Jayson Adair - CEO Jeffrey Liaw - CFO and SVP, Finance William Franklin - EVP, U.S. Operations and Shared Services

Robert Majek - CJS Securities Ben Bienvenu - Stephens, Inc. Ryan Brinkman - JPMorgan Bret Jordan - Jefferies LLC John Healy - Northcoast Research Matthew Paige - Gabelli and Company Matthew Gall - Barrington Research

Thank you, Justin. Good morning, everyone and welcome to the Third Quarter Earnings Call for Copart.

With me today is Jeff Liaw, our Chief Financial Officer, Will Franklin, our Executive Vice President. And I am going to turn it over to Jeff who will start things off, pass it to Will and then we will open it up for Q&A.

With that I will turn it over to Jeff.

Thanks Jay. We will start with the Safe Harbor.

Our remarks today will contain forward-looking statements, including statements concerning our views of trends in our business. These statements are neither promises nor guarantees and are subject to risks and uncertainties that could cause the actual results to differ substantially from those projected or implied by our statements and comments.

We expressly disclaim any obligation to update or revise these statements or comments. For a discussion of the risks that could affect our business, please review the risk factors contained in our most recent 10-K, 10-Q and other SEC filings.

I will start with a brief financial overview before turning it over to Will. Starting with the income statements, our operating performance included revenue growth of a little over $50 million for the quarter year-over-year that represents 16.9% growth on unit sales growth of 15.6%.

We did experience a detrimental revenue effective of approximately $3.7 million from currency effects due to quite strengthening of the USD year-over-year versus the British pound. Our service revenue grew by $46.9 million or a little north of 18% that is greater than our purchased car sales growth of 3.2 million or 8% year-over-year.

Within our insurance segments in particular, we experienced volume increases across virtually all of our major carriers. We heard the carriers themselves reference in their public discussions, references to heightened driving activity, increased accident rates, as well as elevated repair cost leading them to render total loss decisions more frequently.

That is the volume side of the equation. As we look to the ASP portion of our revenue base we have observed and talked previously about both scrap rates, currency rates, as well as the used car index.

We had experienced in recent months a stabilization of scrap trends which had declined in the past year and changed. We are still down year-over-year for the third quarter in comparison to 2015, approximately 9% for scrap rates across car bodies according to American Recycler.

But we are up sequentially, almost 14% relative to the second quarter alone. We have noted the Manheim Used Car Index for the third quarter was also down year-over-year, a little less than 1.5% and also down versus the second quarter about the same amount.

As a result our ASPs remain decreased relative to last year but they are up sequentially. Moving further down the P&L, our operating cost did grow by 11.7% year-over-year somewhat meaningfully less than our revenue growth which led to some leverage at the gross profit level as we grew GP by 23.7%.

Our general and administrative expenses were up $1.9 million year-over-year, a reflection of higher volume and business activity, up sequentially versus the second quarter, approximately flat versus the first quarter for us this year. As we have noted on prior calls we do expect absolute dollar G&A expenses to rise over time as our volume grows and the complexity of our business increases.

The bottom line is our net income grew by 28.6% for the quarter while EPS was up 45.5%, enhanced by share buybacks in July of last year, December of last year, and March of this year which I will comment on little later in the call. Turning to the balance sheet, we generated cash flow with a reduction in accounts receivable.

It declined sequentially as they do typically with the seasonal depletion of inventory, less so than in the third quarter of 2015 due to a growth in our physical inventory. Our capital expenditures of $66.1 million compared to $56 million and change in our prior quarter, again approximately 85% for land, developments, lease buyouts and the like, largely in investments in our growing capacity.

Last two notes on the balance sheet, the first is that we purchased 2.9 million shares on the open market for 118 million or thereabouts at an average share price of $40.13, a continuation of our program or an extension of the program we completed in December of last year. Over the past 12 months then we have purchased approximately 17.5 million shares or about 14% of our total shares outstanding.

And the last note, we undertook a simple refinancing action. We restored our term loan to the original balance of $300 million that we had completed in December of 2014.

We extended the duration to full five years and expanded our revolver by approximately $50 million. In effect we termed out the revolver balance that we had drawn leaving us with a fully undrawn revolver.

We have reduced our interest rate slightly on both funded spreads and undrawn fees. With that I will turn it over to Will Franklin.

Thank you, Jeff. I would like to add a little color on our business performance as well as the environment in which we operate.

Once again we are very pleased with the results for our third quarter. The 16.9% growth in consolidated revenue was driven primarily from increased volume which grew by 15.6%.

I will start first with some comments about our North America results in which volume grew by 16.4%. First, we believe we are seeing a growth in overall size of the North America salvage market.

Accident frequency was up driven by lower fuel prices and higher employment trends which is leading to increases to miles driven and average speed of travel and consequently to more frequent and more severe accidents. And we believe this trend will continue.

At the same time we are also seeing growth in salvage frequency. By salvage frequency we mean the rate at which cars involved in accidents are deemed an economic loss and totaled as opposed to being repaired.

We believe there are several reasons for this growth. The first is the growth in repair costs, driven by industry consolidation as more independent repair shops are being purchased by MSOs.

And more importantly, the greater complexity of new cars as they incorporate exotic and light-weight materials, extremely tight repair tolerances, sensors, cameras, and other electronics; all of which demand that shops employ new equipment, tools, and training, as well as require more replacement parts for repair. The second is the increase in average age of the car parked which reached 11.5 years in 2015 and is expected to grow.

As car age, their value declines making it less likely that they’ll be repaired. And third is the increasing length of time policy holders must be without their cars during the repair process, whether as a result of the process itself or a longer queue time waiting to get into the collision shop.

This increases not only the total cost to repair the car but also impacts the customer satisfaction metrics. Insurance companies are increasingly sensitive to the quality of the policy holders’ claim experience.

In addition to the growth and the size of the overall salvage market in North America, we saw a growth in our market share as the impact of several recent contract wins for the most part were fully represented in this quarter’s volume numbers. And finally we saw a 10.4% growth in volume from our non-insurance suppliers.

This growth was led by increases in charity and donation cars as well as cars from dealers and brokers. Now I will turn to make a few comments about the UK in which we also saw a growth in volume increasing by 11.1%.

In the UK insurance volume grew to increases in both market size and market share. In addition in the UK volume from non-insurance sellers grew by 23% as the dealer and direct-purchase programs grew in both volume and profitability.

While we grew consolidated revenue by 16.9%, we grew our gross margin by 23.7% and our operating margin by 28.7%. Once again demonstrating the operational leverage endemic in our business model.

Despite the additional costs associated with operating in CAT environments, primarily Houston, we've kept our cost to process each car remarkably consistent over the last seven quarters. As efficiencies derived from processing higher volumes have offset the natural increases in labor and [indiscernible] cost.

We also remain focused on controlling our G&A expenses. While G&A of $31.7 million for the quarter was up both year-over-year and sequentially, we remain well below the run rate of fiscal 2014 of $36.8 million for the quarter.

The growth year-over-year and sequentially was driven primarily by increased cost on brand development, litigation [conferences] [ph], headcount and compensation. And finally, to accommodate the volume growth that we have experienced and the future growth that we anticipate, last quarter we announced an initiative to open 15 new yards during the next 12 months.

We are reporting that during the current quarter we acquired five yards, two of which were placed in service. We closed on those two yards, one in Wilmer, Texas and one in Temple, Texas in April; and currently they have approximately 4,600 and 1,800 cars on the ground respectively.

That concludes my comments. Justin, at this time I will turn the call back over to you for Q&A.

Good morning, this is actually Robert Majek filling in for Bob today.

Good morning, Robert.

Hi, Robert.

Can you discuss the inventory growth in the quarter?

Sure. So our inventory for the quarter grew at approximately 20.7% year-over-year, that's a global number.

As a reminder for folks who haven’t followed us for a long time, when we talk about inventory this is physical assets at Copart as opposed to balance sheet inventory which is a different animal altogether. The growth of approximately 20.7%, if you isolate the effect of weather events that we experienced in Texas excluding the growth from that alone we still observe inventory growth of approximately 18% year-over-year.

That is helpful, thank you. And in previous calls you discussed a top five insurance FRP wins.

Did we see the volume from that contract in the third quarter and was that the full impact or should there still be additional incremental volume in the fourth quarter?

No, I think we addressed that in our comments. We did -- we feel the volume is fully reflected, we don’t see any future growth from those recent market wins.

And I should mention it is just not one, there are several market wins that we have had over the last three or four quarters.

Appreciate it, I’ll jump back in the queue.

Thanks Rob.

Thank you.

Yeah, thanks. Good morning.

Congrats on a nice quarter.

Good morning and thank you Ben.

Just curious, on the gross margin front, you spoke to the leverage, the operating leverage inherent in the business. I will be curious, what cycle times looked like in the quarter given the really strong volume growth you called out and then maybe any other things that you might be doing to capture incremental efficiencies to drive that leverage?

So our cycle times Ben were approximately the same as they were a year ago for the third quarter as well. So, that is not a major driver of the unit performance for the quarter.

And let me add on what we are doing to become more efficient. We are really a very efficient company already.

We are looking to technology to help us in the process and that's in a couple of areas. One is in the dispatch area, the other is the pickup cycle.

And we anticipate rolling out these products to enhance these operations over the next three or four quarters.

And I will just add to that, DMV as well. So, as we process DMV in house as opposed to sending it to the state, we have seen improvement.

And the final point I would make Ben is you really can't crunch the cycle times too much. I mean if you look historically over the last 20 years, they haven’t changed enormously.

There is a period of time from day loss, [indiscernible] loss to pick up to receiving title, to sending title estate, to selling the vehicle. And as Will pointed out and on the DMV that is about really all you can do to compress those times.

So they are always going to run somewhere north of 60 days as an average.

That is really helpful detail, thanks. And looking this year at FX and relative to last year when the dollar was quite strong and the presumable pressure that put on the foreign buyer appetite at auction, what are you seeing from foreign buyers this year year-to-date with the dollar being a little bit more subdued.

Have you seen any trend shift there?

Yes, we have. Actually, sequentially participation by our foreign buyers is down marginally, not a lot but it is down marginally and it is down year-over-year as well.

Okay, and then one last one from me, when you look at your balance sheet, you have raised some debts with the tender offer, but leverage is still pretty modest. I was curious to get your comfort level on leverage and then what sort of capital deployment opportunities would you need to raise that comfort level, would you be willing to take on incremental debt to fund the repurchase or would you prefer to do that out of free cash flow?

We are comfortable with the amount of debt we have got right now. With respect to future debt we will analyze that at that time, so I think it would be premature to talk about what scenarios.

We would have to know at that time what all the factors were to decide we wanted to do. I think the biggest point I might make on this question is the insiders control a large portion of this company.

And so we will always be prudent in our analysis and in our thought process with respect to debt.

Great, thanks and best of luck.

Thank you.

Hi, great, thanks for taking my questions and congrats on the quarter.

Thank you, Ryan.

Thank you.

First question is just -– you mentioned, I think it was Will, that industry volumes are up in North America, [indiscernible] miles driven, etcetera, and I think we can see that. But are you able to say how much of your volume growth in the quarter is from industry tailwind as opposed to how much it reflects the market share gain including as a result of the new contract?

No, those -– we could if we made some assumptions and because it would be based on assumptions we're just -– we're probably not going to share that on the call. I will tell you this though that the salvage has a very unique spot in this collision-repair ecosystem.

And when you see an increase in overall volume of assets, it’s much easier for us to increase capacity than it is for the repair shops to increase capacity. And it’s not because it’s difficult to build in the repair shops, but it’s very difficult to train new technician and craftsmen to accommodate this higher demand.

And consequently we're seeing a higher portion of these assets become -– so we believe a higher portion of these assets being salvaged as opposed to being repaired.

Okay, that’s helpful. Thanks.

And then just on the impact of currency again, I mean, you just mentioned about the lower interest from overseas buyers in U.S. auctions, but what about the currency translation impact on your profits in the UK?

How has that been impacted? And then could you comment at all on how the business there might be potentially impacted by Brexit?

So I think the data we shared at the top was that we experienced a detrimental revenue effect of about $3.7 million in the translation from GBP back to USD and that’s because year-over-year we've experienced relative U.S. dollar strengthening.

So when you –“trade the profits” from the pound back into USD, you get fewer USD than you did a year ago. So that’s the effect we've experienced there.

As for Brexit, I think we probably aren’t well-positioned to speculate. I think there are experts who believe that the euro would then in turn suffer as a result.

I think that’s probably better left to other experts to speculate on. We don’t foresee a meaningful effect on either our UK or U.S.

business directly.

Okay, great. And then just lastly, I think I heard you say that the non-insurance volumes are also rising maybe 10% in the U.S.

Can you just remind us of the size, the materiality of this business relative to your overall business and then provide an update just in terms of what the volume drivers are that are causing the non-insurance cars also to increase in volume? Thanks.

Sure. As a percentage of our total North America volume is actually drifted slightly below 20% and that’s not because it hasn’t grown, because it’s grown nicely.

It’s just that our insurance business has grown so much faster. The drivers for our growth are primarily our returns.

So therefore providing our suppliers favorable returns and that’s attracting more business.

Okay, appreciate it. Thank you.

Hey, good morning.

Good morning.

Morning.

Trying to work around this market share question again. If we look at the inventory growth, and I think last quarter you commented that some of that farmers’ volume began to show up in inventory at the end of the quarter.

If we look at your inventory, up 20.7%, could you talk about maybe which of that is associated with new partners or how much of the growth was associated with new partners?

Well, once again, in order to do that we would have to take the overall growth and a portion or part of that to change in the business environment, how much of that is simply market wins. Those are a 100% it’s real easy to do that.

And might -- just because that be based on some assumptions that we have to employ. We're probably not going to make that -– speculate on that just on the call.

Okay. And then I guess if we look regionally and some of the collision guys, specifically Boyd [ph] was talking about some of the northern markets seeing some softer collision repair trends this winter with the general lack of winter.

Could you talk -– would the quarter have been meaningfully stronger or was that a real regional dispersion as far as strength or weakness in the salvage volumes?

It’s really hard to point to weather as a driver for our business, because we're nationwide. And when you include the UK we're worldwide.

And when you might have increment weather in one region, you might have unseasonably good weather in other regions. So the only time we really point to weather in advance is when we have what we call a CAT.

And we had three CATs last quarter in San Antonio, in Fort Worth, and in Houston. And we – I think we -– Jeff, addressed the impact of those CATs in his inventory numbers.

We could tell you that on the sell side that we calculated a few hundred of those cars were actually represented in the sales volume.

Okay. And I might have missed this, did you give any update on Germany?

No, we didn’t. Outside of North America and the UK that -– those businesses combined represented about 1.5% in revenue and really no EBIT, they’re about breakeven.

And so we have concluded that until they become a meaningful driver of our business in these directions, up or down, we're really not going to talk about their performance. That being said, we will say that we're extremely happy with our international strategy and we're also very happy with the recent execution towards that strategy.

And hopefully we’ll have some more comments in the next few quarters on the results.

Yes, that’s what I was getting at. I was under the impression maybe you're going to accelerate your investment in Germany.

I didn’t know if you had updates as to where we were in that?

Bret, just to the question you opened with regarding inventory growth, I think Will noted how difficult analytically it is to isolate the different effects. I think it is accurate to say that strong majority of our inventory growth is not due to new accounts per se.

That’s it’s more like-for-like growth across our end customer base.

Alright, great. Thank you.

Thanks, Bret.

Thank you. Wanted to ask kind of a bigger picture question as it relates to expectations going forward.

You're adding the 15 or so yards, you are adding capacity to a number of yards. And when I hear you talk about the growth prospects of the business, I hear you guys talking more about salvage frequency than just the number of collisions on the road actually increasing.

Where do you guys think we're at and what are the insurance companies telling you we are at in terms of salvage frequency, the outlook for that maybe over the next three or four years?

I think we want to be clear on that, it’s a combination of both. So we live in an environment right now where the – Will, started to mentioned or in his remarks mentioned, the technician, but the difficulty in hiring technicians today versus 10 years ago is the complexity of vehicles.

So we live in a world where there are more accidents and then when those accidents occur, total loss frequency goes up. The likelihood of that vehicle becoming a total loss goes up.

And much of that is driven. To me it’s very analogous, 20 years ago when we saw air bags and antilock brakes go into cars.

There will be offsets where one reduces the amount of accidents and there will be another offset where when there is an accident one increases the likelihood of total loss. So we're seeing that right now and we are opening up and expanding a number of locations in the next year because frankly we've got record capacities and we anticipate that, that will be the same a year from now that we’ll be looking at another record inventory build with record sales.

Got you, and I wanted to ask about the CrashedToys business. Can we assume like you guys are putting a little bit more resources towards kind of marketing that business and maybe doing some things there?

Can you kind of talk about what the plan is for CrashedToys and it almost even seems like that there is like a retail aspect of it that you guys are marketing? I was just hoping you could give us some more color on that.

Sure. So we bought the company in June of 2013, when we made an acquisition of Quad Cities and Desert View Auto Auctions, with that came CrashedToys.

We have continued to run the company and understand the brand and what we've decided at this point is we want to build the brand. And so, we've opened a location in Dallas, Texas.

The retail aspect that you talked -– it is a retail operation so that is accurate, but it’s more than that, it’s an experience. And the retail side that we're really pushing for is to have folks come out, hang out, learn about what we do, and eventually become buyers.

So it’s very much an incubator of future buyers of product and it is a differentiator for us on the toy side. So just in the last quarter alone we sold the Porsche 918 for over 400 grand we sold the Denali for almost 200 grand and then we sold Harley Davidson's for $8000 and Hondas for $3000.

So it’s an across-the-board product line but it is everything related to toys and we're testing it right now at this location in Dallas and as we decide or put our strategy together we’ll report on that in future quarters.

Great. Thank you.

You're welcome.

Good morning, thanks for taking my call. You had noted an increase in volume from dealers, is this a trend that you expect to continue as a large number of vehicles are expected to come off lease moving forward?

I think we do. We've refined our processes, we're getting -– we're seeing higher yields.

We've seen growth year-over-year and we see no reason for that trend not to continue. And the really attractive part of that is that these are the most profitable cars that we process.

The cycle times are short, the ASP’s are very high and we're beginning to build more tools to help us in this arena. And once again, we're starting to roll out and our IT department is doing a great job and start roll out a lot of product.

And the tools that help in this arena are in the queue and we expect those to be available to us to use in the next three or four quarters.

Got it, thank you. And then the last question for me is how do you view repurchases moving forward as well as the different repurchase tools available to you?

In the past you’ve done Dutch auctions as well as open market, so I'm just kind of curious how you think about it looking forward?

Sure. And Matt, I think big picture is as Jay noted, capital allocation questions are ones we address on a regular basis as we consider organic uses of our cash for our business internally as well as other possibilities including debt pay down, share repurchases, and the like.

So share repurchases over the long term will likely continue to be a tool or an arrow in our quiver. We don’t comment or speculate precisely on when or how much we would do.

As for the tools, the specific paths to share repurchases, whether they are tenders, Dutch tenders, open market purchases and the like; again, that’s circumstantial. We evaluate given our own assessment of the pros and cons at the times of those decisions.

Perfect, alright. Thank you, gentlemen and good luck for the next quarter.

Thank you.

Hi, good morning, this is Matthew Gall filling in for Gary. Just wanted a -– quick question, I think Will, you had mentioned based on salvage frequency being due certain factors such as increased miles, there have been higher repair costs.

One thing that I think was -– I hadn’t heard before was kind of the speed of travel, but if you could maybe just kind of expand upon kind of that dynamic?

Sure. So of the increased miles driven, more of those miles are freeway, rural and freeway driving activity, which is at a higher rate of speed which leads to more severe accidents.

Got you, okay, thank you. And then as far as the international buyers with FX impacts, is that kind of similar to what it has been in terms as far as purchases from North American auctions or is that down a little bit or kind of directionally in which -– where I think 20% of units purchased..?

It sounds likely but if ever so slightly. I believe we are going from 21% to 20.3%.

Okay. And then lastly as far as the ASPs have kind of started to stabilize, down year-over-year but up sequentially, is that consistent on the non-insurance side or kind of how do we look at that as far as the shift mix from where you’ve been?

Well, yes, when you look at the non-insurance you have to bucket them, because a charity car is completely different than a dealer car. And so we've seen growth in our ASPs for our dealer cars.

As I mentioned previously, those are the most profitable cars that we process. And actually, we've actually seen growth in our ASPs for our charity cars and I can attribute that to a couple of factors, one of which is, because of the scarcity of our land we have been intentionally targeted certain customers for -- you know we would visit them to ensure that we are getting the type of cars that are appropriate for us.

So, we have been very selective in those that we allow to use our land especially in the more precious areas like Southern California and New England area. And because we have been more restrictive on accepting the low end cars, we increased the ASP on an overall basis with the charity cars.

Right, great, thank you very much. Congrats on the quarter.

Thank you.

Alright, thank you and we appreciate you making the time to listen to our call. We look forward to reporting on the fourth quarter in the new fiscal year.

And that concludes our meeting, thanks.

Thank you.