Ladies and gentlemen, thank you for your patience in holding. We now have your speakers in conference. Please be aware, that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow, if you would like to ask a question. It is now my pleasure to turn today's conference over to Jay Adair. Sir, you may begin.

Thanks so much. Good morning everyone and welcome to the Third Quarter Call for Copart Fiscal 2017. On the call today is Jeff Liaw, our Chief Financial Officer; and Will Franklin, our Executive Vice President. With that, it's my pleasure to turn it over to Jeff Liaw, our CFO. After the formal presentation, we will open it up for questions. Thanks.

Thank you, Jay. Good morning everyone. I will start with our Safe Harbor. During today's call, we will discuss certain non-GAAP measures, including non-GAAP net income per diluted share, which includes adjustments to reverse the effect of foreign currency related gains and losses on our cash balances and the adoption of an accounting pronouncement regarding the tax treatment of executive stock option exercises. We've provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our web site under the Investor Relations' link and in our press release issued yesterday afternoon. We believe the presentation of these non-GAAP measures together with our corresponding GAAP measures is relevant in assessing Copart's business trends and financial performance. We analyze our results on both GAAP and non-GAAP basis described above. In addition, this call may contain forward-looking statements within the meaning of federal securities laws, which are subject to substantial risks and uncertainties that could cause actual results to differ materially from those projected or implied by our statements and comments. For a more complete discussion of these risks that could affect our business, please review the Management's Discussion and Analysis portions in our related periodic reports filed with the SEC. We do not undertake to update any forward-looking statements that may be made from time-to-time on our behalf. Regarding the third quarter fiscal year for Copart, our presentation will be on the same basis as the second quarter, with the non-GAAP adjustments as described previously. For a representative snapshot of the business, we always recommend focusing on revenue, gross profits and operating income measures. Third quarter represented record financial performance for Copart in terms of our units volumes, revenue, gross profit and operating income. Starting with the top line, we experienced global revenue growth of 7.7%, this…

Thank you, Jeff, and good morning. Let me add a little color before we turn it over to the Q&A session. Once again, we are pleased with the results of the third quarter of our fiscal year. Our consolidate growth and revenue of 7.7% was driven by increased volume of 8.6%. In the United States, sales volume was up 8.7% and was driven by organic growth and market wins from the salvage market, as well as continued growth in a non-salvage business, which grew 8.1% and represented 17% of our total volume. Since the first quarter of fiscal 2015, our average quarterly volume growth has been 12.2%, and while we see quarterly fluctuations due to weather events, business days and changes in cycle times, we see industry dynamics as a support to continued growth. In the U.S., we also saw marginal increase in revenue per car, as ASPs increased. This is due to a reduction in charity cars as a percentage of our total cars sold, and as Jeff has already mentioned, growth in scrap metal pricing as well as increase in the pre-accident value of the cars assigned to us by the insurance companies. We continue our efforts to develop our international buyer base, despite the challenges caused by the strong dollar. In the quarter, almost 20% of our units were sold to international buyers, which is higher than the same quarter of 2015. In this fiscal year, we saw buyers join us from Indonesia, Cyprus and Bosnia, and we saw growth in volume from buyers in countries like Nigeria, Yemen, Afghanistan, Georgia, Armenia and Ukraine. In total, we sell in over 114 countries. For the quarter, our international operations outside the U.K. remain immaterial in both revenue and EBIT. So we will discuss only U.K., where volume increased…

Thank you. At this time we will open the floor for questions. [Operator Instructions]. The first question will come from Bob Labick with CJS Securities. Please go ahead.

Good morning.

Hey Bob.

Good morning.

Hi. Wanted to start up, just following-up on Will's comments at the end there. You clearly have been growing very rapidly and adding a lot of land. It sounds like you have run into a bit of constraints with the volume that you have had and that's why you are adding over the same. Have you been able, for the most part to stay ahead of the curve, how much more land do you have to add, and just talk a little bit about the process of adding land ahead of the volume and how you coordinated it all? Because I know it takes a long time to get the land and permits and etcetera.

Bob, I think we have done a very good job in staying ahead of the demand, and as you mentioned, it's a very challenging exercise, primarily because of the zoning, but also in some areas, because of the costs. I mean, the per acre cost in Miami is over $1 million. I think the last time we looked, it was $1.2 million an acre, in the South Bay, San Francisco, it was $1.7 million an acre. Sometimes you can't solve the problem with money, because zoning is very-very difficult to obtain. So we have, like we have said before, a team that does nothing, but that searches for these sites, and a legal team that does nothing but negotiate the contracts and tries to get them secured. We think the growth in volume will continue. We see the drivers of the volume continuing, and in some cases, maybe even accelerating. So we anticipate this activity at this level will continue for at least another 24 months.

And Bob, I think it's fair to think about our land acquisition program, broadly speaking, in three different ways. It's a strategic matter for us, it's taxable and it's also opportunistic. But to say it plainly, having capacity is critical to our providing the kind of excellent customer service that our clients are accustomed to, so we are very proactive in staying ahead of the curve. So you heard us announce a while ago, the acquisition of a large plot of land in Florida, which is both relevant for day-to-day capacity, but especially for catastrophic events, so we want to be ahead of the curve, five, 10, 15 years out. It's also tactical, we know yard-by-yard where we experienced congestion, so we are especially aggressive in targeting those areas. And finally, it's opportunistic, so there are moments when plots of land are available, that they otherwise might not be. We talked extensively about the Los Angeles area being a part of the country we pursued for decades, but we acquired a major plot of land last year, because the right moment in time struck. So it's really all three for us. It's very long term and it's also very opportunistic at the same time. Land, as we talked about before, is episodic in nature. You can't say, I will spend X million dollars this quarter, I will spend Y next quarter, because those transactions aren't always under our immediate control. But suffice it to say, we are happy with where we are, but also know that we will continue to invest aggressively, as Will just articulated.

Okay, great. And then just continuing that thought. Obviously, we agree that there should be continued growth in volume from everything we have read and it could even stay at these very high levels and keep growing. In addition to buying land, what else are you doing to deal with and prepare for the greater volumes at your existing facilities?

That's a primary concern for us Bob. I think the rest of our business scaled very nicely. I mean, we have got a tremendous management team, especially at the GM level that we can port to new facilities. We have technology that expands very easily. So when we address the issues that surround our expansion and increasing volume is primarily focused on lands and land acquisition.

Got it. Great. And then my last one, and I will get back in queue, I promise. Just asking for the quarterly update on Western Europe, Germany and Spain in particular, anything new in the last few months since we have talked, that would suggest either a faster or slower roll out than you previously thought? I know it's an undefined timeframe to get moving, but is there any new events there or how is it going and what's the progress?

Well I don't think we ever actually laid out a time table, other than to say that the discussions are taking place at a number of different levels and the results are encouraging. And I think the best evidence of our confidence is our initiative to buy seven new facilities in Germany.

Okay. Terrific. Thank you very much.

Thanks Bob.

Thanks Bob.

Thank you. The next question will come from Craig Kennison with Baird. Please go ahead.

Hey, good morning. Thanks for taking my questions as well. Will, I think you mentioned that you had downsized your non-insurance activity in the U.K.? Could you add a little more color to that decision and give us some feel for how that might shake out down the road?

Yeah. We have two efforts on the non-insurance side in the U.K., one is similar to our CDS, where we are selling as agents or dealerships and institutional sellers. And the others, we are actually buying and selling cars from account [ph]. And it's the latter which we have made some acquisitions, some purchases that were less profitable than we desired. And so we are just prudent in our buying activity, which decreased our margin, but certainly helped our -- decreased our revenue, but -- volumes and increased our margin percentage.

And should we expect, for the next three quarters, for that trend to persist on a year-over-year basis, as we look at revenue growth?

The trends being a reduction in non-salvage?

Yes.

Volume? U.K.? No, I think we have right-sized it, so I don't think any more adjustments are necessary. But I mean, like I said in my initial comments, there is always fluctuations and influences that impact our volume on a quarterly basis. We look at things on more of a long term basis.

Thanks. And then a question for you Jay; with the additional physical capacity you have added recently, what are you doing on the human capital side to run these operations? I don't think you have had to recruit as aggressively as you may be recruiting now?

Yeah. Last year we added 20% to the company in terms of operating employees. So I think the number was 500 new employees in the field. So we have upped -- I mean, it's a good point. We have upped our recruiting efforts in the field -- as you have seen with G&A, we have been able to hold that pretty steady for the year, which has been nice. So there has been some leverage there. And we will continue -- as we are opening yards in advance of volume, you will have a period where you continue to hire more aggressive rate and then, as you fill those yards, you will get some leverage. But we have done a great job. We are happy with where we are at, and the operations team continue to stay ahead of the ball, so we are happy with that.

And as a final follow-up to that, I know you have invested in some excess capacity to handle catastrophes when they arise. How do you plan to change your human capital, as it relates to catastrophes? Do you have to add temporary labor, or do you just shift it around the country, as you have done in the past?

Yeah. We have got a team of special ops folks, that have already identified themselves and let us know they are willing in a cat situation to spend multiple weeks on the road in affected areas. We have got plenty of people that have signed up for that. So last year -- do you remember the number, was it seven cats, nine cats, I mean, that we had last year?

There were four major cats.

Four major cats, and then --

And several small.

Several small. Okay. At one point, I do remember us having three different teams deployed for cat situations. And the point I was simply making, Craig, is it was a very busy cat year -- busier than normal. So one never knows how busy it's going to be this year and in future years, but we were more than prepared last year, and I am very confidence that we are prepared for our customers, as we sit today.

Let me add another comment to that; so one of the concerns when a cat situation arises, is our ability to get transportation and sub-hauling capacity. And for that reason, we actually developed our own internal fleet of 50 trucks. So that in a cat situation, we are not negotiating with others or bartering with others to get volume, we can dedicate our own volume to that area to address the extra needs. So we have got the extra equipment, we have got mobile facilities that we can put on site when needed. So I think we have learned so much from Katrina, all the way through Sandy, and I think we are in pretty good shape when it comes to addressing cats.

Great. Thank you.

Thank you. The next question will come from Ben Bienvenu with Stephens. Please go ahead.

Hi, good morning. This is Daniel Imbro on for Ben. Thanks for taking my question. Wanted to start with operating margins; we saw pretty nice expansion in the quarter. What were the puts and takes to that line item? And then, maybe following on that, what do you think is proper operating leverage in the business, in a normal acc and cat environment?

So I am having a hard time understanding the question. The question was, what's the future of our operating margins?

Yes -- we saw a good expansion in the quarter, as we didn't have any catastrophic events. I was wondering, what's a good run rate for operating leverage in a normal growth environment?

I am not sure I follow that. It depends on a number of different things. The location, the nature of the cars, the number of purchased cars versus agency cars. What we focus on is -- our primary metric is EBIT per car, and we do that by controlling every aspect of our operating costs. And so every month, we spend an extraordinary amount of time, dissecting all of our costs and identifying areas that we can improve. In terms of where you get your best operating leverage, is when you can pump more cars through existing capacity. And it has been challenging more recently, because, we have had to go out to locate new capacity to address the current volume influx. And as Jeff has already alluded to, we have done a great job in leveraging our G&A to expand our operating margins. Our business is very scalable at the G&A level, and so we expect -- while G&A costs will continue to grow, we think the leverage on the G&A costs will also continue.

And Daniel, we don't have the precise number. We have never guided to what our marginal contribution would be. I think what we have said before and can reiterate here is that, on an incremental unit, a substantial portion of our costs are variable and a substantial portion are fixed. The variable portions are the sub-haul expense of course, titling expense, etcetera. Those happen literally on a per car basis, but their aspects of our cost, labor and otherwise, utilities and so forth that are fixed or semi-fixed. As you have heard us described and just heard Will say again, there are constraints to that, and we have experienced that over the past few years, which is why we have invested in additional capacity in new yards.

Thanks for that detail. And then maybe, following on that capacity investments. Are these investments still margin neutral with the increased G&A being offset by increased efficiencies in the yard? Are you seeing that right now?

So I think -- the best way to think about it -- first of all, it doesn't affect G&A that substantially. Most of the expenses that we incur, in connection with the new yard, would be at the yard level and therefore show up in our yard expenses. I think you are rightly attuned to the point that there are puts and takes. The day one savings for us, are that, we save money on sub-haul; because the new yard, is by definition, closer to some of the accidents and repair shops than your prior network of yards were. Day one savings can also include the relief of some congestion, so as yards become overstocked, it can be expensive to touch a car multiple times or make it more difficult to access the vehicles you want to reach. There are also, of course, offsetting labor considerations the day you open a yard, you'd add a headcount that won't be as fully leveraged as you were prior. So those offsetting considerations will then layer in, as we have added new yards every quarter, there are some yards that are 'maturing' and then also, some yards we are newly adding. So I think the effect in our business, over the long haul won't be pronounced. I think you see it over the past few years, as we have added capacity.

Okay, great. Thanks guys, that's all I had.

Thank you for the question. The next question will come from Ryan Brinkman with JPMorgan. Please go ahead.

Hi. This is Samik on behalf of Ryan Brinkman. The first question we had is, looking at the volume growth this quarter, I think where you mentioned 8.7% in the U.S. and while that's pretty much in line with I think what you guided medium term of 8% to 10%, that's still a restoration [ph] from the 18% you had last quarter. So just wanted to get your thoughts on probably on what drove that restoration [ph], as well as what you are seeing in the early fourth quarter in terms of trends? And if all the congestion that you are seeing in the yards had a role to play in that restoration [ph]?

We don't typically provide forward guidance and will continue to adhere to that general policy. But as for the difference in growth rates in any given quarter, there are -- a number of different factors are going to affect it. But most importantly, as you heard us talk about on the last call and on prior ones, there was a major customer win in the second quarter of last year, which we are lapping. The business continues to grow, including with new account wins. But I think tracking any individual quarter and overanalyzing it, I think, will lead you astray, as you compare our inventory growth numbers and our revenue growth numbers, they tend to move in relationship, but not in a perfectly correlated manner. So there is no one sentence explanation for the difference between 8%, 9% versus the mid-teens you saw previously.

Okay, got it. And just last one from us, you ended the quarter here with $200 million of cash. Is there a minimum level of cash that you look to maintain in the business, and as you look at like, capital allocation opportunities that you have between investing in the business and buybacks etcetera, what are the areas that you are looking at, and how are you prioritizing them right now?

There is a minimum level of cash needed to run the business day-to-day. That level is meaningfully below what we have on our balance sheet. But the cash on our balance sheet is a function of a number of different things, including our reinvestment expectations overseas, part one. Part two, tax policy considerations as well, and as you know, there may be changes on the horizon or not. And then of course, our own balance sheet optimization in terms of debt levels and so forth. I think the question you are getting to, is stock buybacks and capital deployments. I think our script will remain the same as always. That is how long term we have returned capital to shareholders. That will continue to be our approach for the future. But as for precisely when and how much and where, we don't have specific plans and can't comment on them.

Sure. Okay. Thank you. Thanks a lot.

Thank you for the question. The next question will come from Gary Prestopino with Barrington Research. Please go ahead.

Hey. Good morning everyone.

Good morning Gary.

Good afternoon.

Most questions have been answered. But in the U.K., can you maybe tell us, you said 18% of your business is non-insurance at this point, which would make 82% insurance. In terms of that insurance business, where do you stand with cars that are purchased versus cars that are auctioned off on a fee basis? Can you give us some percentages there?

It's about 25-75. About 75% of our volume is fee based, about 25% is sold on a principle basis.

Purchased. Okay. So that's a significant flip, right? Because when you first got into the U.K., you were purchasing almost everything, right?

That's correct. Yes.

Okay. And then lastly, and I know I asked this question in the Q2 call, about the tax rate. I think the tax rate was down like 34% in Q2 and I think, going forward, what kind of tax rate should we use? And I think you guys said 36%. Obviously, it was down again in Q3, and if you back in that -- add back that benefit, it looks like it's about a 34% of tax rate overall. Is that like a new lower level tax rate for you guys, somewhere in the 34%, 33% range?

No. And I think when you said 36%, I think Will -- I would say it was five or six quarters ago, we said 35% to 36% is the ongoing rate. And barring statutory change, that's still the right starting point. There will be fluctuations up and down, depending on the particular events of the quarter.

Okay. So just use a 35%, 36% range on a GAAP basis going forward?

Yes. Correct.

Okay. Thank you.

Thanks Gary.

The next question will come from Elizabeth Suzuki with Bank of America. Please go ahead.

Hey guys. Can you just talk a little bit about international markets? And then do you think there are international markets outside of the U.K. and Germany that would be good opportunities for future growth, maybe markets that have somewhat similar fleet and insurance dynamics and will be good candidates for market share expansion over time?

We do. In fact, when we talk about Germany, we are really talking about all the EU and depending on how you define the EU, if you include Turkey; you have got a market that's actually larger than the United States. And we think the value that we bring to that market, demonstrate not only in how receptive Germany is to it, but I think we provide a better solution for both the buyer and the sellers and the actual policyholders themselves. So we think that, once we have the infrastructure in place that we have an opportunity to grow throughout all of the EU. In the other parts of the world, we have analyzed, I think the markets -- in terms of attractiveness, and we are pursuing those. We are in Brazil, we are in India, and we have incipient efforts in China. So I think we have opportunity that we will pursue and it will take several years and won't have any short term impact on our -- we don't anticipate short term impact on our financial results.

Great. Thanks. And just one more quick one, which is -- there are some of the other auction companies that are working to monetize the data that they collect on a daily basis from their auction transactions. What do you view as the potential opportunity, if any, to use your data, given the sheer number of transactions you are involved with every month?

Well, I think the best opportunity to monetize our data is to provide their service to our sellers and our buyers. And so to the extent we can predict with accuracy, the ultimate auction value of the car, then that helps them in making their salvage decision. That's probably one of the primary focuses. I think the other area is to find out, on the buyer side, which buyers have propensity to buy certain types of cars, how we can best market those types of cars with those specific buyers. So that's the primary focus for developing our business intelligence efforts. I think on the operational side, there is opportunities to become more efficient by utilizing technology to make some of the decisions that now are made manually. For example, the severity of damage decision that we make at the time that we receive a car. So, we are exploring a number of different ways that we can use this data and new technologies to make our operations more efficient and more profitable, and we are attractive to our sellers.

Okay. But no immediate plans to like sell that data to outside sources or anything like that?

None.

Great. Thank you.

Thank you.

Thank you. [Operator Instructions]. The next question will come from Matthew Paige with Gabelli and Company. Please go ahead.

Good morning. Congrats on a nice quarter. Just one final question for me is, could you provide any regional color for the U.S., in terms of volume increases and if there is any outliers there?

Not really. I really can't think of an area which we have outliers, absent the acquisition of new business. In terms of organic growth, I think we haven't seen an area that exceeds others. I can tell you that, in terms of some of the new business we have acquired, that has required us to focus more efforts on capacity expansion than in a very short horizon.

Got it. And then just to sneak one in, to follow-up on that, I know you have talked about how land is purchased opportunistically; but is there any area that you wish you could buy more land today?

Sure. Yes. There are several. I mean, Southern California, Miami, New England, Minneapolis. Just almost every place. We have absorbed almost all of our excess capacity. And so, we have a lot of ongoing efforts to expand in almost every part of the United States.

Great. Well good luck and I look forward talking to you in the future.

Thank you, Matt.

Thank you. The next question will come from Bret Jordan with Jefferies. Please go ahead.

Good morning guys. It's David Kelley on for Bret. Thanks for taking my questions. Just a quick follow-up to the earlier regional performance question; we are hearing from other auto sectors, really in the aftermarket, the mild February weather negatively impacted volumes. Is that something that you observed as well, anything related to the northeast or Midwest markets in particular on your end?

No. We really don't. We are so broadly focused that weather patterns in one particular area, aren’t something that gain our attention, and there is ebbs and flows to that. So we plan our capacity around peak need, and so if we do that, the fluctuations that occur at the spring really don't have that much of an impact on our operations.

Okay, perfect. Thank you. And I guess on that note, any change in the usual cadence of RFP activity on the horizon here? Maybe at a higher level, given your recent land investments, how does that ultimately play into kind of the RFP bidding process going forward here?

RFP, that process continues. It's ongoing and we are involved in that process continually. And I really can't say that there has been any spike in recent activity, it's just ongoing and it's normal and we are aggressively pursuing every opportunity.

Okay, great. Thanks guys. Appreciate the color.

Thank you.

Thank you. The next question will come from Bill Armstrong, C.L. King and Associates.

Good morning everyone. When we look at organic volume growth, we have got some drivers like miles driven, accident frequency, total loss frequency. When you kind of look at those factors, what do you think are the most important ones that are driving in volume? Do you think they are sort of equally weighted across those factors or maybe there is one that's maybe dominating more than the others?

Yeah. By far, it is total loss frequency.

And Bill, what period of time do you mean?

Oh, over the last year let's say? Or maybe, just year-to-date for this fiscal year?

Yeah. So the total loss frequency is primarily driven by the increase in repair costs. There is a number of factors that influence that growth, and frankly -- and we have talked about all of it. We have talked about the complexity and the content of cars, and the precision of the manufacturing process and the difficulty of achieving that in the collision repair environment without special skills and tools. And we see that accelerating. What some people sometimes ignore the fact that the collision industry itself is changing. There is a tremendous consolidation process that's ongoing, and we see that continuing. We see the repair facility that are successful in this environment, those that have the capital to spend it on the internal skills and the internal training programs, as well as buy the professionalized equipment that are needed. So all those lead us to expect that repair costs will continue to grow, and perhaps even accelerate in their growth.

Bill, and I think Will's good color is backed up by the basic math, right. So if you compare the growth in miles driven is in the economy still remains reasonably healthy, it's still in the low single digits. Accident frequency is up, but again, modestly, low single digits. But if you take it as a proxy for industry growth, the unit growth trends for us and our major competitor together, that rate is much higher than the growth you would see in miles driven and in accident frequencies [indiscernible] than the total loss frequency. That is both the near term and the long term driver. That has been the big change over the past 15 or 20 years in our industry. Historically, a function we think of vehicle age, as the fleet has gotten older, the propensity for total losses increased. Going forward, that likely remains true and also with the added vehicle complexity you just heard Will describe, you will see that as a factor as well.

And it doesn't sound like those secular drivers are going away anytime soon either?

Secular drivers being miles driven?

No. In terms of vehicle complexity and just a lot of older cars on the road?

Agreed.

Okay.

That for sure, Bill, I would add, all the technology that's going on the outside of the car from cameras to lidar radar to -- all that is going to increase cost of repair. So that's a big piece of what we are also looking at. Going forward, we think there is going to be higher total loss frequency associated with technology.

Right. I would agree. Okay. Thanks.

Thank you for your questions. Speakers, there are no further questions at this time. I will turn the conference back over to you.

All right. Thank you so much again for attending the third quarter conference call and we look forward to reporting on Q4 and the year end on the next call. Thanks so much. Bye.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines.