Conagra Brands Q2 2024 Earnings Call Transcript

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February 22, 2024

There are 9 speakers on the call.

Operator

Good day, everyone, and welcome to the Copart Incorporated Second Quarter Fiscal 20 24 Earnings Call. Just a reminder, today's conference is being recorded. Before turning the call over to management, I will share Copart's Safe Harbor statement. The company's comments today include forward looking statements within the meaning of federal securities laws, including management's current views with respect to trends, opportunities and uncertainties in the company's markets.

Operator

These forward looking statements involve substantial risks and uncertainties. For more detail on the risks associated with the company's business, we refer you to the section titled Risk Factors in the company's annual report on Form 10 ks for the year ended July 31, 2023, and each of the company's subsequent quarterly reports on Form 10 Q. Any forward looking statements are made as of today, and the company has no obligation to update or revise any forward looking statements. I'll now turn the call over to the company's Co CEO, Jeff Lejaw.

Speaker 1

Thank you. Good evening and thank you for joining us. We're pleased to report our results for the Q2 of fiscal 2024. I'll start my comments today with commentary about our business. I'll then talk about a few recent additions to our senior leadership team before handing the call to Leah to review our financial results.

Speaker 1

And then she and I will take your questions. First, on our insurance business for the quarter. We're pleased with our ongoing profitable growth with our insurance sellers, albeit with a year over year noise of a significant catastrophic event in the 1st and second quarters of last year in the form of Hurricane Ian, which I'll comment on in a moment. As anticipated, new and used vehicle prices have decreased somewhat steeply in the past few quarters, while repair costs continue to increase. Those factors have driven a strong and continued recovery in total loss frequency.

Speaker 1

For the months that comprise our 2nd fiscal quarter, we noted a 7% year over year decline in the Manheim Used Vehicle Value Index. At the same time, accident severity as measured in cost of repair increased 1.7% over that same period or pardon me, during the 3rd calendar quarter of 20 23, the most recently available measurement period as reported by ISS Fast Track. Despite the decrease of 7% in the Manheim used a reflection of our auction liquidity and buyer activity after adjusting for the removal of Hurricane Ian from the prior year. As I noted, the combination of these forces, decreasing used vehicle values and increasing repair costs has driven a recovery in total loss frequency. According to CCC, total loss frequency for the 4th calendar quarter of 2023 was 20.9 percent across all loss categories.

Speaker 1

This is up almost a full percentage point year over year and up 1.5% sequentially. As always, we continue to believe that long run trends continue to make repairing vehicles less economically attractive to insurance carriers and totaling vehicles more economically attractive to them at the same time. Our nominal U. S. Insurance volumes increased just 0.3% year over year, though largely again due to the effect of the sell through of units from Hurricane Ian a year ago.

Speaker 1

While we responded to multiple smaller weather events this year, they did not in the aggregate approach the magnitude of Hurricane Ian. Normalized for Ian's impact, we estimate our U. S. Insurance volume to have increased 9 0.2% for the period, a reflection again of total loss trends and market share growth. Turning to our non insurance business.

Speaker 1

First, we continue to grow our BlueCar business, which serves our bank and finance fleet and rental partners in the 2nd fiscal quarter of 2024 pardon me, 2024, we observed year over year growth of north of 30%. Likewise, our dealer sales volume, a combination of our CDS business unit and MPA, our powersports auction platform, Our volume increased by 21% year over year as well. All told, our U. S. Non insurance automotive volume, excluding low value and wholesale units, increased north of 30% year over year.

Speaker 1

Our growth is the result of our commitment to customer service and our auction liquidity. With each additional vehicle we earn the right to sell, we increased the attractiveness of our auction platform to the world's automotive buyers, drawing still more buyers to our auctions to the benefit of all of our sellers, new and old. I'll conclude my comments with a brief welcome and introduction to 3 new members of the Copart executive team who joined us this quarter. First, David Kang David Kong, pardon me, our new Chief Marketing Officer and Neil Madhbani, our new Chief Product Officer. Dave and Neel bring with them the experience and expertise of Global Marketing, Brand Communications and Member and Product Development on behalf of world class digital businesses.

Speaker 1

Dave's previous roles included serving as the SVP of Data Insights and as Chief Marketing Officer for Consumer Auto Finance at Capital One, as well as various roles with McKinsey and Company previously. Neil serves most recently as VP of Product at Chewy and held various strategy roles at Boxed and Staples. Together, they bring a data centric approach to strategy, leadership and customer experience that aligns well with our business objectives.

Speaker 2

I'll take

Speaker 1

a moment to thank Steve Powers, our longtime Chief Operating Officer, who is transitioning to his new role as Chief Business Development Officer. He and his team have navigated our business through years now of pandemic response, abundant storm activity and various disruptive forces in our industry. We extend a warm welcome to Hessel Verhaj, his successor as COO. Hessel was the supply chain leader for DB Schenker, one of the world's largest and most complex logistics providers, for a litany of demanding clients such as Procter and Gamble, BMW, Apple and many, many others. Hetzel will spearhead our efforts to sustain and extend what we believe to be a substantial competitive advantage in our physical operations.

Speaker 1

With a mix of new and experienced leadership, we believe we are well equipped to continue our profitable growth. Our Bedrock operating principles, of course, remain the same. We emphasize providing outstanding economic outcomes to our sellers through excellent service and auction results and to provide the best auction liquidity and experience to our members. With that, I'll turn it over to our CFO, Leah Stearns.

Speaker 3

Thanks, Jeff. I'll begin with our 2nd quarter sales trends. During the quarter, our global unit sales and inventory increased over 7% and 6%, respectively, from the year ago period. Given the relatively quiet 2023 hurricane season, this growth was a function of a partial recovery, total loss, frequency and share gain. Focusing on our U.

Speaker 3

S. Business, unit growth was nearly 5%, which reflected fee unit growth over 4% and purchase unit growth of over 10%. Consignment or fee units continue to constitute the vast majority of our US unit volume. Our insurance unit volume was flat year over year and up 9% when excluding Hurricane Ian units from a year ago. And as Jeff mentioned, our non insurance unit volume growth has continued to outpace that of our insurance business.

Speaker 3

This volume growth substantially came from dealer units, which increased over 21% and fleet rental and finance units, which increased 35%. Inventory levels in the U. S. Increased over 4% and over 6% when excluding low value and cat units. Turning to our international business, we saw unit growth of over 21% with fee units increasing 22% and purchased units increasing by over 19%.

Speaker 3

Our international business ended the quarter with inventory levels over 16% ahead of prior year. For the quarter, global ASPs and U. S. Insurance ASPs declined by nearly 5% from the year ago period and U. S.

Speaker 3

Insurance ASPs excluding Hurricane Ian units were flat. In addition, international ASPs were up about 1 Overall, our ASPs continue to show resilience compared to the more than 7% year over year decrease in the Manheim used vehicle price index for the quarter. Turning to our financial results for the Q2. Global revenue increased to $1,020,000,000 representing growth of over $63,000,000 or about 7%, including a 0.7% tailwind due to currency. Global service revenue increased nearly $72,000,000 or over 9 percent for the Q2, primarily due to higher average revenue per unit and increased volume.

Speaker 3

Our U. S. Service revenue grew by over 7% and international service revenue grew by nearly 26% for the quarter. Global purchase vehicle sales for the 2nd quarter decreased about $8,000,000 or 5% and global purchased vehicle gross profit decreased by less than $1,000,000 In the U. S, purchased vehicle revenue was down over $7,000,000 or about 9%, which was primarily due to a mix shift towards lower ASP units, while gross profit increased over $1,000,000 Internationally, $1,000,000 Internationally, purchased vehicle revenue decreased by $1,000,000 or about 1% and gross profit decreased by $2,000,000 Global gross profit increased to more than 4 $4,000,000 an increase of nearly $38,000,000 or about 9%, and our gross profit margin percentage increased by approximately 100 basis points to 45.5%.

Speaker 3

In the U. S, our gross profit margin increased to 50.2% and our international gross profit margin to 24.9%. The year over year margin increase on a consolidated basis was driven primarily by a revenue mix shift resulting from strong growth in fee units, which generate higher margins and a decline in direct cost per unit sold. On the cost front, during the 1st and second quarter of last year, we incurred cat expenses specifically related to Hurricane Ian, which did not recur. Turning to general and administrative expenditures, excluding stock based compensation and depreciation expenses.

Speaker 3

G and A spend in the quarter was over $72,000,000 reflecting an increase of over $24,000,000 The increase in G and A includes over $3,000,000 in one time costs associated with the conclusion of our CMA process in the UK. The remainder reflects the financial consolidation of Purple Wave into our results, 3rd party project related costs and the impact of investments in our technology and sales organizations to support Copart's business growth. We expect that the investments we are making in our people, processes and systems will provide us with greater operating leverage over the long run. As a result, GAAP operating income increased by nearly 4% to $380,000,000 Finally, 2nd quarter GAAP net income increased by nearly 11% to over $325,000,000 or $0.33 per diluted common share. During the quarter, we benefited from nearly $20,000,000 of incremental income as we have actively invested our cash into treasury securities, as well as a lower tax rate of 20.7%.

Speaker 3

Turning to our liquidity and financial position. Liquidity was $3,900,000,000 as of the end of January, which is comprised of nearly 2 $700,000,000 in cash and investments in held to maturity securities and our capacity under our revolving credit facility of over $1,200,000,000 For the quarter, we generated operating cash flow of nearly $162,000,000 which is a decrease of 14% from the prior year. In addition, we invested about $123,000,000 in capital expenditures with nearly all of this amount attributable to our real estate and physical transportation costs and corresponding fuel consumption. Finally, for the quarter, if you take our operating cash flow less CapEx, we've generated about $39,000,000 of free cash flow. As I've highlighted in the past, our top priority is to invest to grow our core business.

Speaker 3

To achieve this over the last 12 months, we have deployed over $540,000,000 into our real estate portfolio, fleet and technology to provide best in class products and services to our customers. And with that, Jeff and I would be happy to take some questions.

Operator

Thank you. We will now be conducting a question and answer session. Thank you. Our first question is from Bob Labick with CJS Securities. Please proceed with your question.

Speaker 4

Yes. Hi, good afternoon. It's Pete Lucas for Bob. First, just a general question. I was just wondering, can international buyers on your U.

Speaker 4

S. Platform easily buy at other auctions, say, German, Finland, etcetera? Or do they have different logins and different interfaces? Basically, just trying to understand if all your buyers are seeing global auctions equally and getting alerts on the cars they're looking for regardless of point of origin?

Speaker 1

Yes. Pete, good to hear from you and thanks for your question. In short, Copart dotcom is certainly a unified platform period. We do have by virtue in some cases of different regulatory and licensing requirements and so forth, separate registration paths for that reason. But ultimately, we are one global auction platform with buyers many buyers purchasing vehicles on multiple of our from multiple of our countries.

Speaker 4

Helpful. Thanks. And then just one more, I guess in terms of the whole car side, given the relatively recent additions of arbitration and outsourced inspections in the industry, how would you describe Copart's role in the non salvage market versus other industry participants?

Speaker 1

I think the market, as you note, is a dynamic one and looks different today even from what you might have seen 5 years ago and certainly a decade ago. And I think even our offering at the same time continues to evolve as well as we better understand and respond to the needs of our very different types of sellers. So even though we talk about non insurance as though it is one monolithic entity, as you understand, I'm sure, a bank with a repossession acts very differently from a rental car fleet, acts very differently from a dealer as well. And they in turn have a variety of different service needs and requests in terms of the degree in terms of compliance certainly, but also the degree to which we are assessing and altering the vehicles themselves. So our offering has evolved even over the past few years and will continue to evolve in response to those seller needs for years to come.

Speaker 1

So we are quite a bit more sophisticated today even than we were a decade ago, but those offerings will continue to expand in

Speaker 4

the years ahead.

Operator

Our next question is from Daniel Imbro with Stephens Inc. Please proceed with your question.

Speaker 2

Yes. Hey, good evening everybody. Good to catch up. Thanks for taking the questions. Jeff, I want to start on a longer term one on the top line.

Speaker 2

So total loss rate, I think you said at 20.9%. I believe that exceeds prior highs we saw last time before this kind of near term dip. If we dig into that data, how divergent are different carriers on your platform? Are you seeing some that are already in maybe the high 20s? And I think in the past, you've said you thought total loss rate could exceed 30% over the very long term.

Speaker 2

Is that still an applicable long term goal, I guess, as you see the data today?

Speaker 1

I appreciate the question. First, at least from memory, I thought total loss frequency had approached 22, yes, 21.7 at one point before the pandemic. So we're not all the way back though. I think that's a matter of time. To the second part of your question, there continues to be a wide dispersion of total loss practices across our insurance carrier base.

Speaker 1

In some cases because of our own customers' perceived differences of their policyholder preferences. So I think there is longstanding conventional wisdom among some folks that drivers and owners prefer to have their cars back and they will repair insurance companies will sponsor repairs of cars that they economically should not. So that behavior does continue in the industry. And as a result then, we see a pretty wide dispersion of total loss practices across all carriers, though virtually all of them have increased total loss frequency over the long haul. As for your question about where total loss frequency would can it exceed 30%, I think the answer is affirmatively yes.

Speaker 1

The economic value meaning some carriers are there today and others as used car values will even as used car values stabilize, repair costs divided by the value of cars has increased monotonically forever and we expect that to continue as well. So total loss will increase in relative attractiveness because our auction liquidity, our global buyer base keeps driving the values of the damaged cars up while repair costs also rise. So, the relative attractiveness of total loss will increase over time.

Speaker 2

That makes a lot of sense. I appreciate all that color, Jeff. And then maybe one on the financials. Jeff, I know we shouldn't extrapolate any 1 quarter, it's probably the answer, but it has been a multi quarter trend of maybe accelerating G and A spend. So if we look back in that line item, can you maybe parse out what has been accelerating and given it's a multi quarter trend here, is it kind of a fair thing to extrapolate that there may be something's changed and then that line item needs to keep growing at a faster rate?

Speaker 1

I don't the growth rate and Lia can comment here as well. Certainly, we are growing our capabilities. So, the bringing on of new senior talent and the expansion of our offering in the whole card universe and frankly our sophistication in the insurance world as well. Those all require new capabilities and we are delighted to invest in them. So that reflects some of the SG and A growth over time.

Speaker 1

That said, we continue to expect operating leverage over the medium long term. But I think we And I think the trend over time is that we invariably grow unit volume and revenue over the long haul faster and in many cases meaningfully faster than we grow G and A.

Speaker 3

And from just an inclusion of Purple Wave, we did have about a little over $7,500,000 related to incremental consolidation of that business in the quarter, which was obviously not in the prior year period.

Speaker 1

That's true. That's permanent.

Speaker 3

So that is permanent. But other than that, I would say everything else we're focused on is really to drive incremental operating leverage in the future.

Operator

Our next question is from Chris Bottiglieri with BNP Paribas Exane. Please proceed with your question.

Speaker 5

Hey, this is Ian Davis on for Chris. Thanks a lot for taking our questions this evening. First, it seems you won business with a few larger accounts in the past year. How do you think about the cadence of market share wins from here? Do you feel you have the operational capacity to onboard more accounts if insurers want to make the switch or would this likely happen after the recent wins are fully transferred over with the business?

Speaker 1

Got it. We don't comment on individual accounts, but to your broader question about our capacity to handle additional volume, we invest years ahead of the curve, as reflected, of course in capital expenditures over the course of the past 7 or 8 years. We invest ahead of the curve in the various geographies in which we do business, And so, we would be delighted to serve new volume and certainly have the capacity to do so. As you know, it's not even just the storage capacity itself. It's also the logistics capabilities trucking, both owned trucking assets as well as 3rd party assets.

Speaker 1

It's people and it's the scalable technology auction platform and buyer base. And so, to the answer more generically across all of those dimensions, it's absolutely yes. And the flywheel effect frankly applies to some of those dimensions, not just the auction dimension as well. For example, the stronger we become and the larger we become as a logistics company, the better access we have to both third party and first party transport capabilities, the better we are about deploying people to a storm and so on and so forth. So the answer is affirmatively yes.

Speaker 6

Got it. That's helpful. And just

Speaker 5

one more if I may. Ocean freight seem to be rising due to conflicts in the Middle East. Could you help us understand how rising ocean freight rates impact your business? We'd presume that international buyers in these markets would just bid less for the vehicles. Is that the right way to think about it?

Speaker 5

Are there any other impacts to consider?

Speaker 1

In a word, yes. Though, I think it's always worth commenting on what the relevant substitutes might be, right? So insofar as you're talking about ocean freight, the demand for mobility in these various countries, the countries that we sell vehicles to, which is effectively every country in the world, but the growth tends to come from what we would characterize as developing economies and their demand for mobility is real and sustained and the growth is real and sustained. So the question becomes what their natural alternatives might be and in many cases they will still ultimately turn to Copart cars as a result. And then the last comment I'd make on that front is that while ocean freight rates can rise, I think it's still systemically and naturally the case that ships mostly come to the U.

Speaker 1

S. Or to the U. K, for example, to our dominant origin markets. They come here full and they leave empty. So, it's often the case that the backhaul legs are considerably cheaper.

Speaker 1

So, the headline numbers may or may not be representative of our buyers' lived experience.

Operator

Our next question is from Craig Kennison with Baird. Please proceed with your question.

Speaker 7

Just on that shipping topic, did you have any issues in the Red Sea due to the conflicts

Speaker 1

there? No, not appreciably so.

Speaker 7

Thanks. And Leah, I wonder if you would expand on factors behind the resilience in your average selling price given the commentary relative to the Manheim Index?

Speaker 3

Sure, absolutely. So just as our overall mix shift within the underlying unit makeup of our business what's selling through the Copar platform, that is one driver. So as you think about the increase in our unit volume coming from our blue car sellers, our dealer units, those are higher ASP units. But also as you think about used car pricing coming down and total loss frequency increasing, the incremental unit that is totaled by an insurance company is inherently a higher value unit. And that's because when total loss frequency came down, as a result of rising used car prices, that resulted in the underlying borderline units falling out of the mix and those are now coming back.

Speaker 3

So as insurance companies are facing elevated repair costs, they're incrementally totaling the higher value vehicles more frequently and that's driving additional resilience within our ASP.

Speaker 1

And then I'd offer also that it is the auction liquidity you've heard us speak about on a few occasions today as well that as we as the platform grows, as we earn more blue cars, as the total volume of activity on the website grows, that draws more buyers, which has helped to sustain prices at levels well beyond what the Manheim used vehicle index might reflect.

Speaker 7

That helps. And if I could sneak in one more, Jeff, on Purple Wave. Just curious if you've made any or taken any initiatives since you've acquired a stake in that business and maybe highlight what those might be?

Speaker 1

Fair question. We're very excited to have them as our partners in their arena. The leadership team there, Erin, Susie McKee and others are terrific. And so by and large, I think I'd describe them as leading the charge with their customers, their community and so forth and doing a terrific job of it. So yes, we are finding ways to support one another efficiently, but it's principally about backing what we think is one of the very best teams in the industry.

Operator

Our next question is from Bret Jordan with Jefferies. Please proceed with your question.

Speaker 1

Hey, good evening, guys.

Operator

Could you talk

Speaker 8

a bit more about the international market as far as various country performance?

Speaker 1

Yes. I think we've seen strong unit volume really across all of our geographies. As you know, Brett, they are in various stages of maturity. The UK as a business, of course, looks a lot like ours and like ours here in the U. S.

Speaker 1

And as a result, would see the same total loss trends and with the results being driven in large part by the same factors we see here. In places like Germany and Spain, those of course are newer businesses for us and so changes there are driven also by market share wins and conversions and so forth. So there are more local dynamics specific to those countries. But I think performance across the board has improved year over year. Okay, great.

Speaker 1

And then I

Speaker 8

guess in the blue car, just the non insurance business in general, could you talk about the unit economics? Are you getting a better seller fee because you're not negotiating with a very large insurance company for high volume? Or as you're growing that business, do you charge a lower seller fee to get the volume?

Speaker 1

Yes. I think for a host reasons, Brett, we don't talk about the seller fees that we charge. We certainly endeavor to provide the specific type value as requested by a given seller and the range of service varies tremendously even among sellers within a specific seller type. So even among insurance companies, we perform a very wide range of services for folks in different portfolios for each. And the same is true on the non insurance side as well.

Speaker 1

As for the unit economics, we tend to do well in those domains because the ASPs are high, but they're also, in some cases, higher touch and more transactional by nature, as you've heard us comment on in the past, that there's something very scalable about a large insurance company, with whom we have elegant B2B integrations and so forth that tends to be less true among the smaller sellers.

Operator

Our next question is from Ryan Brinkman with JPMorgan. Please proceed with your question.

Speaker 6

Hi, good evening and good afternoon. This is Josh on for Ryan Brinkman. Thanks for taking our question. Just maybe the first question on capital allocation. Could you maybe share your latest thoughts around capital allocation and how you are thinking about capacity expansion and subcategory diversification into 2024?

Speaker 6

Thanks and I have a follow-up.

Speaker 3

Sure. I'll touch on capital allocation and Jeff can jump in. Just from an overall allocation perspective, we do focus our priority from the top of the list for our core business. So we are constantly focused on adding capacity, the ability to serve cats from a cost perspective, we're managing our yard distribution to ensure that we have optimal positioning from a cost perspective for sub haul tow. So investing in real estate, investing in our logistics capabilities and ultimately our technology platform to serve our customers is our number one priority from a capital allocation perspective.

Speaker 3

Beyond that, we do look at expanding geographically. We look at complementary adjacencies as we expanded with Purple Wave earlier this year. And so from an overall corporate development perspective, we do find ourselves with lots of opportunities to assess potential targets. However, we have a very high threshold for how we think about generating returns long term. We have an incredible track record and we patient on the capital allocation front as it relates to deploying capital through M and A and through investments.

Speaker 3

We do seek to enter into partnerships with complementary companies that can serve our customers alongside us in a very efficient fashion. And so we've done that with folks at companies like High Marley where we've endeavored to solve problems for our customers that collectively we can do more efficiently together than we can do alone. And then ultimately historically to the extent we had excess cash, we have leveraged the share repurchase program, but have done so very on behalf of shareholders.

Speaker 1

The one afterthought of that offer is that our capitalization with our clients is a distinctive competitive advantage. Our conservative balance sheet, our net cash balance equips us such that we can be patient even through a crisis. So in the midst of a pandemic when nobody knew for how long driving and economic activity would be shut down, we were able to continue our business as it stands today. We didn't lay off folks. We didn't suspend CapEx, etcetera.

Speaker 1

Our insurance clients have a long memory and they know those things. They know that when land is available for us to acquire so that we can preserve it for the industry's use for the next 50 years, they will do so gladly and proudly despite it, of course, coming with big ticket prices as well. So the point there is that capital allocation is not a subject in isolation. It's also a commercial matter that affects how we interact with our customers as well.

Speaker 6

Understood. That's very helpful color. As a follow-up, maybe would you be able to share any on ground trends that you were seeing from the recent floods in California? And if you could just give us any color on the potential profitability impact that it could have in the Q3?

Speaker 1

Thanks. Yes, I think we were all struck of course by unusual weather patterns in California relative to I think what we would all agree is long standing history in the state. We are well equipped there with again land, trucks, personnel, technology, etcetera to respond to events as they emerge. To date, we haven't yet observed events of anything near the magnitude of Ian, Ida, etcetera, as we experienced in the Northeast, in Florida, in Texas, Louisiana, etcetera. We're ready for it.

Speaker 1

And should the weather evolve in a manner that the activity becomes very elevated and on a sustained basis, you'll see us continue to invest in that as well.

Speaker 6

Understood. Thanks for taking my questions and good luck.

Speaker 1

Great. Thank you.

Operator

Thank you. There are no further questions at this time. I would like to hand the floor back over to Jeff Liao for closing comments.

Speaker 1

Great. Thank you for joining us and we'll talk to you after the Q3. Take care.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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