Good day, everyone, and welcome to the Copart Incorporated Second Quarter Fiscal 2020 Earnings Call. Just a reminder, today's conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Jay Adair, Chief Executive Officer of Copart Incorporated. Please go ahead, sir..

Thank you, Samantha. Good morning, everyone, and it's a pleasure to welcome you all to the second quarter call. I’m going to turn it over to Jeff Liaw, our President for Safe Harbor, and then I'll give you a quick update on the company, and he will give an update on financial performance.

So with that, Jeff?.

Thanks, Jay.

During today's call, we'll discuss certain non-GAAP measures, which include adjustments to reverse the effect of certain discrete income tax items, disposal of non-operating assets, foreign currency related gains, certain income tax benefits, and payroll taxes related to accounting for stock option exercises, and the effect on common equivalent shares from ASU 2016-09.

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 these non-GAAP measures, together with our corresponding GAAP measures, are relevant in assessing our business trends and performance. We analyze our results on both GAAP and non-GAAP bases.

In addition, this call may contain forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied by our statements. We do not undertake to update any forward-looking statements.

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.

Jay?.

Thank you, Jeff. For starters, I'd like to state that we have never been better prepared for the future. When we think about capacity, we think about it globally, and whether it's in Europe or the U.S., we have more capacity to date we have ever had.

This is an effort that has been ongoing for the last five years to build out a network of locations that are closer to the car, and then have more room, so that we can continue to handle vehicles that come in, due to continued total loss rates, again due to technology in cars, and due to market share gains that we have seen over the last five years.

We expect that both those trends will continue, and I'm happy to say we have the capacity to handle that. When it comes to catastrophes, whether they be small catastrophes or super storm events, there is no match for the way that Copart handles a cab.

Our preparedness has never been better through equipment that we utilize in the field, through locations where we have large facilities that can store 20,000, 30,000, 40,000 vehicles in a super storm event, to the process we've developed over the last five years, and to the technology that we deploy, it is not an understatement to say that our position in the industry is unmatched when it comes to those events.

Our people are also the best in the industry, whether it be through our tenure, as the company has achieved so many years of success now, whether it be the training, or the talent, their ability is unmatched and I put a huge, huge amount of credit on our success over the last five years and wins due to the people that run this company.

Our technology continues to lead the industry. We've been a leader in the technology space now for 20 years, moving completely online back in 2003, 17 years ago. And I would put our technology teams up against any of the tech titans in Silicon Valley.

What we have developed over the years, and what we are developing currently and that we’ll be rolling out in the years to come, we'll continue to keep the gap between us and our competitors, and offer a service offering to our customers that is unmatched.

Copart is a technology company, but we're also a land holding company with over 10,000 acres, over 200 facilities, and we're also a logistics company. We're picking up over 250,000 vehicles a month, and we do that from assignment to pick up in less than a day. Through our people, our process, and our technology, we’ll continue to win.

With that, it's my pleasure to turn it over to our President, Jeffrey L., for an update on the financials and the performance of the company.

Jeff?.

Thank you, Jay. As Jay noted, we are pleased with our results for the second quarter. It was a record second quarter for Copart in revenue, gross profit, and operating income. We experienced global revenue growth of 6% or $90 million to change over last year. Our U.S. revenue grew at 23.8%.

The international revenue nominally declined 2.6% year-over-year, but that's primarily due converting a substantial U.K. customer from a purchase-based sales contracts to a fee-based arrangement instead.

Our global service revenue grew $93.2 million or 22% year-over-year, which along with units sold, is a more accurate measure of the underlying activity in our business. As we've noted on our prior calls, vehicle sales and costs are disproportionately visible in comparison to their economic relevance to our business.

Our purchased vehicles declined $3 million year-over-year for the second quarter, or 4.4%, due primarily again to the shift of the U.K customer from our purchase arrangements to a fee-based consignment engagement. Our global unit sales grew by 13.7% year-over-year, with U.S. units growing 15.3%, and international units growing 5.7%. Our U.S.

unit growth was driven by organic growth from our existing insurance customers and non-insurance customers, as well as market share gains.

The long-term trends we've noted in prior discussions in favor of riding total loss frequency are continuing, driving organic growth from insurance customers, as the strong salvage returns we generate at auction continue to become more and more economically attractive, compared to rising repair costs.

We continue to grow our noninsurance business, as well, nominally on a unit basis 5.8% year-over-year, which reflects growth in certain seller groups, such as automotive dealers, offset by proactive capacity management efforts on our part with charities and wholesalers.

Excluding those charities and wholesalers, our noninsurance business grew on a unit basis 20.6% year-over-year. We attribute this growth to our increased marketing and sales efforts. But perhaps most notably, to the auction liquidity we achieved at Copart.

We have brought a large pool of buyers and sellers together, and the auction liquidity we deliver to our sellers, we would argue, is the very best in the industry. Our global inventory increased 7.5% year-over-year. U.S. inventory grew at that same 7.5%. International inventory growth just north of that at 7.8%.

This inventory growth was again driven by the same unit growth trends noted above, both industry growth as well as customer wins. Our gross profit grew from $208.2 million to $259.9 million or 24.8% increase year-over-year. We experienced a gross margin rate change from 42.9 to 45.2 with gross margins expanding by 230 basis points.

A portion of this is attributable, of course, to that same shift of the customer from a principle-based arrangement to a fee-based arrangement. In addition to that, we achieved efficiencies across the globe in the form of operational leverage, which helped to further expand gross margins. In the U.S.

and globally, we would again, as always, note rising labor health insurance fuel costs, towing costs, et cetera, offset also by generally benign trends in ASPs, as well as operating leverage. On those average selling prices in particular, in the U.S., our ASPs grew at 0.7% year-over-year. Our ASPs continue their growth.

That reflects, I believe, now 13 consecutive quarters of ASP growth in the U.S. That ASP lift is a product of more bidders, more international bidders, and therefore more auction liquidity. This is the year-over-year comparison, as well as an increase in mix of newer, less damaged cars.

That's a trend we talk about on our call now for years, and it continues to prove true. International bidding and buying activity, again a reflection of our proactive marketing efforts, as well as the effectiveness of our all digital auction platform, VB3.

The outcome is that we generate more auction activity, more bids per unit, and therefore, better selling prices for our customers. Just shy of 50% of the value of our U.S.

auctions are attributed or won by international buyers, and the vast majority of our units have their prices affected and lifted by the participation of those same international buyers. Turning to general and administrative expenditures, I'll speak about them, excluding stock-based compensation and depreciation.

They are up from $33.2 million a year ago to $39.2 million this quarter. It's also up slightly sequentially by about $400,000 relative to the first quarter. In general, G&A expenditures will fluctuate and grow over time, as with other numbers on our P&L and our cash flow statement.

We can only encourage folks to take a multiple quarter view in projecting the business. We continue to believe we can achieve operating leverage, given the top line growth rates we have experienced in recent years.

We do believe there are -- as with yard cost, there are certain inflationary pressures here regarding labor rates, health care costs, and the like, but we believe we can achieve operating leverage, nonetheless.

Our GAAP operating income grew from $164.7 million to $209.9 million, or an increase of 27.4%, reflecting 250 basis points of operating margin expansion. Our net interest expense is roughly flat year-over-year at approximately $4.5 million.

Other expense slash income of $400,000 in this case, largely attributable to currency gains, offset by losses from certain non-consolidated equity positions of ours.

Our second quarter income tax of $36.4 million reflects a $14.8 million tax benefit on the exercise of employee stock options, which has been reflected as such in the non-GAAP earnings included in our release from yesterday.

GAAP net income increased from $131.4 million to $168.7 million for the second quarter this year, or an increase of 28.4% year-over-year. And finally on the P&L, our non-GAAP net income decreased from $124.9 million to $153.5 million, growth of 22.9% year-over-year.

Turning then to the balance sheet and cash flow statements, we finished the quarter with $93.5 million of cash on the balance sheet at $320 million in change of net debt. We adopted a new lease standard, as you likely know already, this year -- last quarter, in the first quarter of 2020.

And we now show $104 million as an operating lease right of use assets with the corresponding $105 million liability on the balance sheet as well. On the cash flow statement, we generated operating cash flow of $144.5 million for the quarter, an increase of $37 million, driven principally by higher earnings year-over-year.

Our capital expenditures of $269 million in the quarter. The strong majority of these capital expenditures were for capacity expansion, per our practice in recent years. I'll note here that we continue to invest aggressively in capacity expansion to serve both industry growth, as well as our market share wins.

As we discussed in great length in the past, permitting is a complex and collaborative dialogue with the communities in which we do business. So, the timing of the completion of certain purchases is always subject to lumpiness in our cash flow statement.

We will invest millions, and in some cases, tens of millions of dollars at a time for single assets, single site completions. We're delighted for ourselves in our customers that we’re able to achieve and to execute this past quarter's worth of capital projects.

That said, even in this capacity growth period of Copart's history, the quarter obviously is an outsized CapEx quarter for us. We would look to the last few years as more indicative of our general run rate in a growth period. With that, I'll make a few final comments on our efforts in Germany, and then we can open it up for Q&A.

Regarding our efforts in Germany, our strategy and approach continue unabated. We are investing very substantially in people, and technology, and in lands. We continue to source cars as a principle to build liquidity, and we're getting progressively better at it..

However, the real long-term objective remains unchanged, as well, which is to earn consignment volumes to serve the insurance industry there, both for the carriers’ direct economic benefits and lower claims costs, as well as their benefits in improved policyholder experiences in the cases of total loss.

We have active dialogues with decision makers at major carriers, and have sold cars on a consignment basis for the insurance industry in Germany. We look forward to discussing that further with you on future calls as well. With that, Samantha, I'll ask you to open it up for Q&A..

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

Good morning. I just wanted to start on the last call you alluded to helping some carriers optimize their claims process.

Can you talk more about that how it's going? Have there been any initial results or is that a long-term game plan, is that a 2020, 2021? How should we think about that?.

Bob, I'd characterize that is a 40-year journey. That's something we do literally every day. We may have spoken about it in somewhat greater detail on the last earnings calls, but we view it as-- our principal job is to improve the claims process and economic outcomes for our insurance customers and there is in term.

So there are certainly individual products that we have in the queue, products we have released, products that we are already selling, but I wouldn't view that as a discrete change per se in what we do, Bob just an ongoing purposeful commitment to that very outcome..

Got it. Okay, thanks. And then you just spoke about obviously the highest CapEx quarter you've had. Was all the land in the U.S.

is this international as well? Are you still looking to keep a similar pace in the last two years going forward? Can you just give us little more color on that?.

The vast majority of the capital expenditures will be in the U.S. with some internationally, but the vast majority will be U.S. So I called it out because it is obviously a much higher rate that we have incurred in recent years.

We have announced our 2020 initiatives in April of 2016 if memory serves, so approximately 4 years ago we began this aggressive capacity expansion phase in our history. I would look to the past few years as more indicative of the run rate of our expenditures in this capacity growth phase more so than this past quarter.

It is the nature of the beast, Bob, as you know having been in the industry for a long time that CapEx is by nature is lumpy because you closed on our property that could have been literally tens of millions of dollars and then or is delayed by 6 months. And so the tens of millions of dollars of expenditures await you in a few quarters time.

So we don't endeavor to smooth it. We simply want to acquire and develop the land, so we have it available for our customers and ourselves as soon as we can and sometimes it happens all at once..

Got it. Okay, great. It sounds I guess crazy to ask this given I think 14% volume growth in the quarter and for several years, double-digit volume growth.

But are you currently constrained on growing faster based on your capacity? Have you reached equilibrium now that you're just acquiring new capacity for future growth? Can you talk about where you stand if there have been constraints before, if you've reached what you need to get for current levels?.

So it's a fair question. I think as Jay noted at the top. We've invested in the land, so that we could serve our customers exceptionally well across all markets if and when they are ready to do business with us. So that’s our commitment to them which is also as you may have heard during the discussion there within certain noninsurance sellers of ours.

We've made proactive decisions to free capacity in that respect for these critical insurance customers in particular. I wouldn't say it's been a gating factor, Bob. But it has required us to make an all hands on deck effort to acquire and develop that land..

Got it. Okay, super. Thank you so much..

Our next question will come from Craig Kennison with Baird..

Good morning. Thank you for taking my questions. I wanted to ask about industry trends, what you're seeing in terms of claims activity and the total loss rate and how you see that unfolding in 2020..

I'll take a bigger step back, Craig and make a broader observation. I think we are seeing claims activity that's relatively flat year-over-year in terms of the nominal claims.

So these are the same data points I'm sure that you track already regarding certain carriers who disposed probably their claims results as well as certain industry aggregators to do the same. Over most of our 40-year history, I think we've seen claims frequency generally decline. Very modestly over time as cars get safer perhaps drivers get better.

One anomalous period for that trend of course was 2011-2016 when smartphone penetration -- smartphone distraction was perhaps at its peak but otherwise, for most of our 40-year history, accident frequency has generally declined over time.

However, the one way tailwind in our business as you know has been total loss frequency, which has increased very steadily over time. I think individual months and quarters are tough to measure.

I think there is always going to be a lot of noise in that number, but I think if you take any kind of step back at all, you can see that trend continues to move up and for reasons I think that become reasonably clear once you dig, they have set below the surface, which is that the cars are becoming our cars are becoming more sophisticated over time or technologically involved and, therefore, all of the sensors and cameras and the motor car, making it more difficult to prepare.

So, repair costs are rising, which makes repairers less compelling while at the same time our auction liquidities improving our international buyer base is expanding.

So, quite literally at the same time prepares are worse salvage is literally better which is what it's driven total loss frequency increased sixfold -- fivefold sixfold over the past 40 years and why we think it will continue to rise over the years to come.

I expect that in 2020, I know there's a bit of a long-winded answer but I expect that this year, but frankly for years and decades to come..

Thanks.

And then looking at your European business, and European car park, are there is substantial differences in the constitution of that car parks such that we'd see a different trend in total loss rate or claims frequency?.

In the broader strokes, no. There certainly are local and country-specific idiosyncrasies that can affect exactly how we enter and how we participate. But in broad strokes, no. The cars are similar, the underlying drivers that's make the total loss such a compelling economic proposition here in the U.S.

and in the UK are by and large true there too, which is to say, high-labor prepare high-labor cost repair costs vehicle complexity. And frankly, again emerging and growing it demand for those same brand of cars..

And lastly, how would you frame the conversations you're having today with European insurance carriers versus those conversations maybe a year or 2 ago, now that you've got sort of assets on the ground and an active platform working in Europe?.

Fair question, Craig. [Indiscernible] much more productive. It's one thing to discuss analogs to the UK and the U.S. and why the economic proposition can or should be compelling. It's another matter to have yards open, people engaged telling cars as well as by the way, actual sales results at auction which demonstrate the superior economic outcome.

So, literally buying cars on the platform, they're using and trading a profit on the ground in Germany to buyers outside of Germany, in many cases is the most compelling argument of all. Which is not a Germany, can be like the U.S. is that Germany on February 19, 2020 February 20 is delivering auction of X, Y, Z.

So the conversations have advanced in part for that reason..

Our next question will come from John Healy with Northcoast Research..

Thank you. I wanted to ask you guys about the comments you made about technology. Clearly, you guys have led the industry for a long time on that front. And when I think about kind of the last few years, I feel like you guys have made some nice upgrades to the buying and selling applications.

I was hoping to understand from a technology the endpoint where you guys are pushing the envelope? One area that kind of I've always thought about and we talked about that potentially could create service benefits would be if titling with the states could become a little bit more seamless and maybe you guys could develop applications there.

So, just trying to understand on the back-end side of things, what technology can bring to the industry? And that said, if you bring technology into the industry, potentially cars move quicker, does that a road some of the economics that you guys have been able to benefit from associated with the storage and the vehicle for the extended period of time?.

Thanks, John. My answer to you probably be similar to what I said to Bob, which is that that is a non-stock investment for us when there is technology to improve outcomes, in particular for our sellers.

And for them, outcomes means, in the ordinary course, shortening cycle times, allowing them to close claims more quickly selling the cars -- well, titling them we're treating the original titles processing the salvage side of state more quickly and therefore auctioning network quickly to a global liquid platform.

That there are literally dozens of steps in that process, each of which has its own process and technology to do best for us internally. So the answer your question, broadly, yes, the technology is by far our single biggest Copart investment here besides our land.

If you were literally to walk through Copart headquarters and meet with group by group you find the technology group is overwhelming just a numbers and resorts expenditures. So, it has been a huge part of what we do, we talk about it, frankly more with our sellers than we do on calls like this, but it is our single biggest Copart investment..

And I might have missed it, but I probably did.

Did you guys mention what inventories were at the end of the quarter in the U.S.?.

Inventories [Technical Difficulty] 7% year-over-year..

Our next question will come from Daniel Imbro with Stephens Inc..

Hey, good morning guys. Thanks for taking my questions. Jay, a quick clarifier on your opening comments. Talking about capacity growth and incremental market share.

Are you seeing incremental market share out there today? Are there any large contracts coming up for RFP in the next year or was that just to comment on kind of overall strategy and recent trends?.

Well, we never get into specific clients or talking about, whether they're up to tender after RFP. But we have succeeded historically at having market share wins and the point I was making is twofold, one that we have the capacity to do that going forward and the second was I anticipate that trend will continue.

I think the other thing I was going to add on the previous question, there was a comment about whether or not if we sell vehicles quicker, if that would be detrimental from a storage standpoint. And for the most part, we benefit when vehicles are sold quicker.

Our goal -- just so that all the investors understand, our goal is to move those vehicles as quickly as possible for the customer services vehicle generates a higher return and storage or storing vehicles an insignificant part of the business. So, I wanted to just add some clarity on that..

That's helpful. And then, Jeff, maybe a follow-up, you continue to call out a benefit from this mix shift within non-insurance towards dealer and off ways away from municipality and charity.

How far along in that mix shift are we? Should that continue or have we largely phased out a lot of the legacy municipality charity toward that should be more steady state, kind of, going forward? What's the right mix longer term, strategically?.

Complicated question. We of course value our customers across all of these categories. We just also do face somewhat some resource constraints from time to time and to make decisions accordingly. I would think of that shift as largely complete.

And we don't want -- the best level of detail we can get into what happened which quarter and how did this quarter took to remodel year-over-year. But I would think that -- I think about is largely complete..

That's helpful. And then just one last one from me.

Historically, if we look at warm winters 2012-2017 there does tend to be some negative impact on volume growth in the coming quarters just due to less accident frequency, are you guys thinking that this winter should have any kind of impact on your results today in the back half of the year or industry dynamic strong enough to where we should really see that show up in this business.

Thanks..

Yes, it's a very fair question. We tend -- with the exception of, of course, extreme weather events, we tend not to talk about whether because it sometimes feels like it's to both difficult to quantify and becomes an explanation of that could become an excuse for factors in the business.

I do agree with you that it was by all measures, a benign winter higher temperatures lower precipitation at least across the United States and that, yes, therefore, that generally means fewer claims at the top of the funnel quantifying that precisely, I don't know. Inventory was up 7.5% year-over-year nonetheless.

So, whether that was depressed by temperatures precipitation is a judgment probably better left to others and to me personally..

Thank you. Our next question will come from Stephanie Benjamin with SunTrust..

Hi, good afternoon. Jeff, I was hoping you could talk a little bit more about what you're seeing on the call it the pricing or revenue per unit side of the equation. I think you called out another quarter of ASP growth. But on a year-over-year basis maybe is a little bit slower from some historical trends.

I think some are kind of calling for some declines and used vehicle pricing this year. I don't know if that's going to materialize or not, but maybe if you could speak to that side of the equation on the pricing and revenue per unit side and what you're seeing in the market. Thanks..

In that, I think you're asking really about two different economics phenomenon, one of which is the selling prices for our cars at auction.

That itself is a function of both cyclical and secular forces, some of which you mentioned is cyclical x variables that can affect selling prices of cars our auctions of course include used car prices, as you noted, currency fluctuations and the like, among other things.

The second, of course, is we think are that total loss frequency rises, and as total loss frequency rises, we get more marginal totals, more drivable cars that would drive ASPs up. So the combination of the two over the very long haul, we think will drive ASPs up in any individual quarter or year, month, week, day, etc.

The projects become perhaps too fine to pass all of those variables. But generally speaking, we believe the secular tailwinds are ultimately net debt. The second part of your question on revenue per unit, that's not something per se that we express we disclose. We of course drive revenue -- we drive unit volume as much as we can.

Revenue growth also with the addition of services we provide to both sellers and buyers..

And then I just had a clarification, I know that’s twice, I apologize for hearing it but on Germany, did you say that you were testing some consignment models are testing that consignment model with some carriers in Germany or did I miss that twice. So just a clarification..

We have sold cars on a consignment basis insurance carriers in Germany. That said, we also continue to purchase cars through our principal activity is continuing as well as we build the physical infrastructure people-based and technology and talents to serve that industry long-term..

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

Hey, good morning, guys.

When you think about the inventory growth in the quarter and you had some pretty big share gains last year, is there any way to look at what was the contribution from new customers versus what was core legacy-ish inventory growth?.

I would characterize -- well, I think that's a level of detail, we probably would get into. But I would, the way characterize it is that there was both underlying market growth as well as market share gains in that year-over-year number..

Okay, great.

And I guess we don't talk about of scrap pricing anymore, but do you see any impact, I guess from the Chinese market demand, relative to what's going on with Corona virus? Is there any pending volatility on scrap price there?.

I'll answer in two parts. Scrap price maybe effect on Copart I would say is largely de minimis. So the Chinese buyers in part for regulatory reasons but are a very tiny portion of our overall sales below percent when I last year. So they're are not insignificant buyer of Copart cars.

That said, Corona virus, obviously, will not necessarily observe specific national borders. So, if it spreads there could be in effect downstream but today's no..

Okay and then just one question on Germany, what's the total acreage there? I guess when you think about the yard size in Germany, I think about being somewhat smaller than the U.S. yard.

So, I guess is it better to think about it in acres versus locations?.

Probably so, though not something we would discuss. Yes, we are investing in acreage. I think your intuition generally is correct and that our yards would be smaller today in part because we needed to get going. The lead time here in the U.S.

and for that matter in Germany to develop acre parcel for vehicle storage is long and we work like to wait to do that. So, we had gotten achieved operations in a number of facilities there more quickly by starting with smaller facilities and some cases mixing [ph] them..

Our next question will come from Gary Prestopino with Barrington Research..

Good morning, Jay and Jeff, how are you? Hey, could you tell me, just as a percentage of the vehicles you're selling, insurance versus noninsurance, how is that mix changed.

I mean, what is the current percentage now versus where it was maybe last year?.

The current percentage is approximately 2a% and I think a year ago, it was a little bit north of that. There was some seasonality to it -- but not year-over-year. It's not seasonality. So a year ago was 22% I believe and now is 21%. And that's partially a function of the shift within non-insurance that we just talked about a moment ago..

And as you -- one could assume that most of the growth there is dealer cars. Correct? If the growth is for dealer cars..

That is a meaningful source of the growth in our non-insurance business. Yes..

Do you have the capability, and I probably should know this, but I'm asking the question, with the dealer car, do you have the capability to sell it at the lot, their lot or do you have to take it to one of your facilities to sell it?.

So, there are, let's say, probably the safest way to -- the best way to characterize it is that we are exploring multiple ways to service those automotive dealers. I think clearly from their perspective today, our principal value proposition is the buyer base that we offer in comparison to other offerings in the marketplace.

For example, we have a global buyer base. We already have the post booking from all over the world and that is the value we offer. And how we deliver that and whether physically we require as deep or not, those are all variables that are relatively simpler to manage, quite candidly, Gary.

But I think the value proposition side, I think it's clear and how we deliver it we are experimenting with a number of different avenues..

Thank you. Our next question will come from Derek Glynn with Consumer Edge Research..

Thank you for taking the question. I actually had a follow-up on the non-insurance business and specifically your relationship with independent dealers. I'm curious how the vehicles sourced from them or that purchased by them at your auctions differ from their own core inventory offering at retail.

Are there any key differences in terms of age or quality? I'm just trying to get a better sense for how they're leveraging your platform..

I think the trends would be hard to draw very broad sweeping ones, but I'd say in general, of course, if they do there tends to specialized X and receives a trading and brand Y, that would be a natural car too to process through a Copart or consign to Copart auction.

But I think you finance are all over the map and automotive dealers sometimes simply wants to achieve near-term liquidity and cosign a number of cars through us, so you will see a wide range sometimes damaged cars often in tax cars that are perfectly drivable, sometimes both cars under facilities, sometimes newer ones as well.

It's tough to provide rules on that..

Thank you. This is the last call for questions. [Operator Instructions] Our next question will come from Chris [ph] with Wolfe Research..

Hey, guys, thanks for taking the question. A question for you on the European rollout. So it sounds like you have -- you are proving out the capabilities and the data to the insurers right like with actual data and actual service.

So, besides like the right type of highly regulated industry like what are the other friction points that are preventing insurers from acting more quickly given what's presumably compelling data? And then two, once they've made that decision, how long is it take for them to like changes that disposition model and on board? What's kind of the timeline of conversion once they've decided that this model's a better model?.

I think the single biggest barrier, Chris, is simply inertia, which is that it's been an insurance industry that is accustomed to a set of historical practices literally for decades, from their interactions with their policyholders all the way back through claims. So the practice habits are difficult to break.

We do believe that when carriers shift meaningful volume in this direction and improve the policyholder experience, that there certainly should be some momentum built that causes it to accelerate from there. But speculating as to exactly what that conversion time frame is tough to do. But the barrier I think is more habits than anything else..

Got you. That's helpful.

And then can you help us think through kind of the CapEx, the implications of CapEx on kind of yard op cost? I mean, the CapEx has been super robust lately, but how does that translate near-term? Is there [indiscernible] to lag, or how do you basically translate the CapEx to yard up cost in the coming quarters or years for that matter?.

I think if you had access to literally every data point inside our company, that would be too noisy a correlation to try to draw. So CapEx, I'll just give you some directional indications.

CapEx, when we open a new facility is net helpful because we -- certainly the new site is closer to some of the seem to be accidents or the repair shops where the cars are being retrieved from. So, we would achieve immediate savings in terms of the retrieval of the vehicles.

We may achieve savings because there are yards that are very congested nearby, and therefore are incurring extra labor costs and the likes to manage the vehicles inside the facility. However, of course, opening new facilities incurs some level of quote fixed costs, including utilities, and telecom, management's labor, and the like.

So, there are puts and takes. I would say across the system, the CapEx, we are opening enough new facilities, expanding enough current facilities, and have done so very steadily, that the effect in any given quarter won’t be that pronounced.

It’s one reason you don't hear us discuss -- we don't explain gross margin variations or cost variations because a facility’s newly opened. It's now a big enough set of facilities that the opening of any given set in a quarter does not affect the financials visibly any way from where you sit..

Got you. That's very helpful. All right. Thank you for the time..

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

Yes, thanks, guys. I actually have a follow-up. Jeff, a quick follow-up on the European market commentary. While the car park is similar, I believe alternative part usage is lower, particularly in collision repair in Europe.

So, I guess the question is, is there an existing collision salvage market place in Europe to support traditional salvage volumes, or would the units you sell over in Germany -- or what you're selling in Germany more of the run and drive vehicles today?.

Industry observation I think is fair, which is that alternative parts utilization in Europe is considerably lower than here in the U.S. That said, there are clearly cars that economically should not be repaired, and so even within Europe today, they we will find a home one way or the other.

There are cars that are 110%damage, which you could not possibly justify the repair cost restored back to [Technical Difficulty].

The economic value proposition for the carriers is that we can help them achieve full and fair value for those salvaged vehicles, whether it will ultimately fuel dismantling, or simply be scrapped altogether, or be rebuilt and re-driven again somewhere else.

We simply help the carriers to achieve that full fair liquid market value, as opposed to today's traditional pattern of disposition which don't do that. But I think your industry observation is fair. But nonetheless, there are still are many cars that are totaled in Europe today..

Makes total sense. Thanks so much..

Thank you. At this time, I am not showing any further questions in the queue. I would like to turn the floor back over to the speakers for closing remarks..

Okay, thank you, Samantha. Thank you, everyone, for attending the call. We look forward to reporting Q3 in the next quarter. Thanks so much. Bye-bye..

Thanks, you guys..

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