Copart Inc

NASDAQ:CPRT

Earnings Call Transcript 2019-Q1

[Operator]

Good day, everyone, and welcome to the Copart, Inc. First Quarter Fiscal 2019 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, Inc. Please go ahead, sir.

[Jayson Adair, CEO]

Thank you, Chantelle. Good morning, everyone, and welcome to the first quarter conference call for Copart fiscal 2019. It's my pleasure this morning to turn it over to Jeff, who will go through the financials. We'll then come back to Will, who will give you an update on U.S. and international. And then, I will give you an update on what is happening in Germany, since there are a lot of changes going on there, and pass back to Jeff as well.

So with that, I'll turn it over to Jeff.

[Jeffrey Liaw, CFO & Senior VP of Finance]

Thanks, Jay. I'll start today's call with a safe harbor. During today's call, we'll discuss certain non-GAAP measures, including non-GAAP net income per diluted share, which includes adjustments to reverse the effect of disposals of nonoperating assets, foreign-currency-related gains and losses and certain income tax benefits related to accounting for stock option exercises.

We've provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our website under the Investor Relations link and in our press release issued yesterday. We believe the presentation of these non-GAAP measures, together with our corresponding GAAP measures, is relevant in assessing Copart's business trends and financial performance. We analyze our results on both a GAAP and non-GAAP bases described above.

In addition, this call contains 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 the risks that could affect our business, please review the management's discussion and analysis portions in our related periodic reports filed with the SEC. We do not undertake to update any forward-looking statements that may be made from time-to-time on our behalf.

Turning our attention first to the first quarter of fiscal 2019. We achieved a record first quarter in unit sales revenue, gross profit and operating income. The period presents a somewhat noisy comparison in comparison to the first quarter of last year given the events of Hurricane Harvey last year and Florence and Michael this year. We'll provide metrics during this call with and without those events to provide you a cleaner comparison.

Starting at the top line. Our global revenue grew 10.1% year-over-year. Excluding those three hurricanes I just mentioned, revenue would have been 15.1% instead. We were burdened by an unfavorable year-over-year currency effect on revenue of 0.3 million on foreign operations primarily due to the strength - relative strength of the U.S. dollar in comparison to the pound and the Brazilian real.

Our global service revenue grew 5.5%. Again, excluding those three hurricanes, global service revenue would have grown at 11% instead. Purchased car growth was 48%, split approximately equally between U.S. and internationally in terms of the absolute growth. The growth in the U.S. was driven by a mix of things, including NPA and Copart Direct. Internationally, our growth was driven by the U.K. and also by Germany.

As you know from following Copart, our actual Copart owned inventory is still relatively modest, with $19.7 million at quarter end, small in the context of our overall business since purchased car revenue reflects the gross value while our service revenue reflects only the net.

Our global unit sales grew 4.1% year-over-year, with U.S. unit growth of 2.4% and international unit growth of 14.3%. Excluding those three hurricanes, our global unit sales growth would have been 5.6%, with U.S. growth of 4.2% and the international growth, of course, unchanged.

Our nominal global inventory decreased year-over-year 1.5%, but excluding those three hurricanes, our global inventory was up 10% year-over-year in comparing the October ending balance versus the October ending balance of a year ago.

Turning to our gross profit. Gross profit grew from $163.3 million a year ago to $195.9 million this year or 20% growth. As you may recall, the first quarter '18 was burdened by Hurricane Harvey, which represented a net drag on the quarter of $17.2 million at the gross profit line.

The first quarter of '19 is likewise burdened by expenses related to Hurricanes Florence and Michael, which collectively represented $4 million of gross profit loss in the quarter. We have not treated this event as an "extraordinary event". We believe the storm readiness and responses in essential service that we provide for our customers, and although catastrophic events tend to be unprofitable for Copart, and in the case of major storms [indiscernible] substantially. So we believe our commitment to exceptional service in these events distinguishes Copart from the competition.

Excluding these three events, our gross profit in both periods would have yielded a gross profit growth of 11%, a meaningful leverage on our unit growth of 5.6%.

Our gross margin rate increased from 39% to 42.5% for an increase of 350 basis points. That, of course, includes the burden of Hurricane Harvey a year ago as well as Florence and Michael this year.

Excluding all three of those events, gross margin rate would have declined slightly approximately 180 basis points, with a strong majority of that decline attributable to the mix shift in purchased cars.

On ASPs, I'll provide just a quick headline with Will to provide much more color thereafter. Our ASPs grew 13.1% in the U.S. despite lapping a strong ASP growth quarter a year ago in the first quarter of '18 of also 13% or thereabouts.

Turning to our general and administrative expenses. Stock compensation and depreciation grew from $29.5 million a year ago to $34.8 million. U.S. growth in this respect of $3.8 million largely related to costs associated with supporting our growth initiatives, as well as certain litigation costs, and the $1.5 million increase internationally is largely related to the expansion of our European business.

As we have repeatedly said, our general and administrative expenses will grow over time with inflation and complexity, but we continue to believe we can achieve operating leverage over time given the strong top line growth.

Our GAAP operating income grew from $123.9 million to $151.4 million or growth of 22%. Excluding the hurricanes, operating income would have grown at approximately 10% year-over-year.

Our net interest expense was down due to a lower net debt balance. Our first quarter income tax rate of 23.3% is a reflection of the lower U.S. federal tax rate you heard us talk about on prior calls. We are now at a 21% U.S. federal tax rate for the full fiscal year '19. Our GAAP net income increased from $77.5 million a year ago to $114.1 million this year or growth of 47% year-over-year.

As I'm sure you recall, we experienced a somewhat complex quarter in the fourth quarter. The first quarter is relatively straightforward in comparison with very limited non-GAAP adjustments to net income. And therefore, the net income of $77.1 million a year ago in comparison to $113.6 million this year is similar with growth of 47% year-over-year.

One last topic, turning our attention to the balance sheet and cash flow statement. I'll pause here to talk about revenue recognition 606 or the rev 606 new accounting standard.

This is the first quarter in which we've implemented those new revenue recognition principles, which reflects largely a reversion to how Copart previously accounted for its revenue prior to the implementation of rev 605 in fiscal 2011.

So under the new accounting standard, to oversimplify, we will largely recognize revenue in connection with a particular vehicle at the time of its auction, including, for example, services we provide with respect to inbound towing and title processing.

The onetime cumulative adjustment to retained earnings is a reduction of $23 million. Certain revenue and corresponding costs that had been recognized in Q4 and previously under the prior accounting standards are now recognized in Q1 and beyond, while revenue and corresponding costs that previously would have been recognized in Q1 are instead deferred to Q2 and beyond. The long and short of it is the net effect on our P&L in Q1 was not material in terms of either revenue or our profit metrics.

The new revenue recognition standards also affect our balance sheet in non-cash ways. For example, because we will not recognize revenue as earned until the time of auction as a general matter, certain of our accounts receivables that we would previously have booked in Q1 will now instead be booked in Q2.

So on our balance sheet, you'll see the AR balance would nominally reflect a decrease of $16 million, but the change in cash from the cash flow statement on accounts receivable of $29.3 million is a more accurate reflection of like-for-like AR growth year-over-year.

The same logic applies to vehicle pooling costs. We will now defer more of our costs into Q2 and have "deferred" costs from Q4 that we've now recognized in Q1 in subsequent periods. As a result, VPC growth on our balance sheet of $39 million significantly outpaces like-for-like VPC growth of $13.6 million as reflected in our cash flow statement.

On cash flow itself, we generated operating cash flow for the quarter of $107.7 million, with CapEx of $62 million at change. A little over half call it 55% of our CapEx was attributable to capacity expansion and lease buyouts, with the balance attributable to yard equipment, IT and others.

And with that, I'll turn it over to Will for more color on the business.

[William Franklin, EVP, U.S. Operations & Shared Services]

Thank you, Jeff. And I'll provide a few comments about our operational performance for the quarter, where we once again delivered a very strong quarter. In the U.S., our volume grew by 4.3% when adjusted for all CAT activity, which includes Hurricane Harvey last year and Hurricanes Florence and Michael this year.

Our volume growth continues to be driven by organic growth and market wins within the insurance market and a continued expansion into the noninsurance markets. Organic growth in the salvage market continues to be driven by, we believe, an increase in total loss frequency as high repair costs are leading to a higher percentage of accidents resulting in an economic total loss.

We continue to aggressively develop our noninsurance business, which include franchise and independent dealers, finance companies and leasing companies, fleets, charities, municipalities, equipment dealers and wholesalers. The growth in volume was spread broadly across multiple seller segments.

Volume from dealers was up 29%, finance companies, 11%, wholesalers, 54%, rental car companies, 30%; and fleet and industrial equipment, up 77%. The only segments in which we experienced declines were charities and municipalities as we intentionally restricted our sales and marketing activities in these low profit segments.

We have successfully grown our noninsurance volume as we developed better systems integration and [de-fleet] [ph] bank and dealership operating systems, developed a more focused internal programs targeting the specific operational needs of individual segments and as we continue to increase the returns that we're delivering to our noninsurance sellers.

In total, our U.S. noninsurance volume grew by 14% and 44% over the same quarter last year and same quarter two years ago. However, excluding charities and municipalities, our noninsurance volume grew by 30% and 116% for the same quarters. In total, noninsurance business represented approximately 25% of our total U.S. volume.

In the U.S., our service revenue per car, excluding the impact of Harvey, on a quarter basis was up almost 6%. The increase in revenue per car was due primarily to higher ASPs, which grew by 12.7% as more than half of our total revenue per car is tied to the ultimate selling price of vehicle.

The increase in ASPs were driven by a number of factors, a 4.5% increase in the value of used cars as measured by the Manheim Index, which, in October, reached the 140-mark for your first time, a 15.2% increase in the value of crushed car bodies; beneficial mix of cars sold as noninsurance cars and powersports vehicles are generally running dry [ph] and near the higher selling price, the increase of our digital marketing activity, and the continuing trend of insurance companies totaling newer, more valuable and less severely damaged vehicles.

We continue to expand our marketing activities and to enhance our auction platform. On a quarter over basis, the number of unique bidders was up almost 25% and the increase in the number of bids received per lot was up almost 6%.

Our outreach to international buyers continues. Our U.S. website is now translated into 7 languages. These languages are native to 135 countries. We now sell cars from our U.S. yards to 147 countries.

Despite the headwinds caused by the stronger dollar, buying activity from international buyers on a quarter over basis increased. Total sales to international buyers was over 23%.

When we include all export activity, including buyers with domestic addresses who only export, our international market represents over 34% of all units sold. We believe these activities contributed to the record U.S. ASPs and auction return percentages.

Now turning to our international operations. Our revenue grew from $68 million to $90.2 million or 32.5%. International service revenues grew from $42.7 million to $51.2 million or 19.9% while purchased car revenue grew from $25.3 million to $38.9 million or 53.9%.

EBIT grew from $17.9 million to $21.1 million or 18% as purchased car revenue inherently yields a lower margin per vehicle. Volume grew by 14.3%, driven primarily by growth in the U.K., Germany and Brazil. Jeff and Jay will provide far more detailed comments on our progress in Germany later in the call.

Globally, we are seeing rising diesel fuel prices, labor and health insurance costs. Nevertheless, when adjusting for the abnormal costs associated with Hurricane Harvey last year and Hurricanes Florence and Michael this year, our average cost to process each car grew by only 2.7% in the U.S. and 3.5% worldwide over the same quarter last year. In total, the incremental costs this quarter associated with Hurricanes Florence and Michael was approximately $4.3 million.

To provide the CAT support our insurance customers come to expect, we must make financial commitments early in the CAT process. Accordingly, before the storm hits, we obtain and we stage equipment and people. We obtain additional land capacity and we arrange for additional sub-haul capacity. We do this on a scale appropriate for the worst possible scenario.

For Hurricanes Florence and Michael, we relocated 180 people, 75 loaders. We arranged for an additional 500 trucks for sub-haul capacity, and we committed to 17 new temporary property leases.

We'd like to acknowledge the outstanding work of our CAT teams and reinforce Copart's continued commitment to supporting our insurance customers during all CAT activity.

Our CAT-adjusted inventory was up in the U.S., internationally and worldwide by 10.4%, 14.1% and 10.9%, respectively. The growth in U.S. inventories suggests a continuation of our double-digit quarterly volume growth expectations. Accordingly, we remain extremely active in our yard expansion program to accommodate the growth and in support of our effort to provide permanent CAT capacity at CAT regions.

During the last quarter, we entered into 21 land purchase and lease contracts. We closed on 11 contracts. In North America, we are currently engaged at 26 land development projects, representing over 1,200 acres of capacity.

That concludes my brief comments. Now I will turn the call back over to our CEO, Jay Adair, for further comments.

[Jayson Adair, CEO]

Thank you, Will. Good morning again, everyone. Before we discuss Germany, I'd like to give you an overview of the U.K. We knew 15 years ago that we need to be a global business to win. We entered the U.K. in June of 2007 with an acquisition of a small company that had 3 locations called Century Salvage.

Shortly after that, we purchased Universal Salvage, giving us 9 locations across the U.K. Today, we have 15 locations that allow us to pick up quickly and economically across the U.K. To win, we knew we needed a network of locations. We grew the business organically by winning new business, by opening additional yards and through some future acquisitions.

For those of you that have followed us over the years, you know that we used to have this principle on the vast majority of the insurance cars that we sold in the U.K. At the beginning, we didn't have the track record in the U.K. that we obviously had in the U.S., so we were happy to buy cars and make money in the process.

Over time, we simply showed to carriers favorable spreads that we were generating on our trades. And in doing that, they shifted to a consignment model instead of selling their vehicles to us. We do this because it is better to be on the side of our customers as a partner rather than as a vendor purchasing vehicles.

Now Copart U.K. is the #1 place to go buy a salvaged vehicle in the U.K., selling well over 300,000 units a year and generating the highest returns in the market. To deliver on the Copart promise, in Germany, we need a network of yards, a marketplace, people and the technology to deliver on that promise. And I'm happy to say that we're there today in Germany.

Because Will is focused on running the U.S., Jeff has been able to spend a lot of time working on Germany to get us to this point. So I'd like to turn it over to Jeff now to give you an update on the German operations, and I'd like to thank all of those that were involved in the last 6 months in Germany on making the success that we've seen happen for Copart. Jeff?

[Jeffrey Liaw, CFO & Senior VP of Finance]

Thanks, Jay. On the topic of Germany, you've heard piecemeal from us, of course, over the years. And as promised on the first quarter call, we want to take this opportunity to describe the opportunity and our status in greater detail.

I'll start first with a description of the German industry more broadly. The German insurance market, auto insurance market, operates very differently from the U.K. and the U.S. with respect to total loss claims.

In the U.S., for example, when you as a covered policyholder total your car, the insurance company effectively buys the car from you, and what happens thereafter is invisible. As you know, the insurance company then consigns the car through Copart and keeps the proceeds of the auction.

In Germany, by contrast, nearly every car in an accident, even a mangled one, is owner retained. So when an accident occurs, the insurance company estimates how much value the policyholder has lost by comparing the pre-accident value, or PAV, of the car with the post-accident residual value of the vehicle and pays the policyholder that loss of value.

As the insurance company assess that post-accident value, the carrier registers the car on multiple listing services, in effect, miniature auctions on which buyers bid for vehicles. The insurance company generally then chooses the highest bid from across all of these listing services to be the "residual value" from which the indemnity payment is calculated and then paid to the policyholder.

The policyholder then has a 21-day option period to sell the vehicle to the listing service auction "winner" at the residual value just established. But there's a catch: these listing services are a really tough experience for the buyers themselves.

First, buyers are obligated to honor their bids for a full 21 days after bidding, tying up their capital. Second, the buyers have the obligation to buy the car, but the owner of the vehicle does not have an obligation to sell it to them, creating a fairly severe adverse selection problem.

And thirdly, perhaps most importantly, they will ultimately close on fewer than 1 in 10 vehicles on which they are the "winning bidder" on a listing service. That makes it impossible to plan for the -- to plan their own dismantling and rebuilding business, and of course, further complicates tying up capital on cars you largely won't win.

So the punchline is that buyers are constrained by their capital on how many vehicles they can bid on and, given adverse selection, will bid depressed values for cars. So who ultimately loses in this inefficient process? Insurance carriers are establishing their indemnity payments or their financial losses on claims based on what is an artificially depressed residual value. The cost is paid by them and ultimately by German policyholders, who have to cover excess lost costs with their premiums.

We'll then turn our attention to Copart Germany's evolution. In 2012, recognizing that we needed to understand the market firsthand, we acquired Wreck Online Marketplace, one of the leading listing services in Germany. Then in 2016, we opened our first auction location in Germany in Bad Fallingbostel near Hanover.

In our last earnings call, we talked about evolving our strategy in Germany as well. That evolution in short is as follows: we intend to pursue insurance company consignments in parallel with our efforts to purchased cars on our listing service. In the past, when we've entered new markets, as Jay just described, in the U.K., for example, in 2007; and in mature [ph] business in the U.S., we have sometimes established our presence by buying cars first.

We intend to move very quickly to build the infrastructure that advantages Copart in a more mature market. That includes the land that enables us to store cars efficiently -- I'll talk more about land in a moment; trucks in a geographic footprint enables us to tow cars economically; and vehicle auction volume that attracts buyers and sellers alike.

In 2018, so far, we have announced our next 6 locations. That physical footprint is critical because it enables fast pickup across the entire country and essential capability in a competitive marketplace for cars. It enables cost-efficient pickups.

As you've heard us described in the U.S. in the past, every yard reduces towing costs and improves pickup times because every yard is closer to some of the cars than our current network would be.

And lastly, it's worth knowing the -- worth noting the importance of buyer convenience. Because the majority of the cars that we sell through Copart Germany auctions are purchased by foreign buyers outside of Germany, having yards enables them -- enables our buyers to accumulate vehicles and pick them up more efficiently in larger batches.

Regarding our progress beyond land, we are purchasing and selling vehicles in Germany at a meaningful positive spread at our Copart auction locations. Every car we buy and sell adds to our knowledge base and improves our ability to buy and sell the next subsequent car.

Our intention is to run biweekly auctions at each of the sites we have announced with more to come. We're hiring staff for our yards as well as drivers for our trucking network. We use a combination of owned trucks and third-party sub-haulers to build out our logistics network.

We've deployed our next-generation IT system, which we call [Cobalt] in Germany as well. Ultimately, we believe that the strategy we're pursuing in Germany is broadly applicable, with some local refinements to the other large economies in Western Europe.

We started with the buyer in Germany and let's finish there as well. For the first time in Germany, the Copart Germany model will deliver an actual certain auction process, a buyer who bids on a car and provides the highest bid on the vehicle will ultimately own the car. We, for the buyer's benefit, now have the logistics benefit of multiple locations at which a buyer can store cars until they efficiently pick them up.

As a general practice over the past 25 years or so, we tend to tell you what we've done after the fact as opposed to promising it in advance. We'll continue to honor that approach in general, but we recognize that Germany and Western Europe are substantial enough opportunities to warrant a more substantial check in, as we have provided today.

We look forward to growing our business in Germany for many years to come. We're energized by the progress and momentum in Germany thus far and are excited by the size of the opportunities ahead of us.

With that, we'll turn it back to the moderator for Q&A.

[Operator]

Thank you very much. [Operator Instructions] Our first question will come from Craig Kennison, Baird.

[Craig Kennison, Baird]

Good morning. Thanks for taking my question and thanks for the terrific summary on Germany. I had a question on the consumer experience in Germany. How does a German consumer find out about Copart or your listing service? And is there anything you need to do to promote the service in ways that you don't have to promote it in the U.S.?

[Jeffrey Liaw, CFO & Senior VP of Finance]

The consumer, Craig, I would argue, is a participant today in the total loss process, as you heard us just describe. The insurance carrier provides them with the indemnification payment for their loss then hands them the details of an offer provided by a third party. It's then the consumer's responsibility to orchestrate that subsequent sale of the car to that winning bidder from the listing service.

So if anything, in Germany today, the consumer is arguably too involved in that process. You can imagine you're trying to orchestrate the sale of a one-off vehicle from your home or from a repair shop to an individual you have never known in the past and will never see again in the future, may in fact even be picking up a car from a foreign country, is a complicated endeavor.

I don't think that Copart's branding among consumers is essential in Germany. I think building our network and building our credibility with insurance companies and certainly with buyers, which I think you know we already have tremendous credibility with the international buyer base, that's much more important than winning the hearts and minds of consumers individually.

[Craig Kennison, Baird]

So if you think of all of the totaled cars in Germany, to what extent are you getting a listing opportunity on those cars? What's your market share of listing opportunities, if you will, in Germany?

[Jeffrey Liaw, CFO & Senior VP of Finance]

That's frankly hard to quantify, Craig, in part because for every car that it does experience a severe accident, like the carriers, generally speaking, will list the car on multiple services, WOM or Wreck Online Marketplace, the business I described a few moments ago, is certainly one of the handful of clear market leaders. So our market share position I described is strong without being able to quantify it.

[Craig Kennison, Baird]

And then, the final question on Germany here. Just obviously, you are purchasing a higher percentage of cars there to more or less kickstart liquidity. Can you give us a feel for the economics of that? And how quickly you can turn a car? So if you invest a few thousand dollars in a car, how quickly does that car turn over? Thank you.

[Jeffrey Liaw, CFO & Senior VP of Finance]

It turns over reasonably quickly. There the titling process is certainly not more complicated than it is in the U.S., for example, so the turnover isn't a challenge per se. The economics -- I think the punchline is that we have been able to buy the cars on these listing services subject to the same adverse selection problems I just described for the marketplace broadly, then turn and sell them to Copart Germany and earn positive profits in the process of doing so.

I think the sample size at this point is probably not large enough to provide a deeper -- a very detailed unit economic P&L picture. The punchline is we are able to make money. It's evidence then that the current listing service model is inefficient and costing carriers and policyholders more than it should.

[Craig Kennison, Baird]

Thanks for the detailed overview.

[Jeffrey Liaw, CFO & Senior VP of Finance]

Thanks, Craig.

[Operator]

Thank you very much. Our next question will come from Bob Labick, CJS Securities.

[Lee Jagoda, CJS Securities]

Lee Jagoda for Bob. Good morning. So just following up on Germany. I think that you guys have about 11 yards in Germany today. What do you think the - what do you think you need to be fully built out in Germany? And how long do you think that, that process could take before we see multiple insurers actually buy in?

[Jayson Adair, CEO]

Will you let me?

[Jeffrey Liaw, CFO & Senior VP of Finance]

Yes.

[Jayson Adair, CEO]

Okay. Well, we've announced to date eight locations, correct?

[Jeffrey Liaw, CFO & Senior VP of Finance]

Seven.

[Jayson Adair, CEO]

Seven, okay. We've announced 7 locations, and we will end up announcing 12 by the time we're done. I would argue, we've got enough of a network now, we can handle cars. So we've got more than enough capacity. We can pick vehicles up quickly, and we're not picking them up economically yet, but we'll be there very soon. I'd say within 90 days, we'll have the economic right, that we'll be happy with what it's costing to get a vehicle picked up.

The next step is the marketplace. So by acquiring all these vehicles, as Jeff said, we're getting a strong feel for what they're worth, so we can be even more competitive, buying more vehicles and making a spread on those vehicles. So that will improve, but what's more important than really buying vehicles and making a spread is that we're creating a marketplace where our customers, when they come to Copart, they're guaranteed to get that car.

This isn't about going on a platform, and 1 out of 100 times I submit a bid, I end up getting the car because most of the time I'm outbid, I don't know it. And then when I am a high bidder, the insured decides not to sell it to me because they flip it through the dealer to somebody else through adverse selection.

So this is a sure thing, guaranteeing that when I bid on Copart, I will get the car. All of our auctions, or I should say, the majority of the cars that we're selling at auction are not on reserve, so there are no reserve auctions. So if you bid, you own it. So that has been our focus.

Our focus has not been on getting insurance companies to come on board yet because it's about building the network, it's about building the logistics, it's about having the marketplace where buyers are coming every single day and finding product and buying that product.

And by doing all that, through our people and our technology, we'll then go to the insurance companies and show them our spreads, very similar to what I said in my opening comments that we're going to show them the spreads we're making and say, why aren't you just processing it this way instead of doing it through the platforms?

Additionally, as Jeff said, and this is one of the biggest parts for me, it's not only that we think there's money being left on the table [joining an] [ph] efficient marketplace, and that's why they list -- literally, there are major insurers that list on all three of the major platforms because they'll get different bids through the platforms.

So that piece is important. But to me, what's more important is that you're -- in Germany, you are telling the insured that your vehicle is worth €30,000 prior to the accident, and it's now worth €10,000 after the accident. And you're giving them a check with €20,000 and telling them to dispose of the vehicle through a buyer that they have no idea what the process is.

So not only do they have the option of selling to that buyer, but then they've got someone that is at the shop or maybe the vehicle is at their home, and they've got a adjustor that's talking to them and they're an appraiser and they're working all these to figure out who should I sell the vehicle to in the end and have to deal with that.

So it clearly is our belief that if they're given a check for €30,000 and the vehicle is picked up and disposed of, and they never have to deal with it, it's a far superior customer experience from the insurance company's perspective and from the insured's perspective.

[Lee Jagoda, CJS Securities]

All right. That makes all the sense in the world. Just so I'm clear, though, how many, if any, insurance companies are currently participating on your platform today? And as outsiders, what are the next milestones we should be looking for?

[Jayson Adair, CEO]

Yes. We have a few, let's say, three, maybe four customers that are really starting to utilize the website now to sell vehicles, but it's not in any way material yet. They're more wanting to try to recover bad vehicles, some hail-damaged vehicles, et cetera, to dispose of those vehicles.

And there's a transformation that has to take place where they're not just dealing with inventory that they're stuck with in the sense of recovering [bad] [ph], hail damaged, but that they actually say that this is the process going forward.

And again, I can't -- I really can't state it enough, Jeff and I and the rest of the team have been making a number of trips to Germany in the last 6 months, and I can't tell you how confident I am that we're going to see insurers that will switch their process. It's just -- the numbers don't lie.

When you look at the returns we're getting on vehicles and you see the amount of times that the insured sells the vehicle somewhere other than the platform, those two combined plus the experience for the customer, I think you're going to see in the next six months some customers switching their process and converting to Copart and the Copart model.

[Lee Jagoda, CJS Securities]

That sounds great. Thank you very much for the color.

[Jayson Adair, CEO]

You’re welcome.

[Operator]

Thank you very much. Our next question will come from Stephanie Benjamin, Suntrust.

[Stephanie Benjamin, Suntrust]

Hi, good afternoon. Thank you for the questions. I just kind of want to go back and again on Germany and kind of thinking through here, obviously you know, there's a lot that – lot that's been done in the last year from building infrastructure, the IT system and just what I'm assuming there a whole lot of investments in the initiative.

So just kind of if we think going forward, should we be expecting significantly more investments or this is kind of the run rate and -- to kind of look at it at this point going forward? Or just kind of trying to get a gauge on where we are from just an investment standpoint?

And then lastly, I just kind of wanted to follow up on the last question and just thinking about if you have received any pushback for insurance companies or any reasons so far, or maybe they're not just getting it, why they wouldn't immediately switch just considering the returns you can show them, that would be great? Thanks again.

[Jeffrey Liaw, CFO & Senior VP of Finance]

Thanks, Stephanie. I think as you know, we tend not to grant any forward-looking guidance on any aspect of our P&L, revenue costs or otherwise. But in short, I think you can tell from this description today that we have made real strides in Germany but still have meaningful growth aspirations from here as well.

So certainly, our hope is that we are investing much more capital because that's a reflection then of ongoing growth in the business. I don't think we're prepared to quantify that or any point there. As to your second question about any resistance from insurance carriers, I don't think there is a lack of willingness or interest.

I think the point is that our model, like the one in Germany, has evolved for a reason. And there are tax and regulatory and commercial practices that have been long-standing in Germany.

This is a rather different model, I think, very clearly superior, but it certainly will take time to prove to them. As Jay was describing, unit price for car purchase [indiscernible] but the economics are overwhelming. And so there's no resistance per se. I'd say strong interest, strong curiosity in our model.

[Stephanie Benjamin, Suntrust]

Great. Appreciate the color. Thanks, again.

[Operator]

Thank you very much. Our next question will come from Daniel Imbro, Stephens Inc.

[Daniel Imbro, Stephens Inc]

Thanks, good morning. Thanks for taking my questions. I wanted to follow up a quick one on Germany. I think you guys mentioned, there are three major platforms in the German market. But given the higher returns that you're generating with your model, does any of the incumbent players have the ability or desire to change strategy as you guys are succeeding in that market?

[Jeffrey Liaw, CFO & Senior VP of Finance]

We haven't seen any indication that they are, that they have the desire. And I think we have a fairly strong belief that they wouldn't have the ability regardless. So recall that a majority of the buyers at Copart Germany today are international, so that's on the back of Copart's global reputation, on the back of Copart's already established international buyer base.

If somebody tried to replicate that from scratch solely for the purposes of having a more active listing service in Germany, I think that would be a tall order. So no, there's no indication that they have endeavored to do so and [indiscernible].

[Daniel Imbro, Stephens Inc]

Okay. And then staying over there in Europe. With Brexit in the U.K. right now, can you maybe talk through how you guys think different outcomes could play out in your business? Or for one, what percentage of the U.K. business is exported to Continental Europe and how potential Brexit outcome could change or disrupt your U.K operations?

[Jeffrey Liaw, CFO & Senior VP of Finance]

I think we - you saw from the disruption a couple of years ago and a year ago, currency fluctuations, that certainly affects our business, as you know, in multiple ways. And so when the pound is weaker, the earnings reflect our P&L at a much lower U.S. dollar rate.

That said, I think Brexit clearly remains very much TBD as the portion of cars that are sold outside of the U.K. are disposed of [indiscernible]. So there are cars in the U.K. that go to other places within Europe and probably beyond Europe as well. We expect trade to continue of those cars. Under precisely what tariffs and under what regime will ultimately emerge, I think, remains to be seen.

[Daniel Imbro, Stephens Inc]

Okay. Great. And then one last one, moving back to the U.S. business. We seem to have seen U.S. salvage industry growth slowing a little bit. And part of that is noise from the CAT events but even so shaking out sort of the mid-single-digit range.

What are you guys seeing in the industry today? And has your volume outlook that you've previously indicated of kind of high single digit industry growth, has that changed at all? Thanks.

[William Franklin, EVP, U.S. Operations & Shared Services]

Not really. It may have moderated slightly. But given the difficulty in getting land, we really haven't reduced our efforts in expansion in any meaningful manner. And these trends, we try not to react for quarterly changes in trends. We think that in the long run that we're going to see increases in total loss frequency just because of all the dynamics that you all heard about, pre and post-repair expansions of scans and -- or complex cars and younger cars, all that intuitively leads us to the conclusion that total loss frequency will continue to fall.

[Daniel Imbro, Stephens Inc]

Thanks a lot.

[Operator]

Thank you. Our next question will come from Chris Bottiglieri, Wolfe Research.

[Chris Bottiglieri, Wolfe Research]

Thanks for taking the questions. First one, so the global inventory ex CAT was up 10% or ex hurricanes, let me call it that way, and volume was up 4%. I guess, how many points of that inventory growth was from international? And then like what else would you attribute the accelerate from?

[William Franklin, EVP, U.S. Operations & Shared Services]

We kind of gave that. I mean, international is up 14% and U.S. is up 10.4%, so there was growth internationally.

[Chris Bottiglieri, Wolfe Research]

Okay. And why such strong growth in inventory growth in the U.S. then looking forward? What do you say that's driving that?

[William Franklin, EVP, U.S. Operations & Shared Services]

Well, we don't predict. We've been looking backwards and say that our average volume growth rate over the last 17 quarters has been 10%. And then, there will be natural fluctuations quarter-to-quarter. We really don't see influences change significantly that have driven that thus far, so we think it's going to be in that range.

[Chris Bottiglieri, Wolfe Research]

Got you. Okay. But I'm trying to understand the European market a little bit better both on the supply side and the demand side. At this point, if you're not sourcing from the insurers, is it super majority of your purchases coming from listing services? And then what were mix like of your own wreck listing service versus the third party ones?

[Jeffrey Liaw, CFO & Senior VP of Finance]

Well, I mean, - a handful of customers who are consigning cars to us, but still, the strong majority of the cars sold in Copart Germany today are cars purchased on our listing service.

[Chris Bottiglieri, Wolfe Research]

Got you. Okay. And then demand side, can you talk about the customer mix, how that might differ from what you see in the U.S.? And give us a sense of - I don't think there's a very big salvaged part industry in Europe yet today. So can you maybe talk about how the buyers are different and kind of how you see it evolving, if you do, just to remain in this market?

[Jeffrey Liaw, CFO & Senior VP of Finance]

I think the buyers are ultimately somewhat similar because they are from outside of Germany. So some of the countries that are meaningful buyers, even of Copart U.S. cars today have become the buyers of Copart Germany vehicles as well. They are no doubt dismantling a portion of the cars for parts and are no doubt rebuilding a good number of them as they put back on the road as well.

[Chris Bottiglieri, Wolfe Research]

Okay. Thanks for the help.

[Jeffrey Liaw, CFO & Senior VP of Finance]

Thank you.

[Operator]

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

[Gary Prestopino, Barrington Research]

Morning, everyone. Will, you cited various categories of growth in the noninsurance side. I thought it was dealers were up 29%. Could you give me the other segments and the growth that we saw there?

[William Franklin, EVP, U.S. Operations & Shared Services]

Sure. Our finance companies, which includes banks and leasing companies, was up 11%. Wholesalers, up 4%. Rental car companies was up 30%. And fleet and industrial equipment companies were up 77%.

[Gary Prestopino, Barrington Research]

Okay. Thank you. And then you had 25% of your total U.S. volume in this quarter was noninsurance. What was the percentage last year? Do you have that handy?

[William Franklin, EVP, U.S. Operations & Shared Services]

I do. It was a little over 22%.

[Gary Prestopino, Barrington Research]

Okay. And then, Jeff, with these noninsurance cars, I would assume that they get sold a hell of a lot faster than the salvaged vehicles. You don't have to put a title and settle with an insurance company on that.

Does that - as these grow as a percentage of your U.S. cars sold, does that kind of somewhat distort your inventory growth in a sense of that these cars are flushing out a lot quicker versus the salvage cars?

[Jeffrey Liaw, CFO & Senior VP of Finance]

It can. So each segment that we talked about has its own profile, its own characteristics. So while you might make a sense about a quicker cycle time overall, some segments are actually a slower cycle time.

But in general, you're right. It has a - as a group, a quicker cycle time, and therefore, increases the velocity of our yards, improves the utility of our land.

[Gary Prestopino, Barrington Research]

Okay. And then just so I make sure I'm understanding Germany. Germany, if an owner retained, you're actually still going to the owner and buying the car, correct? You're not -- the insurance company is not retaining the car in what you've built?

[Jayson Adair, CEO]

Correct.

[Gary Prestopino, Barrington Research]

Okay. All right. Do you - and I know, Jay, you mentioned that you're obviously -- you're going to try and do the same strategy that you used in the U.K. to move from a principal agency over time, but are there any U.K. insurers that are writing in Germany right now that could maybe be take the lead in this and kind of start budging the German insurance companies towards going to this contingent basis?

[Jayson Adair, CEO]

Yes. Gary, we're just in the process right now of preparing the data to share it. So our approach has been very simple. We felt without a marketplace and without a network, we couldn't offer an insurer the vehicle and unit our service and then have to tow it 6 hours north at the Hanover. So we've got the network now. We've got results of the auctions that we can share. And it's really about sharing our data in the next 90 days.

And one of the most compelling parts of this to me is, yes, we're making a spread, you can see that, and that's great. But one of the most compelling parts is the fact that the -- when they're a high bidder on one of the platforms, when a buyer is a high bidder on one of the platforms, and that high bidder that's given to the insured, that the majority of the time, the insured doesn't sell it to them.

But there's a whole secondary auction that's taking place. That's the problem. And the platform price is the number that the insurance company uses. So that's the number that they're saying, okay, your car is worth 10 grand. It was 30 before the accident. Here's a check for 20, and this buyer will buy it off you. And then the majority of the time, the insured does not sell it to that buyer. Instead, they go out into the secondary market through people that work at the BMW dealership that's doing the repair, through other sources. They're going out because we came out to them.

And it's not too hard in Germany, we figured that out. It's not too hard in Germany to figure out where a damaged -- obviously, in the U.S., I give the example. It's not too hard to figure out where a damaged Ferrari is in Dallas. There is not that many dealerships.

When you get into Germany, it's not that hard to figure out where a damaged BMW or a Mercedes is in Munich, and so you can make phone calls and talk to them, or you even have a route where you just walk into the dealerships and you look at the salvaged and they put you in touch with the insurance and you're buying that product off of them for more than the platform bid.

So this is really about showing the insurance guy it's not only a better service for the insured, but it's about showing them that there's this whole secondary auction, it's an inefficient marketplace. And the biggest frustration, we talked to our buyers, why do they love Copart so much, the biggest frustration is they bid on the platforms and the majority of the time, they don't get the car.

They bid on Copart, 100% of the time, they get the car. And that allows a buyer to know exactly what they're going to repair. If they need parts, they've got the parts. If they're going to do a rebuild, they've got the vehicle for rebuild. And then, they can store it at Copart for the next two weeks while they build to run and send a truck out to pick 9 cars up and haul them back to Poland. So that really -- the benefits there are really obvious, and it's just about us in the next 90 days articulating that now to customers.

[Gary Prestopino, Barrington Research]

Okay. Thank you very much.

[Jayson Adair, CEO]

You’re welcome.

[Operator]

Thank you very much. [Operator Instructions] Our next question will come from James Albertine, Consumer Edge.

[James Albertine, Consumer Edge]

Thank you so much and good morning to everybody. Great details on Germany. A lot of questions, obviously, already, and I know you don't give guidance. So I wanted to ask sort of a real-world-looking question here a little bit.

Are you - can you tell us, rather, if you're on plan or if you're slightly ahead of plan with respect to your -- what you'd budgeted for growth in Germany? And the reason I ask, given the radical change you're bringing to the market and the tax and regulatory setup.

I want to understand what the impetus may have been, whether it's consolidation of buyers or sellers or what have you, that may have accelerated the investment there in Germany, and if we could think about the rest of Europe potentially being a little bit faster as that market consolidates over time?

[Jayson Adair, CEO]

Okay. Well, I think the big change is that we have spent the last two years trying to understand the marketplace with a single location, and it's a learning process. The first part I'd say, you've got to learn how the market works, and there is been a lot of us trying to figure out, okay, why it's the insured - why is our buyer on our platform the high bidder and they don't get the car?

And then, you eventually realize as you reach out and make phone calls and talk to people, you find out and you kind of decipher how the marketplace works. And that's how we've now come to the conclusion that there's a secondary auction that takes place and a bunch of other facts that we know about the marketplace.

And I would say that it's a big investment in time and it's a big investment in dollars, and we want to make sure that we knew that our model in our minds would work. And we came to that conclusion this year, and that's why we opened up so many locations to build the network of facilities, where we can pick cars up quickly, store them, liquidate them at auction and replicate that process over and over and over.

So it was really about being prudent in our approach upfront and learning, and we've spent the last two years doing that. And now we're in a very quick pace to accelerate the market in terms of units going through auction and accelerate the market in terms of getting clients to convert now to the Copart model.

And this is simple math, right? They're going to convert, and the insurer is going to be happier that they don't have to deal with a buyer coming at 8:00 at night to pick the vehicle up, and so that's a win. They're going to see Net Promoter Score increases from a customer service standpoint, and they're going to see more money in their pocket because they're not losing the vehicle in the secondary auction.

So this should benefit the insured and benefit the insurance company. And our research so far proves that to be the case. Did you want to add to that?

[Jeffrey Liaw, CFO & Senior VP of Finance]

No.

[James Albertine, Consumer Edge]

Maybe as a quick follow-up, Jay, if I may. Given the progress you made, the learnings and the breakthrough you've had or it seems that you're having in Germany, does that lower the degree of difficulty to go laterally kind of across Europe? Or will you have to effectively start over in a similar way as you did in Germany if you were to shift into other markets?

And then, if I can ask one, Jeff. You talked about the economics. You said it's profitable with your ROIC over time. I would guess this is a very compelling opportunity economically.

But from a modeling perspective, and there's no guidance here, but I wanted to get a sense. This must be coming on as sort of dilutive to your corporate EBITDA margin near term, I would imagine. Is that a fair assessment while you're maturing in that market?

[Jeffrey Liaw, CFO & Senior VP of Finance]

So let me tackle those questions individually. First is your question as to the rest of Western Europe. It's certainly the case that we're building the muscle memory now to understand how to roll out in a market with some of the nuances and its own refinements.

Certainly, our ability to succeed in Germany will inform our approaches in other countries. So there's -- there will be additional work to be done, so it's not simply replicating the next morning and staying in France or otherwise.

But I think we have -- we will have enhanced our capabilities and enhance our reputation, and the friction should be lower for the next iterations of this approach. As for the profitability of the model, I'd first note that given the principal nature of it, I suppose, if you want to literally talk about the math on a -- because they're principal cars, they are clearly dilutive to the margin rates both on the gross line and the operating profit line.

As for how the balance of it will evolve over time, I think we just have to be patient and see in future quarters. We're not in a position to provide a forecast.

[James Albertine, Consumer Edge]

Understood and appreciate it. And best of luck.

[Jeffrey Liaw, CFO & Senior VP of Finance]

Thank you.

[Operator]

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

[Bret Jordan, Jefferies]

Good morning, guys.

[Jeffrey Liaw, CFO & Senior VP of Finance]

Good morning.

[Bret Jordan, Jefferies]

My star one was broken. A quick - I might have missed this. Did you size the German market, how many cars total there annually?

[Jeffrey Liaw, CFO & Senior VP of Finance]

We haven't. We characterize it as substantially larger than the U.K. market. For example, just by comparison, I think if you look at the metrics, whether it's population, GDP per capita, GDP, et cetera, I think we believe it's meaningfully larger than the U.K. And we view the Western European market collectively as being similar or larger than the U.S.

[Bret Jordan, Jefferies]

Okay. Great. And then a question on the noninsurance U.S. vehicle. Do a higher percentage of those go to export in the sense that there's less concern around a condition report, whether it's essentially a whole car, is your export shifting as that mix shifts?

[William Franklin, EVP, U.S. Operations & Shared Services]

Certainly, some are appropriate for the export market, but I would say that the -- without knowing exactly -- without looking it up, I wouldn't think it'd be too materially different than our normal export percentages. So 35% is probably an appropriate expectation.

[Jeffrey Liaw, CFO & Senior VP of Finance]

Right. Directionally, probably a little bit higher because -- simply because the scrap cars are sold in the States. So a local car that's going to be melted down pretty much right away will be sold within a pretty narrow radius location of the yard.

And so simply by virtue of dealer cars generally not being melted down, there's probably a higher mix that go in export, but I don't think the difference would be dramatic.

[Bret Jordan, Jefferies]

Okay, great. Thank you.

[Jeffrey Liaw, CFO & Senior VP of Finance]

Thank you.

[Operator]

Thank you very much. Ladies and gentlemen, at this time, we have no further questions in the queue, so I'd like to turn the conference back over to management for any closing remarks.

[Jayson Adair, CEO]

All right. Thanks, Chantelle. Thank you, everyone, for attending the first quarter call for Copart, and we look forward to reporting on next year, and wish you all a happy Thanksgiving.

[Operator]

Thank you very much. Ladies and gentlemen, at this time, this conference has now concluded. You may disconnect your phone lines, and have a great rest of the week. Thank you.