Good day, everyone, and welcome to the Copart, Inc. Fourth Quarter Fiscal 2017 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. .

Thank you, Travis. Good morning, everyone, and welcome to the fourth quarter earnings call for Copart. We'll also report on the fiscal year 2017. I'm going to pass it over to Jeff Liaw, our Chief Financial Officer. After a financial update, he'll give it to Will Franklin, our Executive Vice President, who will give you an update on operations.

And then finally, I'll talk on the superstorm taking place in Houston and the work taking place in Houston and Florida..

With that, I'll turn it over to Jeff Liaw. .

Terrific. Thanks, Jay. And first, our apologies to folks listening into the call for the technical difficulty that caused us to delay the call until 10:15 Central or 11:15 Eastern..

I'll start with the safe harbor.

During today's call, we'll discuss certain non-GAAP measures, including non-GAAP net income per diluted share, which include adjustments to reverse the effect of foreign currency-related gains; impairment of long-lived assets; acquisition-related fees; certain income tax benefits, foreign income tax credit limitations, and payroll taxes related to accounting for stock option exercises..

We have 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 result on both GAAP and non-GAAP bases described above..

In addition, this call may contain forward-looking statements within the meaning of federal security 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 portion of 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..

Now to the fourth quarter. It was a record fourth quarter for Copart in terms of unit sales, revenue, gross profit and non-GAAP adjusted operating income. We experienced global revenue growth, as you've noted in the press release, of 13.8%.

This is despite a detrimental year-over-year currency effect on revenue of $4.1 million from foreign operations, primarily due to weakness in the pound, which experienced a decline of 7.6% or so year-over-year versus the USD. You'll recall that the Brexit event occurred in late June of 2016..

We experienced global unit sales growth of 11.2%, with U.S. unit growth of 11.6% and international growth of 8.8%. U.S. unit growth has been driven by market growth within existing customers as well as new wins with existing customers and new customer wins as well.

Excluding catastrophic events, unit sales growth would actually have been higher at approximately 13.6%. This is because last year's sales were enhanced by catastrophic events at that time. Approximately 1% of the growth is attributable to acquisitions, which we'll describe in further detail later in the call..

We experienced global inventory growth of 10%. Even ex-catastrophic inventory from both periods, inventory growth would have been 10.3%. Again, approximately 1% of the growth is attributable to acquisitions..

Our service revenue grew by $47.3 million or 16.3% as compared to a purchased car revenue decline of $1.4 million, again, a function of our ongoing shift of principal units to agency arrangements whenever we have the ability to do so..

We grew gross profit from 145 -- pardon me, $141.5 million to $167.5 million, with an increase in gross margins from 42.5% to 44.2%, a reflection in part of an improvement in ASP year-over-year of approximately 7% in the U.S..

Year-over-year, scrap was down slightly or near flat. We again cite the American Recycler average of crushed car bodies across the 5 regions in the United States and average them over the 3 months in the quarter. The U.S. dollar was plus or minus flat versus the peso. The peso was actually up slightly year-over-year, approximately 1%.

We have also noted relative strength in the used car market. We cite the Manheim index again averaging over the 3-month period, up from 125.9 to 129.2 over that period..

Moving further down the P&L, turning to general and administrative expenditures. On a GAAP basis, we were up from $31 million even to $34.3 million, excluding depreciation and amortization.

Over half of the growth, so approximately $1.9 million on a pretax basis, is attributable to transaction expenses for National Powersport Auctions as well as the excavation assets we have described to you previously..

GAAP operating income growth grew from $106.2 million to $110.8 million or 4.3%. But here notably, that includes the pretax impairment charge of $19.4 million, transaction-related expenses of $1.9 million. Excluding those factors, non-GAAP operating income grew from $106.2 million to $132.1 million, growth of 24.4% year-over-year.

And this is despite, again, currency-related drag of approximately $1.4 million, again, due to weakness in the pound..

Net interest expense for the quarter was down from $6.3 million a year ago to $5.5 million this year due to a lower funded debt balance..

Our GAAP net income decreased from $84.1 million in the fourth quarter of last year to $70.3 million in the fourth quarter of 2017. That again is explained in large part by the impairment charges, which were $19.4 million on a pretax basis and $12.3 million on a post-tax basis..

As for additional color on the impairment charges, for those of you who have followed Copart for years, you know that in fiscal 2015, we wrote off approximately $29 million of our investment in an enterprise-wide SAP implementation. This impairment this quarter reflects largely the write-off of technology assets related to that implementation.

At the time of that write-off, we reduced the scope of our systems implementation, retaining a more limited set of SAP modules for further investment and deployment. We have recently concluded that further pursuing this more limited SAP implementation is less efficient and cost-effective for us than other alternatives available to us.

Our fourth quarter impairment largely reflects the write-off of the remaining SAP-related capitalized assets on our balance sheet..

You'll recall also that in the fourth quarter of last year, we benefited meaningfully from a GAAP tax shield created by stock option exercise -- exercises, which increased the Q4 2016 income by $11.6 million..

On a non-GAAP basis then, net income increased from $69 million to $82.9 million, growth of 22 -- pardon me, 20.2%. After adjusting for the stock split, year-over-year non-GAAP share count increased slightly from 232.5 million to 235.9 million. The majority of that increase is attributable simply to the effect of a higher stock price.

We, therefore, experienced 16.7% increase in non-GAAP fully diluted earnings per share..

Now turning our attention to the balance sheet and cash flow statement before I hand it over to Will. A few cash flow highlights.

Operating cash flow for the quarter of $144.2 million, higher than the $125 million of a year ago, due in large part to increased cash earnings as well as the use of deferred tax assets due to the realization of excess tax benefits from stock option exercises. CapEx was $47.5 million for the quarter, the vast majority again for land and development..

I also wanted to provide some color on recent strategic acquisitions for Copart, including National Powersport Auction, a leading wholesale auction services provider for the powersport segment. Our rationale in making this investment was twofold. The first is, that we believe this could be an attractive acquisition in its own right.

It was a negotiated transaction at a fair valuation for a compelling business in the powersport space. Accretive on an operating income basis to Copart right away.

We like it as a stand-alone investment because they are the unquestioned market leader in the wholesale auction arena for powersport vehicles with substantial growth potential, both through geographic expansion and market penetration. The management team there is terrific. The founder remains CEO of the business.

They have an entrepreneurial mindset and shared values between them and Copart. We also believe this is a compelling enhancement to Copart's core offering in the powersport space. You've heard us talk about our endeavors in the CrashedToys arena. This brings us a team and relationship in the powersports arena..

Over to Will Franklin. .

Thank you, Jeff. I'll provide a little color on our operational assets, our business last quarter before I then turn it back over to Jay for final comments..

Copart delivered another strong quarter. In our fourth quarter of fiscal 2017, we grew our worldwide revenue by $45.9 million or 13.8%, yet our gross margin increased by 18.4%. And excluding the impact of the impairment, our EBIT increased by 22.6%, illustrating the operational leverage endemic in our business.

Our consolidated growth in revenue was driven primarily by an 11.2% increase in worldwide volume. In North America, unit volume was up 12.5% and was driven by organic growth and market wins in the insurance market, with continued growth in our noninsurance business and our recent NPA acquisition.

On a same store sales basis, which excludes the NPA acquisition, North America volume grew by 10.9%..

While we continue to see growth in volume from our insurance suppliers, driven primarily by the elevated level of total loss frequency, we are also seeing significant growth in our noninsurance business.

Excluding NPA, which in the current quarter grew by almost 11%, noninsurance suppliers are composed of several sellers from various sectors from the vehicle redistribution ecosystem and includes franchise and independent dealers, finance companies that give us the repossessions and off-lease vehicles, charities, municipalities, equipment dealers and brokers.

In addition to the increased overall volume from noninsurance suppliers, we are also seeing a beneficial change in the mix as charity cars, which typically have the lowest gross margin per car, declined in both total units and as a percentage of total units.

At the same time, volume from franchise and independent dealers, which typically yield one of the highest gross margins per car, grew by almost 20%. In North America, we also saw an increase in revenue per car.

Buyer revenue increased due primarily to higher ASP as used car pricing was up almost 3% and a better mix of cars being auctioned, fewer charity cars and more dealer cars. We also saw an increase in revenue from sellers as we adjusted our pricing to certain sellers to more accurately reflect the value of the land utilized in our operations..

In June, we announced the acquisition of National Powersport Auctions or NPA. NPA is the largest auction dedicated solely to the nonsalvage powersport industry. It has a network of 5 facilities through which it auctions or redistributes primarily motorcycles, all-terrain vehicles, personal watercraft and boats.

We see NPA as a highly synergistic acquisition. Clearly, NPA and its team have developed an industry knowledge that we can tap to help us improve the performance of our CrashedToys brand and increase returns to our insurance customers from the sale of salvaged motorcycles.

We will benefit from the cross-pollination of our buyer bases, especially Copart's international motorcycle buyer base. While 22% of our total volume is sold to international buyers, over 30% of our salvaged motorcycles are sold to international -- into the international market, primarily in Mexico, China, Poland and Guatemala.

Additionally, we can leverage Copart's network of 169 domestic locations to marshal inventory and reduce NPA's transportation cost..

We continue our efforts to develop our international buyer base. In North America, the value of products sold to international buyers increased to 22.9 -- 22.7% from 20.3% the previous quarter and 21.1% the same quarter last year.

In this quarter, we saw buyers join us from Singapore, Morocco and Bosnia, bringing the total number of countries in which we sell cars to 117..

Turning to the U.K., we saw growth in volume of 3%. The marginal growth in units resulted in part from our decision to reduce our focus on the less profitable direct purchase program. Absent the impact of the direct purchase program volume, we would have grown volume by 5.3%.

In addition, in the U.K., we continue to increase the volume of the higher margin cars consigned to us by franchise and independent dealers. Volume from this sector grew by almost 30% and represented over 9% of our total U.K. units.

These changes resulted in a modest increase in revenue expressed in pound of 1.2%, but an increase in EBIT of 16.2% and an increase in our EBIT margin of over 400 basis points..

We continue to see meaningful progress in Germany. We are now holding biweekly auctions with cars from 3 insurance companies and one major rental car company.

Auction activity is exceeding our expectations as the number of auction participants and the number of unique bidders per auction are actually higher than those same metrics for the United States.

Returns achieved through our German auctions exceed those achieved for the existing remarketing convention in which vehicles are placed on a listing board for a period of 2 days, and the high bidder is subject to a 21-day contingency period in which the seller may withdraw an offer to sell.

We are seeing interest from several additional insurance companies and our efforts to open 6 more yards in Germany continue..

We're also seeing meaningful progress in Brazil where volume and EBIT contribution continue to grow. This year, we opened our first yard outside the state of São Paulo in the state of Minas Gerais, just north of São Paulo. And we are involved in further expansion efforts..

On an overall basis for the quarter, our operations outside North America and U.K. while profitable remain immaterial in both revenue and EBIT. At the end of the quarter, our North American inventory was up 12% and global inventory was up....

[Audio Gap].

Generally, we have seen the increased volume lead to reduction in the average processing cost due to greater fixed cost absorption. However, in the current environment, new volume is processed through new yards as most idle capacity had been consumed by the continued growth in volume..

We remain focused on controlling G&A expenses, and we are pleased with our efforts to gain leverage by limiting its growth. Total G&A expenses for the quarter were $34.3 million.

But when adjusted for the cost associated with the NPA acquisition of $1.9 million, they remain very consistent with the prior 2 quarters despite the increase in both volume and number of yards..

During the quarter, we continued our facilities expansion activity, announcing the expansion of 6 existing facilities. During fiscal 2017, we opened 11 new yards, 3 of which were outside of the United States. We expanded 15 existing facilities, and we opened 1 CAT yard, which is a nonoperational facility except in CAT event.

In total, we added almost 700 acres of capacity. Our expansion activities will continue as we believe industry trends will drive significant future growth in volume..

That concludes my comments, and I'll turn the call over to Jay Adair. .

Thank you, Will. Thank you, Jeff. I want to start by talking about Hurricane Harvey. What we're seeing in that market is a superstorm that is up there with the likes of Katrina in 2005 and Hurricane Sandy in 2012. I'm going to start by saying, I can't say enough about our special ops teams and the operations team, in general.

I've been referring to them lately as the Army Corps of Engineers for Copart. Just the mobilization, what takes place in a superstorm like this is phenomenal. I'd like to quantify that a little bit for you..

We got our first assignments on August 26. The first day, it was less than 20 assignments. Within a matter of a few days, we were receiving over 5,000 assignments a day. So far, we've taken in over 65,000 assignments. We predict in that market that we will end up taking something north of 85,000 assignments.

And we are already -- we have already picked up over 40,000 units or over half of what has been assigned so far. So we are seeing an event that has just such huge magnitude, and I want to give you some more examples of that. We're still seeing over 1,000 assignments a day. We flew in and surveyed the area.

Literally, one day after the storm took place, we were operating, up and running the day after the storm took place. And our surveillance told us that there was a lot of standing water.

And when you got that kind of standing water and you see that the dams are full, the lakes are full and it's going to take a while for the water to recede, you know that the call-in volume is going to take weeks. So here we are today, more than 20 days past the event taking place and still we're seeing over 1,000 assignments a day.

And so that's a prime example. I want to go over how we're handling the storm..

[Audio Gap].

More than 5 sites, but I'm just going to refer to the 5 major sites that had significant volume. We can store in a CAT situation like this, on average, about 100 cars per acre. So if you were to think about -- if you're picking up 1,000 cars, they're coming in 2 cars at a time on a truck.

So there'd be 500 trucks that have to be unloaded if that site is taking 1,000 cars a day. And that 1,000 cars is going to eat up 10 acres. When you think about it in that perspective, some of these members, I think, should surprise you.

We immediately took down Royal Purple Raceway, which is in Baytown, west of Houston -- I'm sorry, rather, east of Houston. You've probably seen on the news that racetrack a few times. It's a drag strip and currently has well over 15,000 cars in that site..

On the other side of Houston, we have World Raceway (sic) [ World Speedway ]. And World Raceway is just outside of College Station. So it's quite far west of Houston. But again, another site that has well over 15,000 vehicles in that site. So again, doing the math, that would mean over 150 acres at both those sites currently are full of vehicles.

We have a site in Channelview, which is on the east side of Houston. And we have another site in Sealy, which is on the west side of Houston. Both those sites will be completely full within the next 2 weeks. And we have a large Copart Houston facility. The Copart Houston facility is well over 100 acres.

And it will be completely full within the next 2 weeks. All in all, not counting Copart Houston facility, not counting that facility, we have over 750 acres of storage. We have room for over 100,000 vehicles. And as I said, we've already picked up over 40,000 units.

And we anticipate being finished with this storm from a pickup perspective in the next 3 weeks. So we're picking up well over 2,000 cars a day at the current run rate..

From a personnel standpoint, we have over 400 people that are assisting in Houston, that will be working in the affected areas. I've been down there twice. Our chief operating officer has been down there for days on end, along with vice president of ops and many other members of the team.

Our marketing department, our sales department, all down there assisting in the process. So I'd say, it's an enormous undertaking. We have over 600 tow trucks that are down there assisting on a regular basis. And we are picking up at any given time into 3 separate locations.

As we will fill Royal Purple here in the next week, we'll be transferring over to Channelview and Sealy and some of the other sites that we've got and continuing to fill World because World is by far the largest site that we've taken down..

The majority of expense associated with towing, as I said, should be completed in the next 3 weeks. And once we've got 85,000, 90,000, 95,000 vehicles, we'll see exactly what it's going to be. But once we've got all those vehicles on the ground in the next 3 weeks, the process of selling those vehicles will take place.

And I estimate or we estimate that we'll be selling very few of those vehicles in Q1. The majority of the vehicles will be sold in Q2 and Q3. And there will be a tail into Q4. I'm sure there'll be additional questions associated with that. I just wanted to give you some color on it, not to get into too much detail and leave room for questions..

With respect to Irma, I think we got really fortunate here and missed potentially what could have been a very, very tragic event. While there is enormous wind damage in the area, both heavy rain that caused flooding and storm surge from coastal waters were both relatively light considering what it could have been.

We've taken over 5,000 assignments so far in this market. We estimate this market to be somewhere in the neighborhood of 7,500 vehicles that will be assigned. And that's including Florida, Georgia and on up to the Carolinas. So relatively small number of units coming into that market.

In addition, I'm happy to say we've taken down no sublots in that market like we have in Houston. And the importance of that is just expense-wise. So in Houston, there will be significant cost associated with taking down those sublots. We usually have to pay some fairly heavy rent to take those sites down.

In Florida, Georgia and the Carolinas, we are using existing capacity. We have a mega-site in Florida with over 150 acres. That is in standby mode. Will referred to it in his opening remarks. And with such small volume coming into Florida, we don't really need to use that facility. We have enough storage at our existing sites.

So as I said, not something that is going to make a huge negative financial impact in the company in the Florida area. But as for Houston, there will be some extraordinary costs that are coming out of that, just like we saw in Hurricane Sandy and Hurricane Katrina..

Finally, I just want to comment on Maria. It's currently -- and I'm sure everyone's tracking, it's currently a 145-mile an hour storm. It's sitting over the top of Puerto Rico right now and is a Category 4. The current predictions are that it will turn northward and not hit the U.S.

However, being in this business as long as we have, we've seen those predictions be accurate and we've seen them be way off. So for now, based on the speed of the storm, we think it's about a week away or less than a week away if it is going to come towards the U.S.

And as I said, we've got ample capacity right now in Florida, Georgia and the Carolinas and then up the coast if it is to go into Virginia, New Jersey, New York, et cetera. So fingers crossed, hopefully, that turns out to sea as Jose did. And no doubt it's been a very active year so far for superstorms and for CAT activity..

So with that, I'd like to turn it over to Travis, and we will open it up for questions at this time. Thank you. .

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

This is actually Robert on for Bob this morning. On the National Powersport Auction acquisition, you had touched on it in your prepared remark.

But can you just talk a little bit more about the business model, the growth potential there and the purchase multiple you paid?.

I can address 2 of those. So the business model is that they are a -- they historically have been a wholesale-only auction platform for motorcycles. The business actually was born -- is largely serving first lenders for repossessed bikes.

Over the years, they have diversified their source of powersports vehicle and diversified beyond motorcycles as well. But today, they, and now we, source vehicles both from lenders for repossessions as well as from dealers. The buyers are largely dealers themselves who in turn would sell through their own retail channels.

That's been the business model. They've got 5 locations today across the country. We believe there is potential for growth, as I noted earlier, both in terms of geographic expansion as well as further market penetration.

The powersports arena is less intermediated than, for example, the car or the automotive universe, and so there's potential in both regard. As for the purchase multiple, historically, as you know, from Universal Salvage in '07, QCSA in '13, we tend not to elaborate meaningfully on those front.

This is a compelling acquisition to us financially as well as strategically. We believe it's accretive to us on an operating income basis. And I think that should be illustrative. That's how we think about businesses in terms of the actual cash flow and operating income delivered. We believe it makes good sense for Copart in those regard. .

And earlier in the year, you had purchased additional land in Florida for use as standby in catastrophic event.

If I understood your earlier comments correctly, it was not used for Hurricane Irma?.

It's not used materially. I think we're storing 400 or 500 cars there that hit the Punta Gorda area because that yard actually did sustain some damage. That facility that we have there did get flooded. So as a way to switch that one out, we moved those vehicles into Okeechobee there. Okeechobee got room for ... .

Another comment on our capacity in Florida. One of the reasons that we're not in need of additional sublots is because previously we had purchased a 51-acre site in Jacksonville, which we had not announced, but which we are able to utilize in this situation. .

And just lastly for me on Germany and Spain.

Anything new in the last 3 months since we had last talked that would suggest faster or slower traction than your original time frame expectations there for the greater rollout?.

No, I think all indications are very positive. I think a [ gating ] issue in further expansion will be our acquisition of real estate. We're very optimistic about the potential of that market. And as we've said before, when we talk about Germany, we're really talking about all of Europe and the EU. .

Our next question comes from John Healy with Northcoast Research. .

I wanted to follow up on the storm question. I don't think you guys directly said, but I believe in Sandy, you guys lost about $10 million or so, maybe even a little bit more than that when all was kind of washed out.

Do you expect to lose money on these storms that we saw this storm season? Or do you think it's more of a neutral or maybe even a potentially profitable event given that you guys have been so thoughtful in terms of how you improved your planning for these items?.

So John, I think that's a fair question, and we weren't -- we're not purposefully being evasive. This is something we'll talk about at the end of Q1. As you know, there are offsetting considerations here. On the one hand, we do run additional unit volume through our fixed infrastructure, so in that regard it is helpful.

But as you also know, we face elevated cost, both in terms of the towing expenses, personnel expenses as well and of course, through catastrophic leases. So there are -- those are the offsetting considerations. And again, we'll provide the color.

I know that what you're looking for, the directional answer, but we'll have to wait for Q1 and we'll elaborate much further then. .

Well, let me add one more point. The expenses and the revenues in these kind of situations are very choppy. We tend to recognize the expenses upfront.

So while we'll have well over $10 million on lease expenses at least in the current commitment, the revenue generated from the car that -- in which those cars are -- reside won't come until they're sold, most likely that will be in Q3 and Q4. So you're going to see the revenues recognized upfront and the revenues recognized in subsequent quarters. .

That makes sense. I wanted to shift gears a little bit. Something I haven't heard you guys bring up yet, but I wanted to ask about the U.K. business. I've seen a number of press reports that at least probably 6 or 7 of the manufacturers have rolled out kind of cash for diesel type incentive programs to get some of the older engines off the road.

Is that something that you think you'll be able to talk about at the end of fiscal '18 and say, hey, it was a big deal for us, and it was a boost to the U.K. business.

Are you expecting kind of a big lift over the next 3 or 4 months from that kind of program?.

We're very aware of the program. We're just too early in the process to figure out the impact this ultimately will have on our financial results. .

Okay. And then just one final question for me.

Any thoughts as you go into fiscal '18 just in terms of how you're thinking about capital allocation? You guys have kind of grown into the leverage that you've added a couple of years ago and was just kind of curious if you see yourself more weighted toward buybacks this year or continue on maybe with some opportunistic acquisition?.

John, I think that's a decision and a process that we undertake on an ongoing basis sort of with among ourselves as well as with our Board of Directors as to the appropriate places to allocate capital.

Over the long haul, you noted exactly how we do deploy capital, both through acquisitions as well as through share buyback to return capital to the shareholder. There are no imminent expectations of us taking potential action on any of those fronts. But certainly, over time, those will be the 2 paths.

And we will -- I should -- also organic investments in our own business. As you well know, capital expenditures for the past couple of years have trended meaningfully above our historical rate. So it's really that first, reinvestment in the business, one, strategic tuck-in acquisitions and share buyback. .

Our next question comes from Bret Jordan, Jefferies. .

One quick storm question just to try to get the scale. You said you expect 85,000 total assignments.

How does that compare to what you think might be the total assignments that come out of Harvey? And then as you bring these vehicles in, could you sort of talk about the quality of the vehicle maybe compared to Sandy, and then obviously talk of more truck and SUV mix down there and it's mostly freshwater damage.

When you ultimately auction these, how do you think they will stack up from a ASP versus prior catastrophic experience?.

Sure. So assuming that you try to base it on what you think your competitor process is and then you try to figure out how many vehicles are uninsured, meaning liability-only coverage, no cost, no collision coverage, so we would never see those vehicles. You're probably looking -- I know there was some numbers out there of 1 million units.

You're probably looking at about 0.25 million units would be our guess that were damaged in the storm based on what we picked up, what our competitors are going to process and based on what we believe the market to be, the liability-only coverage vehicles. So Bret, I think that was your question, I understand, how big the actual event is, okay..

As far as the types of damage, Sandy was a saltwater damage. This is more fresh water. And Katrina vehicles sat in the water for up to 7 days, 10 days. I mean, it would be -- it took a long time to get the water off during Katrina. And this is much less than that, freshwater damage.

And in many cases, a lot of the vehicles I've looked at, clearly, some of the vehicles went completely underwater, but a lot of the vehicles I looked at have only had light damage. So my guess is, that these will fare a little better than the vehicles that we sold in Sandy and significantly better than the vehicles we sold in Katrina.

I mean, if you're going to try and grade flood vehicles these would be better flood vehicles than normal. .

Okay. And then follow-up question then, to skip to the international. I think you commented that Germany and Spain is more of an EU concept as opposed to specific countries. And you said your number of bidders, I think, was exceeding the U.S. number maybe per auction.

How much of what you're doing in Germany is being sold in Germany versus traffic that you're seeing on those auctions from other markets in the EU?.

It's about 25% international, about 25% of the product going outside of Germany and about 75% is within Germany. .

Okay. And when it goes outside of Germany, does it go in the EU or are these still sort of further afield buyers, like you're seeing shipments from the U.S.

to Asia?.

Typically, the EU. Typically, Eastern Europe actually, predominantly Eastern Europe. .

Our next question comes from Ben Bienvenu, Stephens Inc. .

This is Daniel Imbro on for Ben. I want to start on NPA. Sounds like a strategically beneficial relationship.

Was this acquisition more one-off or does it signal you guys would be willing to look at more nonsalvage acquisitions in the future?.

I think as you already know, nonsalvage is a meaningful part of Copart's business today. I think we've shared some rough rules of thumb in the past and said that 80-20 would be about the right ratio for insurance and the noninsurance-related. So this doesn't signal anything new. It's a continuation of our strategy in general.

And it's also an important enhancement into our powersports capabilities in particular. You've heard us talk about CrashedToys and how important that is for us to differentiate ourselves within this portion of the marketplace.

And the reason that it is of strategic value to us is in large part because the National Powersport team brings particular expertise in that regard. .

And then maybe from a profitability perspective, how does that business compare to your like, say, salvaged business on a gross profit percentage?.

It won't meaningfully change the profile of the company overall, both because of the size as well as the nature of the economics. It's much more similar than it is different. .

Great. Great. Great. And then shifting gears a little bit, last one for me. Thanks for the color earlier on the expansion plan.

Do you have any sense how far into this investment cycle we are? Or maybe another way, how many more yards do you guys think you would need to deal with the projected industry growth as well as the excess capacity you're building out for CAT event?.

We think we need significant growth in our capacity. I mean, if you look at our average quarterly growth over the last 12 quarters, it's over 10%. If you look over the last 8 quarters, it's over 13% in a very stable used car pricing environment.

So if you look at the future and you see off-lease vehicles that could approach 4.5 million units a year at the same time you're going to see new car SAAR numbers in the 15 million. I've seen projections as low as the 13 million level.

There's been a real tight correlation between the percentage of off-lease vehicles to new car sales and the movement of used car pricing. And when that percentage exceeds 20%, we've seen a meaningful decline in used car pricing.

So if that's the case, and we do expect used car pricing to decline, then just based on the math, we expect total loss frequency to continue to increase. .

I can provide some broader color on that for you. We, including based on results over the past many years as well as the past few years, view this as a growth business fundamentally. And so the last time, I think, we shared a good concrete number was the fiscal '15 annual report [indiscernible]. We said we had plus or minus 8,000 acres systemwide.

So if the business is growing 5% to 10% and you want to maintain capacity utilization at levels where you've been before, which generally speaking you could do, it does require a substantial investment year-to-year.

So you shouldn't expect the investments to just fall off a cliff overnight, one day, so long as the underlying trend in our business is driving activity, accident rates, total loss ratios. For that matter, catastrophic event continue to yield favorable or increase the salvage result, you should expect additional land investments.

That's been the story for Copart for decades. Certainly, for the past few quarters as well and for the future as well. .

And that gives rise to a couple other thoughts I'd like to share. One is, we have a fundamental change in our approach to our business. So in the past, there was far less volatility in the number of units that we process at a car -- at a yard. And now we're seeing wild swings, not only due to CAT event, but for other reasons.

And so it was easier to operate closer to the edge, closer to 100%, 105% capacity when we knew that our yard capacity would peak the last week in January, the first week in February and then stay there for 6 weeks. Now we can't service our insurance customers with that model. So in non-CAT areas, we look at an 85% capacity threshold.

In CAT areas, we're going to go 70% capacity threshold. So that requires us to expand even further than the growth in the market would indicate. And finally, as we've talked about, we are building our business more and more around our ability to address CAT situation. That's evidenced by our yard that we opened in Okeechobee.

We actually purchased a site in Houston that's about 240 acres. We just purchased it so recently we're not able to use it in this storm, but would be available to us next year.

So along with the growth in the market, along with our change in our business model, along with our focus on being able to service our customers in a CAT situation, our need for land will continue to grow for the next few years. .

Our next question comes from Craig Kennison, Baird. .

Jeff, I had a question in terms of the cost of the Harvey event, any guidance as to what kind of costs you're incurring in the current quarter?.

Pardon me, in our first quarter or in our fourth quarter?.

The costs you're absorbing related to Harvey that is in the current quarter that we're in today. .

In Q1?.

Q1? Substantial. Well, we can't really provide much more color than that. We are incurring a meaningful proportion of the costs. You've now heard Jay and Will kind of separately describe the mismatch in timing in that you'll see meaningful costs in Q1 and Q2. You will really start to see meaningful sales in Q2 and Q3.

And as Jay noted, tripling [ in Q4 ] as well. So it will be a meaningful part of the conversation end of Q1. .

Okay.

And then as it relates to NPA, can you talk about the international opportunity you have there? And then secondly, to what extent can you use VB2 and some of the technology that Copart brings to bear?.

in San Diego, in Texas, Cincinnati, Philadelphia, Atlanta. So we believe that geographic penetration is very relevant. We've done analysis to figure out for their consignment volume how much comes within sort of X miles of a geographic radius. And we think that having a broader footprint in the United States is of a real value to us first.

Internationally, I think that's down the road and a real possibility as well. As for the technology question, they have run stand-alone company very capably and thoughtfully for many years. They've got a stable auction platform as well. As for future integration, I think that remains a discussion for future periods. .

And lastly, any update on total loss trends in the salvage market?.

As [ the fleet ] continue to grow, the most recent report was the first quarter of this calendar year by ISS and I think it was up 2%. Carpark is growing at less than 1% and -- but total loss frequency, which is more difficult to get industry information on, appears to be at -- remaining at an elevated level.

So we don't see anything that in the near horizon that's going to change the dynamics that are driving the growth. .

The next question comes from Ryan Brinkman, JPMorgan. .

This is Samik on behalf of Ryan. I wanted to start with a storm-related question.

So the 85,000 assignments that you're sort of predicting related to Harvey, I just want to see -- and maybe you mentioned this already and I missed it, what were the total assignments during Hurricane Sandy that you received? Because I thought I went back and look and I believe you had called out $20 million of abnormal costs or extraordinary costs during the time of Hurricane Sandy.

So just trying to ballpark what the current numbers would look like for this coming -- for this current quarter. .

That's a fair question, Samik, and we appreciate it. The reason I even paused for a second is, there's always math to be done in terms of "incremental units," right? You would have picked up steady-state units in a given market and how many do you actually pick up over that time.

In a time period, how much is attributable to the natural disaster itself and how much would you have gotten otherwise? Directionally speaking, I think in our annual report, at the time, we had indicated that we picked up, plus or minus, 85,000 vehicles. So I think what you've heard from Jay is directionally this is just similar.

The dust will settle and we'll be more precise about it. But in terms of the rough scale of the unit volume, I think it's -- probably think of it as directionally similar to Sandy. .

And I -- just a little bit to add. And that is, that the cost on this will be higher. The cost associated with Sandy, while high, will not -- I would argue not as high as what we're seeing in the Houston market. So we'll have more -- as Jeff said, we'll have more color on it when we disclose Q1.

But just so you're aware, the actual rent per car is, is turning out to be higher than we paid in the past. .

Okay. Okay. Got it. All right. And just a quick follow-up, can you sort of give us some color in terms of what your market share is in like Texas and Florida versus the national average because you just mentioned 85,000 assignments out of sort of 0.25 million vehicles being impacted, which is sort of north of [ 33 ].

So I'm just wondering if you have any difference versus the national average in terms of market share in those impacted regions?.

We don't comment about market share globally, nationally or regionally. I'd look to the analysts for assistance on that. I think they broadly have a reasonable picture of the marketplace. .

I think our competitor may have actually disclosed the amount of units that they thought they were going to handle in their call. And you might be able to look at that. .

Our next question comes from Matthew Paige, Gabelli & Company. .

Talking about the storms again, while it doesn't sound like it's the case now, but is it possible for the market to become oversaturated with scrap cars if too many CAT events occur closely together?.

I mean, that's an easy answer, [ no ]. I mean, these fleet vehicles are not like typical salvage because they're not damaged, and they represent a small number. We're selling over 2 million cars a year, [ 1,000 additional in a ] well over a 4 million car market, it's a small number overall. .

Got it. Understood. And then lastly for me, historically speaking, you've been at the forefront of technological advances in this industry.

I guess, is there any particular function that you're interested in either expanding or adding to your portfolio moving forward?.

Yes, we're always looking at technology to make us operationally more efficient. And I think that's a -- I think that's been our focus in the near term.

And we're rolling out a number of different features that make our yard operations operate paperless and transfer them to a more seamlessly way that allows us to serve both our buyers and our sellers better. .

Our next question comes from Gary Prestopino, Barrington. .

Jay, you mentioned that the cost of -- relative to what you're doing in Houston are going to be more than they were for Superstorm Sandy. And I just wanted to get back to that. I mean, in Superstorm Sandy, you were dealing in a highly congested area where land was expensive.

So what actually is driving the cost up in Houston beyond what you experienced in Sandy?.

Sure. It's primarily real estate. I mean, the personnel and selling costs are relatively the same. Relatively the same, meaning adjusting for inflation since the storm. Katrina was 12 years ago and Sandy was 5 years ago. But it's mainly leasing cost.

We had property lined up and long story short, we were put in a position, had to pay a little more for the property than we had originally thought we were going to pay for it. So that caused us to -- it's going to cause us to have a higher lease or rent per car expense than we expected, and that we've had in prior storms. .

Would your towing cost in Houston be more than they were in with Sandy?.

Not materially, no. I mean, again, adjusted for inflation, they may be a little higher, but other than that, towing, personnel cost and all other associated costs are roughly the same with prior storms, but costs will be higher in this event due to lease expense. .

Okay.

And refresh my memory, you guys expense the towing initially on these cars, right? You don't book it and then release it when you sell the cars, all expense upfront?.

No, the towing, in particular, is the portion of the expense for ordinary course cars, Gary. And this catastrophic event leads to additional accounting questions on precisely how much to capitalize and how much not to.

But for the typical car with Copart, that is the one portion of the cost that is notably capitalized and deferred into the period in which it's sold. .

Okay.

So you capitalize the costs is what you're saying?.

Hang on one second there, Gary. Great, Gary, clarifying question. A clarifying point here as the guys were reminding me. Revenue recognition, by the way, is a topic that you've heard a lot of companies talk about. It continues to evolve.

But today at Copart, the way we account for the tow cost and the associated revenue is to book those things when they occur. So we book the revenue and we book the tow cost in the period in which we pick up the car.

And so it is a catastrophic event, historically, the way we have accounted for it is to book the extraordinary expenses in the period immediately. We do not [indiscernible]. .

Okay. That's what I was trying to get at. Okay. .

Yes. And we provide that color on the next call. .

We have no further questions in the queue, sir. .

All right. Thank you, Travis. Thank you, everyone, for attending our fourth quarter call. And we look forward to reporting on Q1 on the next call. Thanks so much. Bye..