Copart co-CEO Jeff Liaw said on Tuesday the company, during fiscal year Q2 2023 ending Jan. 31, changed its business practices to help insurers navigate a changed market.

The changes were necessary “due to remote work volatility and driving patterns as well as across-the-board inflation,” and Copart has stepped in to help by providing more virtual inspections, loan payoff, and title services, he said.

“They’ve [insurers] made a number of business process and personnel adaptations that in many cases have proven more durable than they initially expected and now we think may persist forever,” Liaw said.

During Copart’s Q4 2022 earnings call in September, Liaw said record high prices for replacement vehicles were depressing the volume of total losses, even as driving activity and accident frequency and severity continued to rebound to pre-COVID-19 levels.

That’s the opposite of what he explained Copart experienced during Q2. “Our insurance customers [have seen] the suspension and reversal of the rising total loss frequency trend that we had experienced almost completely uninterrupted for the past 40 years. According to CCC, total loss frequency increased from 17.4% in the third calendar quarter of 2022 to 19.7% in the fourth quarter. We think approximately half of this increase was attributable to flood vehicles from Hurricane Ian. Today, as has nearly always been true, total loss frequency is rising due to a combination of two forces.

“First, repairs are more expensive and less attractive due to increasing accident severity, vehicle complexity, labor costs, and rental car costs, and secondly, salvage economics are more attractive because the fastest growing economies in the world in Central and South America, Africa, and Eastern Europe lean on our damaged vehicles to provide the mobility they need.”

Insurance volume grew 9% year-over-year during Q2 “in large part attributable to the sell-through volume from Hurricane Ian,” he added.

Liaw addressed his previous comments in past earnings calls when he predicted Copart’s sale prices would likely be compressed but would be offset by more cars.

“We’re seeing the beginnings of that phenomenon unfold,” he said on Tuesday. “Today, in our second fiscal quarter, if total loss frequency had been at historical levels, we think our insurance volume sold would have been 10-20% higher than it was.”

Outside of insurance, Liaw went on to say that Copart’s BlueCar — a collective arm of the company that covers banking, financing, fleet, and rental car segments — grew 20% during the first half of the fiscal year compared to the previous year “despite the still supply-constrained environment.” He also said Copart believes they’ve “outperformed the overall wholesale vehicle auction industry” and serves as “a valuable source of increasingly newer, lower damaged, and whole cars.”

Newly named CFO, Leah Stearns, said vehicle sales growth came from a nearly 9% fee increase and a more than 23% purchase increase.

“During the quarter, our U.S. insurance business grew relative to its one and two-year comp of 9% and 35%, respectively,” she said. “This was primarily due to the continued recovery and driving activity, increasing accident frequency and severity, total loss frequency, and share gains.”

Auction returns also remained strong during the quarter, she added. For the three months ending Jan. 31, Stearns said revenue, gross profit, and net income were $956.7 million, $426.5 million, and $293.7 million, respectively, which is an increase in revenue of $89.3 million, or 10.3%; an increase in gross profit of $23.2 million, or 5.7%; and an increase in net income of $6.3 million, or 2.2%, respectively, from the same period last year.

“Given the strong financial position, we intend on continuing to invest in our business to meet our customers’ needs,” she said. “These investments include yard expansion, new yard acquisitions, and our logistics and technology platforms. We believe that these types of historical investments have differentiated Copart as a service provider.”

During the Q&A portion of the earnings call, an investor asked if Copart expects the industry to return to historically normal unit growth rates moving forward as total loss rates continue to increase and inventory bottlenecks improve. Liaw said that’s expected but when that will happen is “harder to forecast.”

“That’s a function of the variables we talked about, which is the value of used cars and, therefore, ACV [actual cash value], or pre-accident value, as the Europeans call it — what the car’s worth before it’s in an accident, what happened to repair costs and rental car costs, and the like,” he said. “I think we have total conviction that total loss frequency will revert to historical levels and continue to grow from there. The precise trajectory from today until that point, I think it’s more difficult to forecast, but this is an unabated 40 or 50-year trend with the exception of the past 18-24 months. And so I think we do believe that it will reverse.”

Another investor was curious how artificial intelligence (AI) could, or will be, implemented by Copart. Liaw responded that Copart will likely deploy AI “in some respects.”

“If you’re viewing AI [and] machine learning, all collectively, as the future of technology and neural computing, and so forth — we do deploy some of those tools in our systems today. Most notably, for our vehicle valuation guide, ProQuote, which helps insurance carriers make the optimal real-time decisions about total losses — when and when not to total vehicles.”

He added that, eventually, FAQs will likely be replaced with AI-automated chat.

“You end up with smarter and more informed answers on some of the questions you most frequently get here at Copart so I’d say today, with our sellers and members, the questions are often nuanced enough [and] specific enough to individual circumstances, lots purchased and so forth, that it’s not a ready solution for us today, but we follow the space.”

Images

Featured image: An aerial photo of a Copart auction site in Texas. (Provided by Copart)