Good day everyone and welcome to the Copart Incorporated Fourth Quarter Fiscal 2016 Earnings Call. Just a reminder, today's conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Jay Adair, Chief Executive Officer of Copart Incorporated. Please go ahead, sir.

Thank you, Samantha. Good morning, everyone and welcome to the earnings call for the fourth quarter for Copart. With me in the room today is Jeff Liaw, our CFO; and Will Franklin, our Executive Vice President. I am going to turn it over to Jeff and he will give an update on the financials, and then we will give you an update on the company and then we'll be happy to open it up for questions. With that, Jeff?

Thanks Jay. Good morning everyone. I will start with the Safe Harbor. Our remarks today will contain forward-looking statements within the meaning of federal securities laws including without limitations, statements concerning management assumptions of factors affecting anticipated growth in our markets and in the number of cars we expect to process. These assumptions include factors such as trends in accident frequency and severity, driver behavior, and repair costs. These statements are neither promises nor guarantees and are subject to substantial risks and uncertainties that could cause actual results to differ materially from those projected or implied by our statements and comments. For a discussion of the risks that could adversely affect the assumptions and trends we identify today, or that otherwise affect our business generally, please review the risk factors contained in our quarterly report on Form 10-Q for the quarter ended April 30, 2016. Additional information will also be contained in our upcoming annual report on Form 10-K and in other SEC filings. Copart expressly disclaims any obligation to update or revise these statements or comments. A brief note as well on non-GAAP financial measures. Included in today's discussion are certain non-GAAP financial measures, including non-GAAP net income per diluted share, which reflect the impact of changes in foreign currency exchange rates, and certain tax benefits and foreign income tax credit limitations, related to accounting for stock option exercises. These non-GAAP financial measures do not represent alternative financial measures under GAAP. In addition, these non-GAAP financial measures may be different from non-GAAP financial measures used by other companies. Furthermore, these non-GAAP financial measures do not reflect the comprehensive view of Copart's operations in accordance with GAAP and should only be read in conjunction with the corresponding GAAP financial measures. This information constitutes non-GAAP financial measures within the meaning of…

Thank you, Jeff. I'll just reiterate what Jeff and Jay have already said. We're very pleased with the results for this quarter. The 17.8% growth in consolidated revenue came primarily from increased volumes as worldwide volume grew by 13.8%. I’ll start with a few comments on the U.S. operations where volume increased 14% on a year-over-year basis. The increase in volume has come from growth and the size and our share of the salvage market, as well as growth in our non-insurance volume. As we’ve discussed on previous calls, we are seeing growth on overall size of the North America salvage market. The growth in this market can be estimated by the product of three factors. The increase in the cars on the road or park, the growth in accident frequency or how often those cars involve in accidents, and the growth of the total loss frequency how often those cars involved in accidents are deemed to total economic loss. The mass yields and estimated growth in total cars for 2014, 2015 are between 7% and 9% and suggest using the current rate of growth in park and accident frequency and actual midyear growth rate for total loss frequency, a similar growth in 2016. While we expect the growth in park to remain in the 1.5% to 2% range, we do not see the drivers of the growth in accident frequency and total loss frequency abating. According to Independent Statistical Services or ISS, accident frequency increased 1.22% in 2015 and 0.85% for the first quarter of 2016. The increase in accident frequency is tied to the increase in miles driven, the increase in the rate of speed driven, higher levels of driver distraction and less safe drivers entering the driving population. The growth in miles driven of 3.1% is due…

[Operator Instructions] Our first question will come from Bob Labick with CJS Securities.

This is actually Lee Jagoda for Bob Labick. Good morning. So just want to start on Germany, can you discuss the difference between having the demo auctions and now the live auctions and what the opportunity is there and whether the insurance customers are the same as you have in the U.K, or are they new customers for you.

Well, first we really won’t address the international operations outside of the U.K that they're not meaningful to our financial results, but we will talk about our increased confidence in our international strategy and our view of the opportunity in Germany as well as all of Western Europe. So, it's important to understand that Europe operates on a different model in terms of the total loss settlement process. In Mainland Europe, the insurance company simply gives the policy holder a check for the diminished value of their car, and then it's up to the policy holder to dispose of that car. We think that the Copart model provides value not only to the policy holder because obviously under the Copart model, they're getting a full reimbursement for that car upfront providing them the ability to go and replace that car immediately as opposed to waiting until they ultimately dispose of a wrecked asset. We also think it provides value to the other constituents of this transaction including the buyer. So in the German model, a buyer will submit a bid for a wrecked car and then wait as long as 21 days before he knows if he will receive that car. And in fact statistics show that ultimately the buyer gets that car less than 10% of time. So it's important to know that these buyers are buying raw material for their business, they take these to increase value and they need access to these cars at a specific time and a car of a specific type. And so for them to wait 21 days means that they're willing to bid less for those cars because of the uncertainty. So in this model, they’re actually bidding less for the cars, which means the insurance companies are paying too much in their settlement because the recoveries are less than what they would be under the efficient model that Copart provides. So we're very comfortable that we can come into this market and provide value. In fact we think that the insurance companies that adopt us have an opportunity to be somewhat disruptive in that market. We've done three test auctions, and in all three of those test auctions, the returns that we achieved were substantially greater than the returns achieved under the current model of disposing of those cars. I'm not sure if that answered all your questions, Lee, but I think that gives kind of a good overview of that market and our view of how we will affect it.

That was very helpful, thank you. And one more from me, and I'll hop back in the queue. You mentioned several Greenfield openings, and it sounds like you're going to be expanding those Greenfields overtime. Can you just discuss a little bit about the upfront costs and how long it typically takes for you to get more normalized margins at those Greenfields?

Yes, first off - everyone is different. So we can open up some Greenfields and we will have volume immediately, and obviously in that situation, the upfront detriment to our margins is much shorter. I would say it was typically about a year before they are up and fully operational and functional, in general.

Great. Thank you very much.

Thank you. And our next question will come from John Healy with Northcoast Research.

Thank you. Jay, I just wanted to talk a little bit about the commentary you guys provided about kind of total loss. That was helpful how you talked about the cars on the road, the frequency and just the total loss relationship. But is there a way you could kind of size for us your conversations you might have with some of the consulting companies or the insurance companies about ultimately where they think total loss can go to as a percentage of accidents, and over the last 10 or 15 year it's been an expanding number but kind of ultimately maybe over the next five years or so, where do you think that can go as a percentage of accidents?

I just talked about all the elements that influence that number and so you'd have kind of come to your own decision about how those will be affected by the introduction of new technologies and new laws. We don’t think that in the short term I am referencing probably three or four, five years that anything is going to change with the current trends.

And I might add to that. Some insurance companies run as high as 20% in total loss and the average for the industry today quoted by CCC is 17…

About 19.

19, right now, okay. So in average of 19%, some are as high as 20% and yes the shift 25 years ago was closer to 10%. So it continued to - we used to give the analogy of the throwaway television. You had TV repairmen 50 years ago, and now that's pretty rare. So it’s the same thing with vehicle. As the complexity of vehicles increases, it makes them much more likely to total loss.

Hi John, this is [indiscernible], I'd just add this color. I’d say that for the past 10 years I think a big contributor to salvage frequency has been the increasing age of the fleet so as cars went aged from 7.5 to 11.5 years that I think is a good part of the story for these salvage increase you heard Will and Jay talk about historically. Prospectively from here I think the age will likely stabilize, I think most of the projections I’ve seen indicate that to be true but these other forces I think will increasingly contribute. So vehicle complexity, rear cameras, side view blind spot these extra systems and so forth those have really penetrated vehicles are starting to penetrate vehicles now. I think the severity part of the equation is likely a forward-looking phenomenon as much as it is backwards.

Sure [indiscernible]. I guess the last question, I was trying to hoping that maybe try to get a little more of a forecast so. You talked about some of the insurance companies are 20% now, I mean is there a way of thinking where you think that number had the feeling to go to or potentially kind of the ultimate end game there?

I don't think we’re in a better position to give you a point forecast than you are to develop your own. The contributors to these are many fold as you know, right, used car values, repair cost, repair time, body shop utilization. There are just too many contributing factors to give you a point estimate. We do believe the trend is generally favorable.

Got you. And then I want to ask about the purchase car business, I know it has a tendency to jump around a little bit. With the scrap values kind of maybe picking up a little bit and maybe you’re having some freed up capacity as you’ve put some of the yards on. Is it reasonable to think that you’ll be more active on purchase car in fiscal '17 than '16, or is there any kind of parameters you can put around that?

No, I don’t think the activity is going to change in a meaningful manner. It’s just not a big enough part of our business to move the needle.

Okay, thank you.

Thank you. Our next question will come from Elizabeth Suzuki with Bank of America.

Good morning. In the three months ended in August there is an almost 30% increase in the crushed auto body pricing according to American Recycler. It looks like September the pricing was up almost 50% year-over-year which seems like it bodes well for the first quarter. Do you think it’s fair to say that salvage value should keep trending upward?

Elizabeth this is Jeff. On this one dimension alone it's certainly the case, the scrap values have improved year-over-year. I think it’s worth noting a couple of things. One, scrap value most acutely affects our lowest end cars. So a car that's likely to be rebuilt likely to be returned to service for some number of years export or otherwise is affected much less by scrap. So it’s the lowest end vehicles that are affected not literally, not necessarily the high end cars, part one. Part two is, there are other contributing forces so the strength of the U.S. dollar being an important consideration given the number of cars we export out of the U.S. The dollar has clearly strengthened against a lot of our reference currencies, a lot of our export currencies. So that’s an offsetting consideration. But yes, all else equal scrap improvement year-over-year would be helpful, yes.

Got you, okay. That's helpful. Second, a lot of people are looking at the federal automated vehicle’s policy as an endorsement by the federal government of autonomous check which they’re saying is going to significantly enhance vehicle safety. And what do you think is a realistic timeline of how quickly autonomous check could really be adopted to the point where it actually impacts the accident rate of the overall fleet and is it just too far down the line to be considered relevant?

Elizabeth we've done a fair bit of homework on this questions you could imagine ourselves and when I look - I’d say we have seen historical analog in the sense that we’ve seen accidents rates decline for a very long period of time. So from the mid 1970s to 2011 accident rates declined very steadily as the last generation of accident avoidance technologies spread through the market. It took decades for it to do so which is also going to be true today. If the U.S. for example will see 15 million or 17 million of new car shipments in a given year, we have a car park of 250 million or 260 million cars. It is just decades but the math is fairly straightforward. It will take decades before all cars have these technologies. The second note is, over that same period of time from the 1970s to 1980s, to 2011 the salvage industry grew well because the decline in accidents was more than offset by the total loss frequency which is again a function of repair cost, vehicle age and so forth. So we’ve seen this movie before. I think a lot of that will be true going forward as well. A lot of the technologies that makes automobile safer also make them much more expensive to repair. You heard Will talk about computers and sensors and so forth. The typical car is much more complex today than it was 10 years ago. So the math is decades, I think it’s an open question as to precisely how many but I think it’s decades away.

Yes, it makes sense. All right thanks very much.

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

Hi, good morning. Thanks for taking my question. I know that you don’t give - traditionally, you don’t traditionally give very detailed guidance but you did speak to many of the revenue drivers continuing into next year. What will you say are some of the other big drivers of performance in fiscal '17 versus '16 that investors should keep in mind so for example the trend in yard and fleet costs are G&A or capital investments?

Ryan, that's an understatement. I think we do not historically provide detailed guidance or general guidance but I think your enquiry is fair. The most important driver you did hear Will talk about which is the unit growth and therefore growth assumptions. I’d say just looking backwards say four to eight quarters, big divers are currency, scrap values, catastrophic events which can cause higher than normalized cost incurrence, G&A is largely predictable for us, we don’t provide forward guidance except to say that it will continue to increase on an absolute dollar basis given the increased size and complexity of our business. So there are no other discontinuities. I think the general trends should be similar. As for capital investment, I think you noted at the end of your question about capital investment, that won't per se affect the P&L that substantially as you know we have deployed meaningful capital and land assets. So if you went to some other measures of operating performance, returns on invested capital and so forth, our investments and our infrastructure could of course affect those numbers.

Okay, great thanks. And then just last question is on the international markets outside the U.K. I am just curious if your performance in any of these different regions has caused you to want to invest more so for example in India I don’t know if the experience there has caused you, do you want to keep investing or is it conversely possible to that your experience have having entered a market may not have been what you imagined the market maybe different and you could potentially look to be also exiting some opportunities too. Thanks.

Yes, I would say that all of our recent experiences have done nothing but make us feel more optimistic about these markets and the timing is somewhat uncertain but we will be proceeding with systems and resources and I anticipate real estate as well.

Great, thanks.

Thank you. Our next question will come from Ben Bienvenu with Stephens Incorporated.

Hi good morning. This is [Daniel Hamburger] [ph] on for Ben. So first, you talked about expanding the land acquisition plans. Can you talk about maybe trends you’re seeing in those markets? What makes you confident in building out that type of capacity?

Simply growth in volume. It's kind of funny, I used to be on the finance side and I was always arguing that you need to operate yards at 100% capacity. And for the six weeks during the time of the year where you have peak, you just operate it efficiently, that doesn’t work. On the off side, you have to have a certain amount of excess capacity and now as we enter an environment where we’re having CAT situations more frequently for whatever reason, it amplifies the need to have excess capacity in terms of land to adequately serve our insurance customers. And so because of that, we're - because of the increase of volume, because of the increase in cash and because of the growth in our market share, we find ourselves in a position where we really need to expand our network of facilities.

Daniel, let me quantify it a little bit for you. Copart from an inventory perspective, grew 20% in the quarter. We have over 400,000 cars on the ground. So if you do that math and you then calculate that you can only store about 100 cars per acre, and you sit back and you think about the fact that Copart added over 60,000 units to inventory year-over-year, you’ve got to add 600 acres of land to the company. And that's the kind of growth that we’ve been seeing in the last year and that's, as Will said, we anticipate that growth going forward. So we are - when we talk about our 20/20/20 program that was where we started six months ago. We will anticipate opening more than 20 locations at this point and expanding more than 20 locations at this point because of the growth in units and the corresponding growth and inventories because we have to store those vehicles.

All right. Thanks, very, very helpful. And I kind of on the same line about volumes. We’ve been hearing reports of a significant number of flood damaged vehicles out of Louisiana. How does that compare, I guess to maybe a Katrina or a Sandy or what are you guys hearing out of those markets?

Yes, that market - I went in with a team during that event. That market is about a quarter the size of Hurricane Katrina off the top of my head. So big event. We picked up a lot of cars, but still relatively small compared to a Katrina. In terms of a Hurricane Sandy, Sandy was less than Katrina, probably a third off the top of my head the size of Hurricane Sandy.

All right, great. Well congratulations on a good quarter.

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

Hi, good morning. I guess thinking about acreage, and then maybe we could look at the acreage that the $173 million in CapEx last year. You said maybe 75% of that was land lease and development. And then maybe do you have a expectation for how much acreage you might add in '17?

I’ll tell you, it’s just extremely difficult to give you a response because of the uncertainty of acquiring this land. Not only is it difficult to locate, it’s extremely difficult to get it properly zoned. And the timing of that creates the uncertainty I’m talking about. In total if you look at the total schedule of properties that we're targeting, it's in the many hundreds of acres. And so over the course of probably two years, we’ll be expending a significant amount of capital to obtain those acres. And the math is right. I mean, if we talked about volume growth. If you've got three years of volume growth at 8%, you're at a 27% growth in overall market. And if you assume your markets 4 million cars, you’re well over 1 million cars, additional cars. And so it’s becoming a real issue. And that’s why we’re so extremely focused on it. We have a lot of resources focused on paying this land because without this land you can’t properly satisfy and service your insurance customers.

Hi, Brad just a little more color here. I think the reason you hear us reluctant to provide more specific forward-looking guidance on this is because real estate by its nature is so episodic and unpredictable. We were pursuing land in Southern California for 20 plus years until we found a yard that made sense for us at the location, the permitting and the value available to us. So the business is somewhat elastic. If you look at an aerial photo of our nearby yards in Southern California until we opened a new one, they were clearly fuller than other yards within Copart. We want to be disciplined about how we buy land. We expect to be aggressive about buying and developing land, but that’s also somewhat dependent on availability, permitting, timing and so forth. So it’s a big part of our forward-looking strategy. It’s just very hard to narrow it down to say next quarter. It’s precisely this many yards, it’s precisely this many millions of dollars.

Okay. And I think when you talked about the 14% U.S. unit growth or volume growth, you mentioned market share gain. And could you give us a feeling, maybe what contribution market share was to that 14% i.e. drilling down towards farmers?

Yes, a lot of the volume that we had in market share was a year ago in the farmers account. There’s some new business that’s come on in the most recent quarter. So you’ll be seeing that trend extending in the year. So as I think Will or Jeff is about to give you a number, I want to make sure you understand that, that number will increase as we go into the new year from additional market share gains.

Yes, it is a lot difficult to arrive at a specific number with that certainty. I mean if we look at the growth in the market, we assume it’s 8%. And that’s 20% of our business, 6.5% to 7% came from market growth. And so the balance came from either new business or CAT. And the CAT level is probably 2% of that.

Okay, great. And then one last sort of follow-up. You talked about what drives the salvage, the total rates. And you said MSO market share gains. Are MSO average checks higher than independent average checks? It was my understanding that insurance companies allocate direct repair programs based on low-cost repair and seem to be focusing towards MSOs. Is that incorrect?

I won't comment on that other than to say that industry research suggests that one of the drivers of the increase in the cost of repair these cars is the consolidation that’s occurring. So you’d have to imply that by that statement.

Okay, all right. Thank you.

[Operator Instructions] Our next question will come from Bill Armstrong with CL King & Associates.

Good morning, gentlemen. So it looks like your average revenue per vehicle is directionally increasing. You talked about scrap prices at the low end of your vehicle. So what other drivers might there be driving higher revenue per vehicle?

Every country has its own profile of car that we sell. Every insurance company has its own profile of cars that they provide to us. Some insurance salvage at a higher damage rate, some at a lower damage rate. Overall trends in used car pricing, FX, scrap metal pricing; things like proximity to port have an impact on the selling price of the vehicle. I mean, there’s a lot of inputs and drivers in this ASP movement.

Got it. And on the foreign exchange front, you only have over the last couple of years, I guess, with the stronger dollar, that has sort of suppressed bidding from international buyers. And now with the dollar kind of leveling off a little bit, are you seeing those buyers coming back or getting more aggressive in their bidding?

We have. We’ve seen just a marginal increase in international activity, but nothing near where it was two years ago.

Okay. But it sounds like the deterioration of that is sort of, kind of reached an end there?

That’s fair.

It is actually up, as Will said.

Okay, great. Thank you.

Thank you. Our next question will come from Matthew Paige with Gabelli and Company.

Hi, good morning. To follow-up on your age commentary before with lower new car sales in the 2009 to 2011 time frame, do you see any potential impact or air pockets as these units move into the latter stages of their lifecycle?

What do you mean by air pockets, Matthew?

It is just as - you have some higher sales going into 2008 and then you have lower sales coming out of the recession and before they start to recover in 2012. So you have a couple of years there where the lower sales are starting to get into their prime age for salvage parts or to be totaled.

Clearly, it has caused the average age of vehicles to move up, as Jeff stated earlier. In terms of bucket of cars that are missing in that particular year, I think if you - if we can just take an extreme, if we didn’t sell any cars one year and the next year we sold twice as many cars, I think it would just move the average down. I don’t think it would be indicative of some kind of air pocket or other impact. So, it definitely had an impact in the average age of the vehicles. And as Jeff stated, that is starting to reverse now as we’re seeing 17 million new car sales a year.

Okay, great, thanks. And then second question for me is could you remind us the penetration of transportation and storage fees and sales you make on the unit sold at auction?

I’m sorry.

I didn’t understand.

What was the question?

Of the units you sell at auction, what is the penetration of them that you can take ancillary revenue from transport and storage fees?

Thanks for the question, Matt. I think you are asking about attachment rates for other ancillary services that Copart provides. Its buyers or sellers and we don’t customarily comment on those kinds of things.

Okay, well thank you and good luck.

Thank you. Speakers, at this time, I’m showing there are no further questions in the queue. I’d like to turn it back over to you for closing remarks.

Thanks, Samantha. Again, thank you, everyone, for attending the fourth quarter call. We will be reporting on the first quarter in the New Year fiscal 2017 on the next call. We look forward to chatting with everyone then. Thanks so much. Bye.

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