where we've shut down for a day or 2, and we were able to reverse that by working with chiefs of police, and other folks in law enforcement were able to reverse that and get back open. I'm happy to say all of Copart's locations, for the most part, have been open, for the most part, meaning we were down for a day and then back up, maybe down for a day or 2 and then back up. So we have essentially been running through this whole quarter picking up vehicles, although less, and Jeff will talk about that, and we've been selling off a lot of inventory throughout this process.

So as I said, very unpredictable but very prepared. This was something that, internally, we have reflected on this and dealing with DMVs that have shut down and trying to work with those DMVs so that they continue while they're shut down to the general public and on the retail front, we tried to work with them to continue to process titles in the back so that we can get these vehicles sold. Fortunately for us, we've had a large capacity. As we've been adding land over the years, we've developed a lot of land, developed a lot of capacity. So we've got room at our facilities. We did things. There's some increased costs in the quarter because we did things like move vehicles from 1 yard to another yard in anticipation of DMVs being shut down to ensure that we have enough room at that facility if we had to keep picking cars up and not be able to sell those vehicles. And then finally, I'd make the argument that we continue to express that we are a company that has, for the last 17 years, sold everything online. And so a lot of the states made the argument that if you're completely online, you can stay open. That was another one of our arguments that we utilized, and we've had the benefit of buyers being able to look online and bid online and then send trucks in to pick up the vehicle.

So it's -- overall, it's been a very unpredictable experience. I, really, second week of March, didn't think I'd be, 8 weeks later, seeing jobless claims of 36.5 million. I just didn't -- I wasn't convinced that the government was going to actually be as aggressive as shutting business down across the country. We all know that, that's been the case, and we all know what's happened over that period of time. Our team has really, really rallied. The IT folks, though not all at the office because of social distancing, have continued to deliver technology. We've adjusted, we've course-corrected on the fly and changed the services, how we offer those services, the technology we use to offer those services, and our folks in the field have done a phenomenal job every single day coming to work, making sure we unload trucks, put cars away, set sales -- sell cars, load customers out, et cetera.

And so one of the things we've said internally is while we didn't anticipate this pandemic, the folks at Copart were built for this. We have really done a great job as a company. And for those Copart folks out there that are listening to this call, as your CEO, you guys have done a phenomenal job. No, actually, you guys have kicked ass, and I'm proud of everything you've done. And it's -- this is one of those experiences that will go down in the history books for me, and I couldn't be more prouder of the success and the way we've handled this pandemic. On that note, I'll turn it over to our President, Jeff Liaw, to give you an update on the quarter.

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Jeffrey Liaw, Copart, Inc. - President & CFO [10]

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Thanks. Thank you, Jay. We'll start the remarks with a deviation from our usual script and offer some comments on the COVID-19 crisis following Jay's narrative and its effect on our business, specifically how the coronavirus has affected our operations, our priorities and our financial results.

On operations, as Jay noted, beginning in March of 2020, our business and operations began to experience the interruption worldwide, first, within our European operations and as the month progressed and the quarter progressed throughout the balance of our global operations. As Jay noted, in materially all of our jurisdictions, we've been deemed by local authorities an essential business because we helped to ensure the removal of vehicles from repair shops and impound yards, streets and highways, enabling the critical function of our world's road infrastructure. We're proud of the role our people play in serving the communities in which we do business, and the work we do will enable the smooth functioning of our societies during the crisis and certainly support our eventual recovery from it as well. We've taken great care to follow appropriate health and safety protocols in all of our facilities to ensure safe working conditions for our employees as well as for our sellers, buyers and other business partners with whom we come into contact. We've also adapted, in many cases, to remote work arrangements and have experienced no material disruptions to our business. We frequently and proactively communicate with our customers as well. And in many respects, we're simply continuing business as usual. For example, our facilities remain fully operational as well as the online-only auctions Jay noted a moment ago. Because we've operated exclusively online auctions now for 17 years and have made iterative refinements and more transformative overhauls over the years, we've not experienced any disruptions in any way in terms of how we sell cars. And we continue to believe that our auction technology drives the best-in-class experience for our members and best-in-class returns for our sellers as well.

Turning to our priorities. It won't surprise you that our near-term priorities are on our customers, in many cases, adapting real-time to their own workflow modifications and accommodating their remote work arrangements. We've deployed new technologies in support of those accommodations as well. Our long-term focus is, again, on investing in international member recruitment and retention. Our auction liquidity is sacrosanct and enables our business to grow. We are focused keenly on extending our technology advantage in every respect, both in terms of our auctions as well as the many ways we interact with our sellers, our members and the various aspects of our ecosystem.

We are investing aggressively in our future also in terms of capital expenditures in support of capacity. We believe there isn't any such thing as noncritical capital expenditures. If they were noncritical, we never would have made them in the first place. We'd note we spent more in capital expenditures this past quarter than we did in all of fiscal 2015 in support of ours and our customers' future growth. We'll be opportunistic as we look forward in acquiring still more capacity to serve our customers.

We are investing in our people as well. We continue to recruit, train and promote our team members. We have not furloughed employees or suspended 401(k) contributions. We have said before and fundamentally believe that our people are one of our most critical assets. And while we will always be prudent stewards of our business, we won't make shortsighted decisions that affect our ability to serve our customers well. We want to be prepared to serve them and their growth and our growth as well and, of course, to be prepared for a potentially active tropical storm season ahead.

Then the coronavirus effect on our financial results. It won't surprise you that our operating results for the quarter were affected by lower processed vehicle volume. We received and sold fewer vehicles in the quarter than we had anticipated due, of course, to the pandemic. The volume declines in turn were due to fewer accidents occurring as a result of fewer miles being driven in response to state and national shelter-in-place orders. We track a range of industry sources, including Apple Mobility, Google, the University of Washington's Metrics, among many others. And we would note that from the baseline, it appears that driving activity troughed at down 55% to 65% relative to the pre-coronavirus levels during certain periods in the quarter, though we also note that activity has increased substantially from that trough level.

And then compared to apparent reductions in driving activity, our assignment volume has not been affected as severely, not nearly so, a function of driving behavior and total loss frequency. On driving behavior, because the roads are less congested, it appears that drivers are often driving faster and perhaps with more distractions still. Total loss frequency has increased according to most industry sources. That's been caused by a mix of repair shop disruptions, which have affected their ability to service automobiles and also insurance carrier decisions on remote work and wanting to simplify the loss claims process as opposed to having adjusters with the vehicles, policyholders recover vehicles after repairs.

We've also noted some volatility in selling prices for vehicles at our auctions, though we would note also that liquidity and auction participation has remained high throughout the crisis. Selling prices in more recent days after the end of the quarter have actually reached levels higher than pre-crisis levels. The price volatility during the quarter, we would attribute in part to substantially strengthened U.S. dollar, and therefore, the currencies that often purchase -- or the countries that often purchase cars at our auctions have had seen their purchasing power somewhat impaired as a result. There, of course, has also been a global economic uncertainty, which has affected demand for vehicles as well and, finally, some potential logistics challenges or uncertainties regarding the exported vehicles. But by and large, the auctions have -- auction liquidity has remained quite strong.

On our own financial liquidity, as we noted in our 8-K issued in March, we drew down $825 million in funds under our available revolving credit facility, in part in response to what we perceived as systemic uncertainty. We've subsequently repaid all of those outstanding borrowings under our facilities. And as of April 30, 2020, we had approximately $1.1 billion of available liquidity, including $300 million of cash in the undrawn facility I just described. Our conservative capitalization, we think, enables us to continue to make decisions for the long-term benefit and interest of our customers and our shareholders.

Looking forward then on the coronavirus, we expect the pandemic to have, of course, an adverse effect on our quarterly revenues in future quarters, with magnitude and timing of those effects, dependent on the extent and duration of suspended economic activity across our markets as well as the potential resumption of shelter-in-place orders. The longer-term impact on our business will depend on the development of the pandemic, society's responses to those developments and the potential availability of vaccines and treatments, of course, none of which we can predict. In short, our approach to the pandemic is that it's a massive disruption to the global economy and the markets we serve but not a permanent structural shift. If and when the facts indicate otherwise and that we are facing such a structural shift in either ways that reduced demand for our services, for example, permanent remote work arrangements that reduce daily commuting or in ways that increase demand for our services, for example, the substitution of automotive transport for public transit and air travel, we'll adjust accordingly.

As we discuss our financial results, we'll share the customary metrics that we provide every quarter. Before the crisis, the themes we've discussed in the past had largely continued, as Jay noted in his opening remarks. Meaningful increases in unit sales, in insurance, in noninsurance, in assignments, average selling prices, bidding activity, international bidding activity and so forth. So the metrics we'll share, of course, include a blend of pre -- and precrisis and crisis input.

Turning to the third quarter. We experienced global revenue decline of 0.5% or $2.8 million year-over-year. That includes an unfavorable currency effect of $3.6 million due to the strengthening of the U.S. dollars -- of the U.S. dollar, pardon me, as well as a shift of a particular customer from a purchase arrangement to a consignment engagement you've heard us describe before.

Global service revenue grew $17.9 million or 3.8% year-over-year, which, as we've noted before, is a more accurate reflection of the underlying economic activity in our business. That, in turn, reflects growth in the U.S. at 3.6% in service revenues and international service revenue growth of 5.1%. We did experience a purchased vehicle decline of $20.7 million or 26% as growth in the U.S. was more than offset by the international decline we noted a moment ago, primarily driven again by the shift of the U.K. customer to a fee-based sales contract.

On unit growth, we experienced global unit sales decrease of just under 1%. We'll provide more color momentarily with a U.S. increase -- U.S. unit increase of 1.4% and an international unit decline of 12.6%. The U.S. unit growth has been driven by organic growth from our existing insurance customers and market share gains. Insurance grew 5.6% in units sold for the quarter. Noninsurance declined 13.4%, though if you exclude the charities and wholesale business, our noninsurance business actually grew year-over-year for the quarter.

Prior to the crisis, as one important group that we track, our dealer consignment volumes actually had continued their double-digit growth rates year-over-year. Our noninsurance business, of course, has been meaningfully affected by COVID-19. We believe we have outperformed other auto auction businesses during the crisis, in part, because we have been a natively digital business for almost 20 years and because of our auction liquidity.

Turning to global inventory. Worldwide, our inventory declined 9.6% with U.S. inventory declining 11.3% and international inventory growth of positive 1.2%. Our inventory declined as auctions consumed inventory, which was then replenished at reduced rates.

Our gross profit declined from $251.6 million to $242.6 million or a 3.6% decline year-over-year. Our gross margin rate declined slightly from 45.5% to 44.1%. In the U.S., we experienced a gross margin contraction of 50.2% to 46.3% as our yards remained open throughout the pandemic with lower-than-expected unit sales and assignment volumes. Our international gross margins increased from 25.4 to 31.7 due in part to operating efficiencies and also in part to the shift of that customer from a principal arrangement to a consignment. In the U.S. and globally, we do note rising for unit processing cost a reflection of negative operating leverage from fewer units sold and fewer units received than we had previously anticipated.

Turning to selling prices for the quarter. Within the U.S., we experienced a decline in average selling prices year-over-year for the full quarter of 4.8%. Prior to the crisis, we had observed increases in selling prices within the quarter. And since the end of the quarter, we have seen prices rise to above pre-crisis levels. As I noted a moment ago, the volatility in the quarter has been due in part to currency effects as well as logistics and demand uncertainty. Even with this unprecedented global dislocation, our international member base remains critical to our auction liquidity and outcomes. We actually increased unique international bidders in the quarter by almost 20% year-over-year and observed increases in bids by international members and increases in bids per unit sold. The outcome, of course, is higher bids per unit and, therefore, better selling prices for our customers as we drive enhanced auction liquidity.

I'll turn now to general and administrative expenditures. In general, as we've noted before, G&A expenditures will fluctuate and grow over time. We continue to believe that we can achieve operating leverage over time. As with all trended data in our business, gross margins, G&A, unit sales and so forth, we'd encourage you to review longer-dated trend lines rather than the single quarter metrics for a more accurate view of the business.

Our GAAP operating income declined from $207.5 million to $195.1 million for the quarter. Our net interest expense increased 9.7% year-over-year due largely to the drawn revolver for a portion of the quarter, partially offset by lower interest rates as well. Other income of positive $2.3 million was attributable to earnings from a nonconsolidated equity method investment, currency gains and asset disposal gains.

In the third quarter, we -- our provision for taxes was $44.3 million, which includes the tax benefit from the exercise of employee stock options, which has been reflected as such in the non-GAAP earnings reconciliation.

Our GAAP net income decreased from $192.7 million a year ago to $147.5 million this year and our non-GAAP net income declined from $154.9 million to $138.3 million for the quarter.

Turning then to the balance sheet. We finished the quarter with just north of $300 million in cash on the balance sheet and just north of $100 million in net debt, leaving us essentially unlevered. We adopted a new lease standard this year in the first quarter, which shows $106.6 million operating lease right-of-use assets and $109.1 million of operating lease liabilities on our balance sheet.

On cash flow, operating cash flow for the quarter was robust at $294 million, an increase versus the third quarter of '19 and a substantial increase versus the second quarter as well. This is driven in part by the cash flow generated from the business as well as the working capital reductions that come with the decline in inventory.

Our capital expenditures for the quarter, $90.6 million. Again, more than 80% of our CapEx was attributable to investing in capacity expansion. We have a number of new yards and expansion projects in the queue as well. We continue our efforts to purchase and develop land to meet current and prospective demand. With that, I'll turn the mic back to the operator who can begin taking questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question in queue. This one 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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I just want to start off where you kind of finished the prepared remarks as it relates to the land. You talked about, earlier in the remarks, the 2 potential impacts on longer term on miles driven. Could be more work from home could reduce miles driven or if fewer people are taking mass transit or flying, there could be an increase. So how do you -- obviously, I don't expect you to know the answer to what the outcome will be in that regard. How does that impact your land strategy right now? And then just as it relates to that, too, is there enough activity going on that you can find more land? Is that -- is it easier or harder now as a result of the economy to purchase land, if you wanted?

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Jeffrey Liaw, Copart, Inc. - President & CFO [3]

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Very good question, Bob. In short, I think you're right that those big societal questions, I think, will remain to be resolved over the months, quarters and years ahead. On land investments, the lead times for acquiring and developing land are quite long. Our expectation is that we will use that land to accommodate our customers' growth and our own for a multiple-year horizon. So it's not a 1-month, 18-month, even a 3-year decision. We acquire land because it makes sense over a 5- to 20-year horizon.

We continue our activity. I think your intuition is fair in that in some respects, our ability to do so has been perhaps limited in some cases where economic activity or regulatory approvals have stalled because of the virus impact. In other cases, though, the crisis may unlock opportunities for us to move forward because land is now available at more reasonable values where local jurisdictions are still more excited about having the jobs that a new Copart facility brings with it. So I think in short, we have not meaningfully disrupted or changed our strategic approach to land acquisitions, and we wouldn't do so based on anything that happens over a 6- to 10-week horizon. As we noted in the opening remarks, if the facts unfold differently going forward, we'll, of course, revisit. But for now, no change in our course.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [4]

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Got it. Great. And then we've talked a little bit on previous calls about your work with carriers on optimizing the total loss process, and you noted total loss frequency seems to have ticked up recently as well, and we've seen that in some publications as well. Can you just expand on what value you can add to the carriers now in the total loss process, given your increased data that you've been collecting for so many years?

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Jeffrey Liaw, Copart, Inc. - President & CFO [5]

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Yes. And good question, Bob. I think we talked about that a couple of quarters ago, and I misunderstood your question last quarter. But in short, we believe that providing more data to our insurance carrier partners and earlier in their own loss claims process will help them make more informed decisions and, in many cases, will empower them to total cars more quickly, which saves them the processing burden, storage costs and repair shops, uncertainty regarding the loss claims resolution with our own policyholders. So for us, it is amassing the data that comes from having sold tens of millions of vehicles over the years and being able to value them efficiently and quickly based on limited data sets available to us at that moment in time and sharing that data in ways that empower those carriers to make the decisions more quickly. That's what we meant a couple of quarters ago, and that work certainly continues to pace.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [6]

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Okay. Super. And then last one for me, I'll jump back in queue. And just shifting gears a little bit. Can you give us an update on Germany? Has the economic impact over there or anything else impacted insurance carriers' decisions to convert to the U.S.-style auction? How are things going? And just a general update.

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Jeffrey Liaw, Copart, Inc. - President & CFO [7]

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I think in broad strokes, we continue to move forward there as well. So we've invested and continue to invest in land and in people and technologies. Our dialogues with the insurance carriers continue to be very productive. I think we noted on the last call that we had begun selling consignment vehicles on behalf of insurance carriers there. This kind of disruption, I think, cuts -- the coronavirus cuts both ways. On the one hand, it's difficult nowadays to meet face-to-face, either among ourselves or with our customers or prospective customers. On the other hand, radical shifts like this also tend to open the mind to considering alternatives where the status quo is no longer the glide path that it once was. So I think it hasn't changed. Either way, I think our conviction that our long-term prosperity in Germany is there for us to pursue.

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Operator [8]

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We'll take our next question in queue comes from Craig Kennison with Baird.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [9]

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Wanted to ask, to what extent did the pandemic reduce revenue in the quarter, knowing that revenue recognition can be something like 50 days after the loss event? So we would expect, I guess, the pandemic impact to be much more severe in the current quarter.

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Jeffrey Liaw, Copart, Inc. - President & CFO [10]

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Yes. I think that observation's fair, and your question is difficult to answer. Your directional observation is fair. And the reason the question is difficult to answer is, you start to cut the data very, very finely, right? Where -- when do you consider the coronavirus start date to have happened in Oklahoma versus Louisiana versus So Paulo versus Toronto, right? So I think the directional impact is very hard to assess. And that's why we didn't get into very elaborate, pre- and post metrics. It didn't -- it just wasn't worthwhile or clean enough to do so pre- and post. But yes, you're correct that given the leads and lags in our business, several weeks from when the accident happens to when the car's assigned to us and then a number of weeks again before we had the title processed and the car available for auction, that there is a lagging effect on our volume, yes.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [11]

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And then maybe -- I know you don't like to comment on the current quarter so much, but maybe just give a sense for what the last couple of weeks have looked like in terms of assignments versus last year. Are we meaningfully better as driving activity normalizes? Or still far below last year?

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Jeffrey Liaw, Copart, Inc. - President & CFO [12]

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I think, Craig, I think we tend not to comment, as you know, on the current quarter. As I noted a few moments ago, we have seen assignment volumes, ASPs and so forth have certainly rebounded very meaningfully from the troughs. The year-over-year comparisons, we'll leave will be for when we talk about the quarter.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [13]

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Okay. And then just on inventory, that was a helpful metric that you always share, maybe not down as much as I had feared and actually up internationally. What's driving the international increase? Is that purely just internal secular trends that you've created through your growth initiatives? Or is that market kind of coming back sooner than maybe I had feared?

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Jeffrey Liaw, Copart, Inc. - President & CFO [14]

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It's a fair question. I think there, yes, are secular forces that we talk about every quarter. In some cases, also, there have been interruptions outside the U.S. in DMV processing of titles. So you noted that the international unit sales were also down more than they were in the U.S. In some cases, that's because of inventory that's been hung outside U.S. as well.

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Operator [15]

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We'll take our next question in queue, comes from Bret Jordan with Jefferies.

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Bret David Jordan, Jefferies LLC, Research Division - MD & Equity Analyst [16]

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On the inventory question, and when you think about the trough in driving being the beginning of April and your month-end inventory being down around 11, would that, in theory, be maybe trough inventory in the sense that maybe an assignment takes a couple of weeks post crash? And if driving has picked up, we'll be seeing inventory sequentially higher, do you think?

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Jeffrey Liaw, Copart, Inc. - President & CFO [17]

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No. Not inventory, Bret. Trough assignments maybe, right? We are several weeks out from trough driving activity, but inventory itself is the accumulation of many weeks, months and, in some cases, years-old stuff. So that's a bigger layer cake, so to speak, that includes driving activity absent volume for loss frequency from a much longer period of time.

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Bret David Jordan, Jefferies LLC, Research Division - MD & Equity Analyst [18]

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Okay. And then on recent selling prices rebounding, is that on the back of domestic bids? Or is the foreign buyer back in the market pretty aggressively?

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Jeffrey Liaw, Copart, Inc. - President & CFO [19]

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Both. There's meaningfully increased unique bidders and bids, both domestically and internationally.

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Bret David Jordan, Jefferies LLC, Research Division - MD & Equity Analyst [20]

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Okay. And then a housekeeping question. I think Jay had mentioned that some of the costs associated with moving vehicles around logistically are due to DMV activity. Could you give us an idea how much expense was in the quarter around that?

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Jeffrey Liaw, Copart, Inc. - President & CFO [21]

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I don't have a precise number to provide, Bret. I think it's -- I think in short, the moving of vehicles on logistics, in part, it was in fear, frankly, of us having vehicle stranded. So we wanted to make sure that our most congested yards would be able to continue to serve our customers. And so we move some cars at our expense within our own network. So I think that's what Jay was alluding to. But no, don't have a precise number to provide.

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Operator [22]

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We'll take our next question in queue, comes from Stephanie Benjamin, Robinson Humphrey.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [23]

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I wanted to comment on some of the land acquisitions and the continued aggressive CapEx plans. Maybe if you could talk a little bit about the geographic location or if you're targeting specific areas. Is this more domestic focused? International focused? What's the kind of general theme or geographies that you're looking at in terms of some of these expansions would be helpful.

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Jeffrey Liaw, Copart, Inc. - President & CFO [24]

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Thanks, Stephanie. A healthy mix of both is the answer. So a fair bit within perhaps our long-standing traditional markets in the U.S., Canada and the U.K., but also investments in Brazil, in Germany and elsewhere, so all of the above. And it's in pursuit of -- in support of our long-term growth, right, we can't stop the ship to wait for crystal clear certainty on what happens with driving activity and so forth. I think we fundamentally believe that we'll continue to drive auction liquidity. But the 50-year trends on total loss frequency will not abate on society's demand for mobility in general. Mobility isn't just commuting to work. It's also necessary for leisure, for health care, for education and that those 100-year trends really will continue perhaps with a meaningful interruption as it stands today. So believing those underlying principles, I think, leads us to want to invest to support our own growth and that of our customers. So I think it'd be irresponsible for us to arrest that process mid-course.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [25]

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Absolutely. And then in terms of some of the comments you've made about certainly seeing some improvement across metrics from trough levels, is that true in terms of both the -- obviously, the U.S.? But internationally, are you seeing some of the same levels of trends?

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Jeffrey Liaw, Copart, Inc. - President & CFO [26]

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In short, yes, with a fair bit of variability and a fair bit of uncertainty, right? So we track those metrics very carefully, but we also -- we'd be at risk of pretty meaningfully oversteering the business if we responded to daily traffic reports in the U.K. from Friday, right? That's not a good way to operate a business or make strategic decisions either. So we track those metrics. We have seen recovery in some cases. Certainly, some countries were later to shut down, and therefore, it will be later to reopen somewhere earlier and therefore, earlier, seeing the full gamut of activity, as you just described. Some folks are recovering more quickly and others more slowly.

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Operator [27]

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We'll take our next question in queue, comes from Daniel Imbro with Stephens, Inc.

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Daniel Robert Imbro, Stephens Inc., Research Division - Research Analyst [28]

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I just wanted to start on something you talked about on the dealer consignment side. You said it was stronger pre-crisis, obviously, probably slowed meaningfully given what you've heard from the channel during the crisis. How do you think that channel progresses and the health of that channel progresses from here just given the declines and reduction we've seen in used vehicle sales, both in the U.S. and globally?

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Jeffrey Liaw, Copart, Inc. - President & CFO [29]

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A fair question. I think if the question is over the next 2 to 3 quarters, harder for me to answer. I think, over the long haul, I think we remain quite bullish about our ability to serve that market. The volumes in the near term, of course, impaired by reduced activity. Sure, folks are taking fewer trade-ins. They're trafficking less in vehicles, period. So there are fewer that makes sense to route -- to consign in Copart. Over the long haul, though, our auction liquidity, our international buyer base, the buying and selling of new and used cars, I think, will continue to capture a growing portion of that ecosystem. So our outlook, long term, certainly has not changed. As I noted a moment ago, I do think we have somewhat meaningfully outperformed other such auto auction platforms during the period, in part because we were never dependent on folks coming and having lunch at the auction facility and bidding live on cars. We have been natively digital for a long time, and I think it showed in the quarter.

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Daniel Robert Imbro, Stephens Inc., Research Division - Research Analyst [30]

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Helpful. And then maybe a related question. Just on the impact used vehicle pricing, there is the positive dynamic as that falls to units with total loss rate going higher. There's a negative to that on revenue per unit. Can you help us just think through the puts and takes and kind of -- is it a net positive or net negative as we think about the changes in used vehicle prices? And then how that impacts maybe the next 12 to 24 months?

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Jeffrey Liaw, Copart, Inc. - President & CFO [31]

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That's a fair and difficult question and one I've wrestled with now for 5 years. And you're correct, directionally speaking, that with softer used car prices, cars will total more easily, and we would see a unit volume improvement. With lower used car prices, however, all else equal, the selling prices for our cars would be reduced as well. And we would, therefore, all else equal, make less per car than we otherwise would.

How those nets, I think we've struggled over the years to know what we, "root for." I think as a CFO and as a financially oriented person, I know that we have hundreds of thousands of cars in inventory already, and I want to achieve the best possible selling price for those cars. So it's probably intuitively hard to read for declining asset values when you already have many of them.

But that said, the unit volume effect would be real. If you saw a substantial decline in used car prices, our unit volumes would increase very meaningfully. And even over the past, say, 4 or 5 years, Dan, used car prices have remained robust and very robust relative to where industry analysts have forecasted that they would be 5 years ago. That has, no doubt, suppressed unit volume that otherwise would have come to Copart, which has been masked by other forces, total loss frequency, market share gains, [let in by] other forces that have made that somewhat invisible. But there's no doubt that robust prices have suppressed unit demand for our services.

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

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Got it. Really helpful. And then if I can squeeze the last one in. Jeff, over the last 12 months, we've heard a lot more talk around the industry just about ancillary services, providing more for the insurance companies. Are there any services today that your customers are requesting that you don't provide? Or do you guys have a robust suite today that you think covers most of your insurance companies' needs?

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Jeffrey Liaw, Copart, Inc. - President & CFO [33]

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I think tough to talk about customers in monolithic entities. Some of them certainly have an appetite for us to do more and to vertically integrate still more into what they do day to day, and we certainly have expanded our service offerings over the past year, 5 years, 10 years, 20 years, and we do more and more for our insurance carrier partners. So yes, there are additional services that we offer and more services that we'll offer over time as well.

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Operator [34]

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We'll take our next question in queue comes from Derek Glynn with Consumer Edge Research.

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Derek J. Glynn, Consumer Edge Research, LLC - Senior Equity Research Analyst & VP [35]

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In this call and in the past, you've discussed some positive tailwinds driving higher total loss frequency. At the same time, we're seeing higher ADAS attach rates on vehicles, which may reduce frequency at some point, and you've also increased exposure to noninsurance segments. I'm wondering if growing volumes in those noninsurance channels is a conscious effort perhaps to hedge yourself from an eventual decline in accident frequency. Is there any urgency to diversify the business?

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Jeffrey Liaw, Copart, Inc. - President & CFO [36]

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A lot of different embedded questions in what you just posed. So I'll try to dissect them one by one. First, in terms of ADAS effect on frequency, I'd note a couple of things. One is that I think the working hypothesis is that it will eventually reduce accident frequency, and I think that's a reasonable hypothesis because safety technologies, for the past 50 years, have generally reduced accident frequency. That's been true for as long as Copart's been around with one short-term blip, I would say, between 2011 and '16 when accident frequency actually went up year-over-year. That was a function of the iPhone proliferating across society. So generally speaking, accident frequency does decline. ADAS, on the other hand, we think, will drive increases in total loss frequency, and those forces will offset one another. Over the course of history, total loss frequency has generally increased much more than accident frequency has decreased. ADAS, I think there's a very logical thread to walk from ADAS proliferation to total loss frequency because what makes cars safer tend to be the sensors on the perimeter of cars that are easily damaged, difficult and expensive to calibrate and will drive still more cars to be totaled.

Specifically, on your question of our diversification into other segments, I wouldn't characterize it that way. It's not a risk mitigation measure so much as it is the byproduct of auction liquidity. As we have cultivated an international and domestic member base that increasingly is purchasing vehicles that have lighter and lighter damage, it begins to more heavily overlap the whole car universe as well, and therefore, the cars that dealers receive on trade-ins become more and more attractive at Copart. We immediately expose that car to buyers in Nigeria, in Honduras, in Poland, Lithuania, in Oklahoma, in Maine, and it is that liquidity which has enabled us to grow within the dealer segment. So it's not per se a desire to mitigate risk. It's a desire to grow the business, and ultimately, that incremental dealer car also then helps our insurance companies as well. Auction liquidity begets more liquidity and begets better option returns.

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Derek J. Glynn, Consumer Edge Research, LLC - Senior Equity Research Analyst & VP [37]

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Okay. Great. Appreciate that. And can you elaborate on what was your original intent and drawn down that amount of capital on the credit line. Was that solely a precautionary measure given the uncertain economic climate? Or was there anything perhaps more opportunistic you were thinking about doing in terms of other capital allocation priorities? I would appreciate some clarity there.

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Jeffrey Liaw, Copart, Inc. - President & CFO [38]

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Sure. Fair question. That was more just a risk mitigation measure we took at a moment when the global economy and the financial system, there was enough uncertainty, and a low enough cost that it made sense for us to draw on the revolver. Know that we had the cash available to us should we have needed it. We still do, of course. Our revolving credit facility remains quite intact with first-tier banks funding. So we have conviction now that it is there when we need it, and that was all there was to it.

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Operator [39]

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We'll take our next question in queue. This comes from Gary Prestopino with Barrington.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [40]

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A couple of questions here. I was writing real fast. I'm trying to keep up. You said your noninsurance were down. Vehicles were down 13.4%. Is that correct?

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Jeffrey Liaw, Copart, Inc. - President & CFO [41]

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Let me give you the precise decimal, but keep going.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [42]

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Well, what I was trying to get at is, if you back out the charity cars, what were they? Down or up? Do you have that?

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Jeffrey Liaw, Copart, Inc. - President & CFO [43]

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If you back out the -- as said the charities and wholesalers, we would have been positive, slightly positive, just north of 1% for the quarter.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [44]

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Okay. That's fine. And then just kind of a hypothetical question here. Given how long it takes for the whole cycle of -- from accidents to assignments, et cetera, if hypothetically, the country opens up by, say, the middle of June, all right, obviously, Q4 is going to be challenged, and no fault of yours. It's just that's the way it is. But when do you think if the -- if the country were to open up by the end of June, when do you think things start to normalize? Is there -- does it take a quarter, 2 quarters, 3 quarters to get you back to where the growth level you were at before?

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Jeffrey Liaw, Copart, Inc. - President & CFO [45]

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And you mean, Gary, in terms of our unit sales or revenue?

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [46]

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Yes. Just in general, yes. Exactly. And what I'm trying to get at is from the time the country starts opening up and you assume that every people are going to be driving, you're going to have the same level of accident, same level of total losses, how long does that take to flush through to your system where you start -- there is no real impact from the COVID situation in any given quarter?

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Jeffrey Liaw, Copart, Inc. - President & CFO [47]

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The reason I paused, Gary, any given quarter, we sell cars that we were assigned that same quarter. So in the third quarter of 2020, we sold cars that we picked up in February, March and April. We also saw cars from the last -- a quarter before and the quarter before and the quarter before and 5 years before, literally, that layer cake that I described a few moments ago. So in terms of -- no quarter -- every quarter has some memory going forward. But I think it's several quarters really before you've got the meaningful burden because it's based on average several months for us to sell a car.

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Operator [48]

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Our next question in queue comes from Ali Faghri with Guggenheim Partners.

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Ali-Ahmad Faghri, Guggenheim Securities, LLC, Research Division - MD & Senior Analyst [49]

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A couple here. I guess, first, can you remind us about your cost structure, fixed versus variable and how we should think about decremental margins in a backdrop like the near term where volumes are declining meaningfully? It sounds like you aren't proactively taking costs out of the business, specifically in response to COVID, but I may be wrong.

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Jeffrey Liaw, Copart, Inc. - President & CFO [50]

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Yes. A handful of questions, what you described there, too. In terms of the fixed and variable mix, that question always boils down to what your time horizon is, and over the long haul, all costs are variable. In the near term, the majority of costs are for semi-fixed, with the exception, for example, of selling costs. Selling costs tend to -- we incur them when we tow a vehicle and we don't when we don't. So I think in the near term, and as you heard us describe a few minutes ago, if we conclude that this is a structural shift, then we would consider meaningful changes. But otherwise, we will operate the business as is with the intent to serve our customers well through storm season and for the next 3, 5, 10 years as well.

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Ali-Ahmad Faghri, Guggenheim Securities, LLC, Research Division - MD & Senior Analyst [51]

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Got it. That's helpful. And then as a quick follow-up here. You mentioned ASPs are above pre-COVID levels. Is that due to a supply-demand mismatch currently as buyers are returning to the market, but the supply of vehicles is still relatively limited, so perhaps it's more of a temporary trend?

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Jeffrey Liaw, Copart, Inc. - President & CFO [52]

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It could be. I think that remains to be seen. I think there is -- that's what you -- the forces you just described a moment ago. Also if the economies recover, if folks had themselves -- chosen to sit it out a week or 2, they suddenly find themselves short in inventory or parts or cars rebuild or what have you, right? So there may be something of a catch-up effect, so to speak. But I think the long, long-term trends before this quarter, our ASPs had been up 13 consecutive quarters, and they won't go up every quarter for the rest of our lives, of course, but that general tailwind of auction liquidity, higher total loss frequency, better, younger cars, less damaged cars, those forces aren't going away anytime soon. Now what that means over a 2-week, 4-week, even a 3-quarter horizon, we don't concern ourselves with too much. What we focus on, of course, is how to drive those returns up on a multiyear basis.

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Operator [53]

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(Operator Instructions) Our next question in queue comes from Stephanie Benjamin, Robinson Humphrey.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [54]

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I just had one quick follow-up. I was hoping maybe you could speak to if you felt, really broadly speaking, if your insurance customers have looked to diversify their auction providers or have restructured some of their relationships or how they interact with their auction providers. Just any high-level comment would be helpful, just looking back the last year or several years.

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Jeffrey Liaw, Copart, Inc. - President & CFO [55]

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No. I appreciate the question, Stephanie. And again, tough to generalize about our customers who are -- have many different ways of approaching the business. But in general, we focus all of our efforts on serving them well and generating the best possible auction returns and providing the best possible service in ordinary times and in crazy times like the ones we're in today. So over time, I think we have generally continued to earn and win the trust of our customers and have gained market share as a result. So I wouldn't say that I've heard that theme in general.

I think the question is can we serve our customers well and can we persuade our prospective customers that we can serve them well. How the chess match works between sole sourcing multiple providers and so forth, I haven't heard any particular trends in one direction or the other. So long as we deliver Copart level service and Copart level auction returns to our customers, we'll let the chips fall where they may. And I think history has proven that, that has been a productive approach.

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Operator [56]

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Our next question in queue comes from Ryan Brinkman with JPMorgan.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [57]

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I know you have historically provided investors with the split of insurance versus noninsurance cars. Are you also able to break out the percentage of salvaged versus non-salvaged or whole cars? I think the whole car split is materially lower than the noninsurance split. But I'm just wondering if -- given the decline in miles driven and accidents, if there is any ability to absorb yard capacity by taking on more whole cars, whether sold by dealers or other sources.

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Jeffrey Liaw, Copart, Inc. - President & CFO [58]

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I think the second question is probably easier than the first. To your -- the second question, in part because we have invested so aggressively in capacity, we, by and large, can serve customers, can serve our dealer customers and our insurance customers wherever they want to do business with us. I think Jay talked about that at some length on our last earnings call as well. We have invested and we continue to invest so that we can always say yes when those opportunities present themselves.

So no, it's not that -- it's not the reduced driving activity and declines in insurance assignments would per se enable us to win more dealer business. It is that we drive excellent returns and service to them that allows us to do so, and the land is our problem. We'll figure that out in the background so that we can serve them flawlessly.

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Operator [59]

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Speakers, there are no more questions in queue at this time.

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A. Jayson Adair, Copart, Inc. - CEO & Director [60]

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All right. Appreciate everyone coming on the call, and we look forward to reporting on Q4 in the fiscal year 2020, and wish everybody stay safe, and we'll talk to you then. Thank you.

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Operator [61]

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Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.