Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:05:33} Thanks for doing this. Can we just jump right into it? Tell us more about how you came to Copart and what you did there, and we'll explore from there.

{audio:0:05:56} Actually, it's a bit left-field because my career history before Copart was all financial services. I'd worked in banking for a while and insurance for many years. I worked for a large multinational company called Zurich, one of the world's largest insurance groups. I think in the States, they're Farmers. I'd worked mainly on the investment side rather than the general insurance side. I was with Zurich; I went for the big job in Asia and didn't get it. I was rather disappointed with that. It was more of a political appointment, so instead of disappearing, they tried to appease me by giving me the role of running the Middle East and Africa, a newly formed region for the Zurich group. Early 2008, there were many intentions and plans to try and plant flags and open new businesses across the region, which excited me because I was very much about creating new markets and launching new things. It's something I've always enjoyed doing.

{audio:0:07:24} We didn’t want to leave Asia. We adored living in Hong Kong, but from a career perspective, I had to move, so we went to Dubai. But by the time I started the job in October, the world had pretty much fallen apart with the collapse of various banks and the crisis, so it was more about holding onto the furniture than going out and trying to spend lots of money on new stuff. The role didn't ever develop. I was doing the same role that I had been doing in Asia, and I felt a little bit peeved about that because we very much preferred to live in Asia.

{audio:0:08:15} I became a bit, I guess, vulnerable after being an incredibly loyal and longstanding member of staff at Zurich, and I was poached by another Swiss insurer to basically try and copy the Zurich international model. I thought that sounded good; I could do some of that. I employed people worldwide, in South America, Asia, the Middle East, and Europe. Then about a year into that, they got into some capital issues with some underwriting of business in France and had to pull the plug on the investment into this whole new international business. I found myself going back and having to make everybody I've recruited redundant, including myself.

{audio:0:09:02} I was then playing a lot of golf and enjoying relaxing with my wife and kids, and basically, I stumbled across a headhunter looking to appoint somebody for Copart. They had a drag racing sponsorship at the time and had won a championship – by their admission – completely by chance. Through this, they got to know a Bahraini individual who was the second son of the head of Bahrain. This chap was good friends with Michael Jackson, he owned a drag racing team, and he found out what Copart did. He said, oh, my God, we need you in the Middle East. They were trying to move into the Middle East via Bahrain as the headquarters, but just at that time, the Arab Spring kicked off, and they realized they were not going to get anybody in Bahrain, which is like a village, really.

{audio:0:10:12} Correct, this was around the summertime of 2011. They made a couple of trips out there early in the summer. I said I was happy to go and have a chat with them because, at the time, I didn't know anything really about general insurance. I knew the insurance world and therefore understood its basics, and I had all the connections in the insurance world. I had all the CEOs' numbers, they knew who I was, and they knew it was probably worth answering.

{audio:0:10:48} I got to know Vinnie Mitz, who was president of the business and driving the international expansion program, and I became the first employee for the Middle East. The headhunter, Korn Ferry, had said, you're not going to get anybody in Bahrain. However, Dubai is much more international; it's certainly a place where many more expats are keen to live because of all the toys that come with living in Dubai that they've set up. They found me, I found them, and by the end of the first meeting, I was so intrigued with this business that I had no idea even existed in life, let alone how successful and how good it was at what it did.

{audio:0:11:36} Next thing, I had a couple of conference calls, and they put me on a plane and flew me to what was Fairfield, north of San Francisco at the time, which was where the head office was. I got on well with Jay and instantly hit it off with the rest of the execs there, and I joined in August 2011. The rest is history. I was employee number one for the Middle East. I started the business. I negotiated licenses, customers, product suppliers, and service suppliers.

{audio:0:12:20} At the same time, Vinny was driving expansion into other major markets that seemed very obvious, China and India. India was a basket case, to be honest. I was given India to go over there and work out what the hell was going wrong and why it wasn't working. I was also involved in a lot of the decisions, strategy discussions and capital allocation meetings for European expansion, which is much more of a strong point of Copart's external exploits outside of the US. A big part of what was the capital allocation management group, whenever in the US, in Dallas, I was always involved in the meetings and asked to be involved in decisions on acquisition targets and all these kinds of different discussions. I've been part of the executive team for many aspects outside of my direct sphere of influence in the Middle East.

{audio:0:13:32} When you were in the Middle East, how did the business model work there? I imagine there are some differences from the US version.

{audio:0:13:44} One of the good, fundamental parts of what worked well for us in the Middle East was at least they had adopted the direct settlement model in so far as insurance claims were concerned. Hence, an accident happens, the assessment takes place, and the insurer makes a decision. Either they repair because it seems economically viable, or they do total loss, as you would call it in the States. In the case of a total loss, they pay the customer their money, and the customer merrily runs along to buy a new car. In the meantime, behind the scenes, Copart takes care of the junk. At least, as a concept of an insurance process, it was a known process.

{audio:0:14:28} There are other challenges in places like Europe and India and basket cases like China where it's not what happens in the same way, and they net settle. They find out the vehicle's value, and they say, you can get this amount for your vehicle. Take this vehicle to here, you'll get paid by this person we'll give you this much, and we'll give you the balance. It's not a particularly nice experience for a customer who has just been through a potentially traumatic accident and has to deal with potentially unscrupulous partners who then might try and negotiate that amount down. Whereas with indirect settlement, they get the check, they don't have to worry about the piece of junk that is the result of the accident, and they move on – hopefully, in a pleasant way – with life and get on with their new vehicle. That at least exists in the Middle East as the basics, but the concept of auctioning in a transparent, open market way was pretty new to the market.

{audio:0:15:33} We came along, and there were no new auction licenses available at the time, so I had to negotiate. We ended up acquiring an existing business, but for a very small amount of money because it was effectively defunct. It wasn't trading. They were selling the odd 20 cars a month if they were lucky, mainly by hand-selling. We came along. We bought the license, we instantly rebranded, renamed, and started to educate buyers in the market. Look, we're running these open-cry auctions from the back of a bus like it still happens in some parts of the world, but get used to it. There still are thousands and thousands of Copart buyers and IAA buyers that exist in that region that were already buying tens of thousands of cars online through auctions in the middle of the night from US jurisdictions, from US sites.

{audio:0:16:50} One of the big opportunities I spotted was that we had a huge customer base we could instantly tap into. We started to provide domestic services to these people that transformed their lives. We started to create some lovely revenue streams, just simple things, like a settlement for vehicles you had bought through Copart US. We could now offer you the ability to pay in local currency in the UAE, Oman, Bahrain, Saudi, and during the same banking week as you were used to in your own country, rather than in the western world's banking week. This created issues because you potentially had three days in which to pay. Still, banks weren't working at the right times. You could start to incur storage charges from Copart in the US for not having settled, and it's just because the banks weren't open at the right times. We transformed all of that.

{audio:0:17:49} The other opportunity, of course, was shipping. Many brokers exist; domestic brokers in the US have domestic licenses in various states across the US that have their own licensing peculiarities. Some of these brokers operate nationally and therefore make a margin on consolidating shipping and moving tons and tons of containers and vehicles through. We started providing our own shipping services, which again started to offer a nice little margin to Copart, which was also convenient to the customer because they could make one payment at the point of sale, boom. I paid for the car. I paid for the shipping service. I can sit back and know that I can trust Copart to deliver the car to me in Dubai, Bahrain, Oman. That was quite a nice little value add as well.

{audio:0:18:47} In addition to taking cars from the local market, the junk, you took cars that people had bought in the US and had shipped. You were taking care of all of that as well.

{audio:0:18:59} Absolutely, we acted in both ways.

{audio:0:19:03} Where did the junk that you acquired locally go? Did that go to Africa or other markets?

{audio:0:19:12} The biggest buyers were Afghanistan and, depending on when the borders were opened, the likes of Iraq and various parts of Africa depending on right-hand and left-hand drive markets. Predominantly, I would say, into the rest of Eastern Europe and the Middle East.

{audio:0:19:39} When you started, Copart had nothing there, but it sounds like IAA was already there when you started the Middle East business?

{audio:0:19:47} IAA had tried to come in and establish itself as a domestic player but had failed. I'm not 100% sure that I know exactly why, but one of the major reasons was that they came in saying they were going to replicate their US model but never committed to investing in the region. Copart's fundamental value add – and why it's nigh on impossible to ever replicate Copart's model – is its land. It has sites across the US; 230 different sites across the US. Back in the day when Willis was buying up the land all over the place, it may have seemed to be quite far out of town. But now, these cities and towns have grown and swallowed them up, and you can't get that land anymore. It's financially impossible to buy or lease the land at a cost that makes the transportation model viable, so your margins just don't make sense anymore. Actually replicating what Copart has done – and IAA to a certain degree – where they don't quite have the exposure that Copart has, has been made difficult.

{audio:0:21:15} When they came into the region, IAA said they would replicate what they did in the States, but they never committed to getting land. They were asking insurance companies to keep hold of the vehicle while they tried to auction it for them. Quite rightly, that didn't go down well. The claims managers started to realize, very quickly, that they could do that and that they could hand-sell these things.

{audio:0:21:43} The mentality in the Middle East is very different from very well-developed markets like the US and the UK, where the price you get for the car is not the first thing you talk about in a meeting. It's almost a given in the US and the UK because they've got such deep penetration of the buyer market and huge inventory access that they know that they're getting the right price for the car. The market is so well developed that they know the price will be right. In one in a hundred, I'm sure there will be examples where you've got slightly more. But it's not worth wasting time on that one in a hundred. They trust in the process, and the efficiency of the process drives the real value to the insurer now.

{audio:0:22:34} In the Middle East, it’s not the same. It was quite painful at times to sit there and have a claims manager give you the example of a battered old Nissan Altima that he could have got an extra 50 dirhams on, but look at the 100,000 dirhams extra that we got on this car or on that car. They were so short-sighted. We started to sit down with the CEOs and run quarterly professional meetings with them where we would analyze statistics and their turnaround times. They started to realize it was better to stop chasing the odd dirhams because it's just not worth their while. Look at the efficiency of the overall process and how quickly we can turn that car around from point of accident through to settlement.

{audio:0:23:33} We got great examples, even in the UK, that we were starting to look at even before I left the Middle East where, with major insurers like even AXA, we're direct settling for AXA customers. We're going to their workplace or their home, and we're taking a signature for transfer of ownership into Copart's name, and at that point, we're cutting them a check and handing it to them. We're then cutting it down to customers' experiences from the point of accident. Naturally, it needs to be sensitive to whether there's been physical damage in an accident. Still, potentially within hours of an accident, a customer is getting a check and is running down the road to get their new vehicle. That is a beautiful experience for me as a customer, and it's the kind of thing that will make me think I’m automatically going to reinsure with AXA. These are all value-adds; I didn't invent these, but they're great value adds that places like the UK were already doing and that we started to deliver to customers in the Middle East.

{audio:0:24:44} This is one thing that Copart is brilliant at internationally, not reinventing the wheel. It's done very well in knowing what it's good at. But also, and this is not me talking out of turn, it has learned from just turning up in the UK and believing that it could just plonk Copart in and it would work overnight because it didn't. It started to realize that what we have as a framework is fantastic, but every country has its nuances. It has its own end-to-end insurance processes that might need a little tweaking here and there. But once you understand the process, Copart's got so many great little value-add services that insurance has never thought of or never seen that it's able to add in, and of course, these are all revenue earners.

{audio:0:25:40} What you see, in a maturing market, is that when an insurance company looks to an annual review, it typically hasn't got a lot to argue about with Copart. We were starting to see this in the Middle East before I left, though I wouldn't say that the market is anywhere near mature. The first thing it focuses on is, let's make it cheaper. I want what you give me, but I want it for a smaller fee. That was a constant battle that you would have. Bringing in extra services would enable you to get your nails into them deeper by integrating them more and more into the process and making it difficult for them to extricate themselves from using Copart. At the same time, they feel like they're getting it at a better price where, in reality, they're not.

{audio:0:26:36} Give me some examples of those add-ins that you’re talking about.

{audio:0:26:45} The data we would have; we have sold tens of thousands of Nissan Altimas, so we have algorithms in the system that would provide you with valuation. So at the point of accident, we can tell you the likely price you will get for this vehicle at auction. In this case, as a claim adjuster, it helps you make an educated decision on whether it's best to write this car off or whether it's best to repair it. We've done exercises worldwide, and Germany was a great example. We proved to insurance companies that were net settling that they were leaving more than about a third of the vehicle's value. For insurance companies, saving every pound on settlement is so crucial. We tell them we have evidence to show they're leaving about a third of the value of that vehicle on the table by net settling instead of taking ownership of the vehicle, having faith in paying out 100% upfront, and then reselling that vehicle through a platform like Copart.

{audio:0:27:54} The beauty in the industry is that a Copart client trusts the platform. Copart has tremendous trust from its buyers. Me, as a buyer, if I’m bidding on that vehicle, I know that as long as I'm the highest bid, I won't be gazumped. I’m not being outbid post the auction. That was the beauty. The auction is sacrosanct. Even though it was frustrating at times because buyers always tried to play a game; they would get straight on the phone to the sales guys, who would then phone me and say, oh, I can get another 10,000 dirhams on this car. And I'll say, it's too late. He's lost it. Never accept a bid for a car post-auction and after the live auction because instantly, people will stop having faith in bidding in the live auction. The minute they do that, the auction is tarnished, and they will never bid with confidence. That's why, 99% of the time, we know we're getting the right price for the car. Because people trust and, therefore, they bid.

{audio:0:29:14} Another great example that we trialed with a company, and it went really well was something called total loss express, which we had taken from the US. In the US, they work with insurance companies and haulage companies that would go to the scene of an accident and narrow it down to something very quick, like five or six questions. A hauler would look at the accident scene, look at a car, and answer five questions. Had the car rolled? Was it front end? Back end? Was it fully flooded? I can't remember them all, but within those six questions, there was a 93% chance that we knew if this was going to be a total loss, in which case we had the power to send that car straight to Copart yard. That then takes out all of the aggravation of moving the car from the scene of the accident to a garage where it sits in a queue, gets assessed eventually, and boom, it's a total loss. It ends up at Copart's yard two or three weeks later. So that turnaround of car and having fresh salvage in the auction was also a massive boost and added huge percentage returns to the insurance companies in terms of what they would get off that car.

{audio:0:30:43} I'm not saying it's perfect; there were times where ultimately it would be decided that it's better to repair that car, and of course, we would then return it to the insurance company free of charge, and they would get on with it. But again, there was a very high percentage of success with that, and overall, it saved the insurance company time, and time is money. If they're settling for that customer, they need that car to be sold and money in as quickly as it can.

{audio:0:31:15} I don't know whether this is true in the States. In the UK and places like the Middle East, it was even more important because, under insurance company legislation, you were not allowed to use the value of salvage as an asset when you're coming to your financial returns. As an insurance company, you have to show that you are solvent and act under IFRS solvency rules, and salvage values are not allowed to be used for solvency purposes, so you can't use them to prop up your balance sheet. You need to turn those into cash as soon as possible, so Copart added huge value in turning those assets into real cash, which then helps the balance sheet.

{audio:0:32:10} It seems like it would then be an easy sale. You mentioned talking to CEOs and going through quarterly numbers but, in general, did you find it easy to convince the CEOs of insurance companies to sign up for Copart? How did that go?

{audio:0:32:25} Generally, I'd say yes. We quickly got complete market dominance in the salvage world and gained traction that way. I'm not saying that I had direct relations with every single CEO. If I got to the CEO, I was pretty damn confident I could make them realize. It is sometimes a bit like the Wild West out there. There are still a few insurance companies that are little clubs of people that aren't potentially caring about the efficiency of their own insurance company. They run it more as a bit of a club. They've got their mates as head of claims, and the head of claims maybe has a vested interest to make sure the vehicles don't go through a transparent auction process if you understand what I mean. That was our only real competition in the salvage world. It was the claims heads. If the claims head had the ears and heart of the CEO, the COO, or the CFO, whoever happened to be running claims, it would be potentially very difficult for us to ever get to them because they would shield us from them. After all, they had financial considerations to worry about from their own pocket. That was the biggest hurdle that we would find.

{audio:0:34:02} Some of our buyers tried to sell salvage themselves, but we got through to them. Because regulations in the Middle East had to catch up quickly with the rest of the world – you've got IMF inspections, WTO inspections, all of these things – insurance companies were highlighted as not fit for purpose because they were run as old boys’ clubs. Slowly but surely, some of these people were having to fall by the wayside, and they had to bring in western executives with a history who were smart at what they did. These people come in and realize, my God, we're still hand-selling salvage. Get rid of this process; let's outsource this. They all realize they don't want the business risk attached to it, let alone that there's probably money being lost in the process. The propensity for corruption and lack of transparency to occur is so high that they just want to get it out, and Copart was the only viable option.

{audio:0:35:20} I imagine that once you got them, they stayed with you. Did they use Copart exclusively, or were they trading off between you and IAA?

{audio:0:35:33} IAA has no presence in the Middle East, no local presence in the Middle East at all.

{audio:0:35:40} Are there any other local competitors?

{audio:0:35:43} A couple of local Afghani traders run auctions. Some of it is stuff they bring in from the US. The containers will come in, they'll open the container, and they have a whole bunch of people in the yard. As the cars get brought out of the container, people will bid on them, and they'll take them off. You'll get some Africans that will travel up for a few days with container space pre-booked, and they'll need to fill it before they get on the plane home, so a bit of that goes on. But no, there's no real competition, particularly in the salvage world. In the used-car space in the US – I think you'd call it whole-car – there's a lot more competition. There’s buymycar.com, sellmycar.com, you’ve got a platform called Emirates Auction, you've got a retail listing site called Dubizzle, and then you've got tons and tons of actual used car traders who are buying and selling. Some of them are buyers through Copart's auction; they use it for parts, or they'll clean the car up and resell it through their retail sites. So there's huge competition in the whole-car market. Sellanycar.com has gotten huge fundraising in the US to expand its model across the region.

{audio:0:37:21} But actually, in the Copart traditional space – and the backbone of what Copart does is still very much salvage – once they're in and see the efficiency, it's absolutely market dominant. A great example is showing a company its average turnaround time from notification of vehicle to sale. We could never put anything into the auction without clean documents, so Copart would offer the service for the documents to be put in Copart's name to save one extra transfer process for the company. We would show them you're way off; let's examine why.

{audio:0:38:07} We'd send a team of admin people in to look at their average price per car. We would strip it down to make, model, year, type of damage; we could analyze it because the Copart system does this. We could tell you what your price is compared to what you should be getting for every single vehicle. They were always off, and we noticed that they rarely ever had a second set of keys, which makes a huge difference. You can imagine these days, a set of keys could cost several hundred dollars, depending on the car, especially if it's something like a Mercedes or a high-end vehicle. It turns out they had no process in their claims settlement process that asked the customer for a second set of keys, and they had tons of customers that had the keys in a drawer. They were never asked for them and never volunteered. Why would you? You're not going to drive around and drop off another set of keys. We brought in a process that said you do not send a settlement check until you have the extra set of keys, or the customer has signed a declaration that says I have no extra set of keys. Six months later, they'd already seen a four percent increase in their total loss return.

{audio:0:39:45} It's little things like this. The CEO didn't often come to our quarterly meetings, but the CFO was always there. When you had the CFO's ear, and you were able to put up slides and say, look at the difference we're making to your salvage portfolio, it was an absolute no-brainer. The Abu Dhabi National Insurance Company, one of the biggest in the UAE, had an Australian chap as the chief risk officer. He attended one of our review meetings, and he said I would take a reduction in the salvage return for this process to exist because it removes the risk and lack of transparency that we have had for years and years in this process. He said, as far as I'm concerned, I'm in. I'm sold. So that's the power we had. Once you got to a level of professionalism, they just got it. They understood the value it brings to what is notoriously a very messy process.

{audio:0:40:55} It sounds like most of your customers were insurers. Did you have another mix? What did it look like?

{audio:0:41:03} Yes, probably 75% of everything we did. In Oman, it was probably higher; in Bahrain probably the same, 75% to 80%. The rest would be a mixture of hire car companies. Many companies in the Middle East are effectively de facto government agencies, so we did a lot of work for the government via third-party entities such as Dubai Taxi. They have a monopoly on taxis. They have four taxi franchises but, ultimately, were all owned by the government. We would sell end-of-life taxis that had done 700,000 or 800,000 kilometers that would still get resprayed, badged, and resold around Africa and would go another 250,000 kilometers. We worked for transport companies, school busses, coaches, ex-delivery. All delivery two-wheel vehicles, home deliveries for pizza and couriers, and all these types of vehicles, tens of thousands of these vehicles exist across the countries, and we would officially sell them.

{audio:0:42:26} We also worked for the Dubai Police. Vehicles that are confiscated or abandoned would sit in a police yard. We would help them with the court process to establish clean paperwork, and we were one of three auction companies that would then sell those vehicles for the government because they needed a minimum of three suppliers. We did tend to get slightly more than our third because they knew we were more efficient, and we had the land where we could help them with the storage of these vehicles.

{audio:0:42:57} When you arrived, I bet a good part of your time was looking for new yards. How did that work? Was land hard to get in the Middle East?

{audio:0:43:17} Land was less of an issue than it would have been and probably is for more mature markets like the UK, Germany, and the US because there is so much space. But it is all a desert. Landscaping is probably more of a cost than you would expect in other mature markets, but the attainment of the land is not an issue. You've got to remember that the cost for the transportation of these vehicles is extremely cheap in the Middle East, where wages for certain demographics of society are extremely low. The salary of a truck driver that would pick up and drop off vehicles across the country is extremely low; probably around $200 a month. Even if you're a few miles out of town – and fuel is extremely cheap over there, they've got quite a lot of oil – the pound for pound cost of moving that vehicle meant that you could go out of town where land was extremely cheap. It wasn't as much of an issue as you might think.

{audio:0:44:38} Do you think that’s a competitive advantage for Copart, given that the land is cheap and easy to get? How does that square?

{audio:0:44:47} It was because it meant, instantly, that the insurance company could give up their yards. Again, the auditing company loved Copart systems because they could choose a car, and we could tell them exactly what row and which bay it was in. We would get regular visitors from the internal or external audit department that would turn up saying we need to check the inventory and boom, boom, boom. They'd always walk away happy, saying thank you very much because before they would go to a yard, they wouldn't know where the car was, and sometimes they wouldn't know where the yard was. Yes, it was very much competitive advantage. We invested in a 28-acre site, which the company still has on the outskirts of Dubai. It’s not very far from where Expo is taking place at the moment, an area converted into effectively a brand-new city on the outskirts of Dubai, and the Copart yard is just beyond that and very near the new third international airport that they’ve built.

{audio:0:46:06} When you talk about the Middle East, what countries are you talking about? It’s kind of a nebulous term. And as a second part to the question, did you find it difficult to move between countries?

{audio:0:46:21} No, moving into Oman and Bahrain was fairly easy because we had a free trade agreement with the US to establish fully owned subsidiaries in those countries, which was convenient. Is it easy? No. Is it possible? Yes. The UAE is trying to put itself at the forefront of the GCC. You've got six countries in the GCC: Saudi, Qatar, and Kuwait. I established us with an agreement in Qatar. I also signed a deal with us to go into Saudi just before I left, so that project is ongoing.

{audio:0:47:06} I suspect they must be fairly close to launch on that. That will be a huge project for Copart, and it will be instant market domination in terms of salvage because of the partner that’s being negotiated there. Was it easy? No, because you've got different rules, different countries, and even to the untrained eye, a lot of it looks very similar. Culturally, it is like dealing with different tribes, and they are very tribal about their own identity, history, and country.

{audio:0:47:45} Who's better than who? There's a bit of jealousy around the UAE because Dubai has been at the forefront of making itself very westernized for a good 20 years now. Saudi is trying to trip over itself to catch up in the space of a few years. A great example of it culturally is that last week, the UAE announced that they were moving to a traditional working week. The public sector is moving to a Monday to Friday lunchtime working week with effect from the first of January, so they've given them three weeks' notice to change everything, which means schools as well. So all the parents who work in the private sector wonder if my employer will change to a new working week? If I'm working for a company that works around the GCC, I'm knackered because my customers will still be working Sundays and not on Fridays. I'm all of a sudden going to be torn. They don't always think things through brilliantly, so you have to deal with that.

{audio:0:48:59} Part and parcel of being in that region is making sure you have good connections with the government because everything works with the government. It's not easy. In the UAE, you need to have 51% local sponsorship to establish a business. That's not completely true because they had made 100% ownership available for domestic use just as I was leaving. Normally, you'd have to be in a free zone to get 100% ownership of your own business. Therefore, in theory, you can't trade onshore in a free zone. You have to trade externally, so around the region. But people still did. They were saying, the likes of big multinationals that have local Emiratis, are shareholders in these businesses. There's no way overnight that they would be able to get rid of these Emiratis and establish their own entity because they'd do it instantly, and then all of the Emiratis would be up in arms. So I think all the industries, certain businesses, and potentially new businesses would get the allowance to open up 100% wholly owned. However, other big multinationals will still have the shackles of a local sponsor, and I don't think they'll ever be able to get rid of them.

{audio:0:50:23} We’re talking about countries in the GCC and who else? Were there any north African countries?

{audio:0:50:29} We certainly didn’t establish local business there but what we did was secure market makers. These market makers would typically be buyers of Copart US who had a long and reliable history of buying salvage through the system that we would then potentially appoint as our local market maker. That meant they could then issue their account structure to individuals to whom they might effectively start providing consolidation services. It was the one guy who might buy one car a month or even one car a year or might buy a car just for themselves, but they couldn't afford to buy it domestically; they buy in something that had a little bit of damage because they knew they could repair it themselves.

{audio:0:51:19} That person would find trading through the US very difficult because to set up your own account, and you'd have to have the ability to send money overseas. You might not have your own bank account, depending on your situation. Suddenly, you have a market maker who would then manage all of that for people, consolidate, and bid on their behalf. They're fully responsible for those bids, but they would issue sub-accounts to their own trusted people, and they'd put in their own deposit regime locally. They'd manage it and de-risk it as much as possible, but effectively, they're on the hook for anyone who bids and wins a car. It's their responsibility to complete the payment.

{audio:0:52:02} I guess that’s the same in other countries like Afghanistan, Iraq, Iran, Turkey, is it similar?

{audio:0:52:10} You did not have local operations there?

{audio:0:52:15} Correct; we had market makers. The only one we had in that part of the Middle East was in Jordan. There was a big auto market in Jordan where we had a market maker that worked for Copart. And we'd established places in Nigeria, a huge Copart salvage market.

{audio:0:52:35} What were the volumes like? You started it from zero; how did it grow?

{audio:0:52:42} The way things are going now, I think you'll probably be looking at extracting more than 100,000 vehicles a year going through. I can't specifically talk about margins, but our region had the highest margins in the Copart world because we could still charge a decent premium to the insurer. After all, what we had was almost rocket science compared to what's available locally and still have a buyer fees regime. We had very, very healthy margins, our overall cost base was quite low, and therefore it was healthy. The thing is, then you just need to keep pushing more and more through the funnel. The Saudi deal was going to double that number within the space of a couple of years once launched because you're talking well more than 100,000 cars for Saudi within a very short space of time.

{audio:0:53:55} As a region, we would have started to compete with, certainly, well in excess of Spain, but in the UK, I think they're doing about 400,000 cars a year. They've got a healthy whole car market, so they would compete with the likes of buyanycar.com and some of the others, such as British Car Auctions. Although BCA was much bigger in the whole car market than Copart, they competed. So about 400,000 in the UK. Within a couple of years, you'd be looking at probably a quarter of a million from the GCC.

{audio:0:54:38} What potential do you see for the region?

{audio:0:54:44} The potential is huge. The thing about the Middle East is it's a really interesting, fabulous place to start up and drive business, potentially. They are very open to and quite entrepreneurial about allowing businesses to come in and improve things. But getting through some of the local connection hurdles can be very tough, and earning your stripes, so to speak, is something that you need to do. To get government contracts, which are important to the future, you need to work on relationships, and you almost need some internal networking to go on and recommendations to happen from some other locals. But if they make a decision, that door will open, and within minutes you could be piling through the door. Once you're in, you could be incredibly lucrative.

{audio:0:56:01} I am surprised that IAA hasn't taken the investment, but maybe it's about the effort to invest to go in and compete. They could turn up and offer what Copart does. Depending on how they set up their cost base, they could very easily go in and try and compete purely on price, and people would listen. It's still a price-sensitive market where people do search for that extra dirham. A lot of people are rewarded on figures rather than customer satisfaction; soft stuff like customer satisfaction scores is not typically included in staff reward packages. That's why the claims manager will be searching for every single dirham or rial or whatever the currency it is from that car because it all adds to his bottom-line targets, and that's how he feeds himself and his family at night.

{audio:0:57:10} Price is something you can compete on very quickly. If you're offering like for like and you come in with a lower price, there will be insurance companies who turn their heads. We had loyalty because what we had was good, and there's nothing else available like it in the market. But if IAA took a gamble, I would say they could go in and compete fairly easily.

{audio:0:57:40} I'm curious about how your relationship was with HQ in the US, particularly with Jay. How did those interactions go? What kind of reporting or incentives did they use to keep track? How did that work?

{audio:0:57:58} Copart's game is all about margin versus volume. They've got the infrastructure in place, and they can upscale it very simply. It's then about pushing as many of these things through the funnel. I knew Jay very well, still know him, still message him on Thanksgiving and the like, but did Jay get up and worry about the Middle East every day? Of course, he didn't. They've got yards in the US that were doing more than we were doing on an annual basis. But Jay was always involved in our international meetings in Dallas or before that in Fairfield, so he was very interested in the business.

{audio:0:58:54} During the last year or two, I would say, of my time at Copart, he became very focused on the European business. Copart had gone into Europe in a large way. Germany will be bigger than the UK. I don't know exactly when, and I don't know where they've got to over the last year since I left, but they'd gone in through an acquisition which was effectively a listing platform called WOM, and had hopes that they would just convince and convert insurance companies. But it didn't work very well, so a lot of investment went into that and lastly they had to go out and get land. They had proven the model to some of the big insurers, but the big insurers were also saying, okay, that's great, we want to use you, but we're not going to use just because you've got a piece of land in Hanover; we want you in Munich. We want you in Stuttgart. We need you around the country because if we're switching a process, we do it holistically. That's why they were looking for nine or 10 different sites across Germany when I was leaving.

{audio:1:00:14} There was some huge capital going into a mixture of purchase and leasing. Line-wise, we used to report to Vinnie Mitz, the US business president and dealt with the US and then focused exclusively on international for his last two or three years. He had run the US for many years and knew everything about how Copart worked.

{audio:1:00:48} Jay is an interesting character. He’s very, very intelligent in ways. Sometimes his way of communicating is quite odd, but it's a bit of a trait with a lot of the old guard of Copart. Sometimes they're obsessed with the minutiae of detail, and it's just a reflection of the fact that they've become what I would describe as a significant big successful family business. Even in the relatively short term of nine years that I was with them, they have grown from a $10 billion company to God knows what they are now, $100 billion? I don't know what the market cap is.

{audio:1:01:40} It’s like $38 billion, close.

{audio:1:01:47} They’ve gone from the $7 or $8 billion we used to quote on early sides to a $34 billion market cap company now; this thing has grown incredibly and largely with the same executives. All that said, that is changing. I don’t know if you know Jeff Liaw. He's a very smart cookie. He's very much involved in the business, and I think he is probably taking over a lot of the day-to-day stuff that Jay may have been involved in and is leaving Jay to maybe deal with the shareholder side and the markets. Nigel and I used to run the UK and Europe. He also retired soon after me, and I think all the international now reports to Jeff. I think they had gone about in Vinnie’s day as let's get out there and plant flags all over the place. There was probably a shakeup within the board who said, hold on a second, Vinnie, you've planted many flags, but we need these things to turn themselves into profitable businesses. So we started to ask, how the hell are we ever going to do that in China? How are we going to do that in India?

{audio:1:03:20} And Eastern Europe, and it’s like whoa, let’s stop now, let’s not plant any legal flags anywhere. In Eastern Europe, they've gone about it by setting up these market makers. Somewhere, maybe in the Ukraine or Russia, they've established these market makers so they can give Copart a presence but without having the legal risk of having an established business there. That's a nice easy entry into some of these markets that might well be filled with a risk that might not be of the board's appetite at this point.

{audio:1:04:02} In India, they had a CEO or an MD for a few years, and he would rock up to our international meetings and come up with the same excuses as to why he was not doing business. Eventually, they got rid of him and asked me to take over. Geographically, it was only a three-hour flight to get there, and I went along. Within two or three trips, I reported. I had some private conversations directly with Jay because he asked me my personal opinion, and I said to him, close it down. It's an absolute waste of time. The Copart model does not work. There's so much corruption in India and a lack of potential progress in this area. We will spend 10 to 20 years trying to force square pegs into round holes. It just will not work. I guess, in a way, it's quite nice that they trusted my opinion and closed it down.

{audio:1:05:13} I'd like to get your overall view on the prospect of Germany. Do you think they'll be successful? Do you think that'll be a big business?

{audio:1:05:30} Yes, I do. I saw a lot of the evolution of Germany. They started doing the listing business we owned in Germany, which we probably still do. There are probably three of these sites across the country, and all the insurance companies typically use maybe two of them. The same car gets listed across these three sites, potentially. As a buyer, I'm bidding on two different sites, and I can see the same cars, so I'm not going to bid in the same way as I would because I'm never quite sure which site might achieve the better price, so I'm always slightly stunted in my appetite to bid aggressively. Also, as a buyer, I could bid on 100 different cars, and I might find that I only get one of them. I might get all 100 of them. When it comes to cash flow, it's very difficult, as a buyer, to manage your business because you never really know what you're going to get and what you're not going to get.

{audio:1:06:41} Whereas with the Copart model, I know if I've won that car at the end of the auction. It's blatantly obvious because it tells me. Within a split second, I'll have the car in my account, and I can instantly click on the link and pay for that vehicle. I know at the end of the auction I've won, and boom, I can move on to the next vehicle, and I know what I've still got in my pocket to bid for the next vehicle. In Germany, that wasn't happening, so any approvals that they'd got, they effectively bought the car themselves, paid a euro over the price, stored up the vehicles, put them in their yard, and then ran them in an auction three or four weeks later.

{audio:1:07:31} For Copart buyers from Eastern Europe, they had a huge buyer base around Poland and Kazakhstan. As I said, they were driving 33% higher prices on those vehicles and then turning around to the insurance company and showing them the profits made on these cars. And then insurance companies were saying, okay, wow, we need to think about this. Some legalities had to be ironed out. There was something called the Vermittler model that they had to figure out because there was a legal problem with an insurance company taking ownership of a salvage car.

{audio:1:08:15} I don't know all of its details, but I know that they had to create a legal process for it to be legally allowed to do it. But they fixed it; they sorted it out. They had run various trials of this form throughout a number of months, and they had proven the point. At this point, a number of the insurance companies I know were turning around and saying, okay, we believe in you, we believe in this model, but you also need a nationwide footprint for us to be able to work with you. So they are in the process of doing that. I'm not aware of where they are today, but I was very convinced that Germany will be very successful and probably bigger at some point than the UK.

{audio:1:09:16} In general, what is your opinion on EVs and driver-assist vehicles and the effect those will have on Copart's business and the industry going forward?

{audio:1:09:31} It is a good question because you start to say, wow, the amount of technology that's coming, is it going to stop an accident? The real answer is no. Copart does a lot of studies and gets a lot of data, and in mature markets like the US, you can actually Google and find a lot of this data fairly quickly if you know what you're looking for. Tesla had done a direct deal with an insurance company for exclusive insurance in the Middle East, but they had to get every vehicle back because they needed them for parts. No Tesla total loss vehicles from the Middle East were coming to us, even if we dealt with that insurance company, because the deal was that they had to go back to Tesla.

{audio:1:10:30} We'd get them coming through, but normally they would be US purchases bought and brought through the Middle East. We would get them in the US, and the interesting thing about them was that they're written off far quicker than standard vehicles because the cost of the technology that goes into them is so high. I'll be misquoting, but suppose there are four cameras on the back bumper of a standard combustion engine Mercedes. You've got something like 120 different electronic parts that are in the same piece of equipment in the back of a Tesla or an EV, so all you need is a fender bender. 70% of accidents are front or rear-end collisions that get fixed. Those vehicles now aren't being fixed anymore because if you have a relatively decent impact back-end damage, the amount of technology destroyed through that means that the car isn't worth repairing, so you're finding cars going through to Copart far quicker because of that reason.

{audio:1:11:44} Obviously, Copart had to do a lot of research into this. You just won't ever stop accidents in countries where you've got mature road systems that have been around for hundreds of years. This self-driving thing is very difficult to imagine ever being 100% in use. If you've got six-lane highways where you could potentially cordon off two of them and put a whole bunch of computer-run cars in just those two lanes, and they can just talk to each other, then that's fine. The difficulty for a self-driving vehicle is the idiots like me who swerve at the wrong time, and a computer can't anticipate that. This isn’t an issue. By the time self-driving cars are more prevalent in the streets, there'll be other reasons cars are totaled or restored.

{audio:1:13:00} At the moment, and I assume the same thing is happening in the States, with the supply chain issues caused by Covid and particularly in Europe because of Brexit, you're seeing a massive increase in used vehicles. They’re up 30% in value, which is crazy, absolutely crazy. You've got dealers contacting you for the car you bought last year and offering you a new one at the same price. There's some crazy stuff going on at the moment. The knock-on effect for auctions is you're seeing a big spike in the value of salvaged cars because used cars, the more you use used cars, the more they're sold, the more they end up going wrong. And therefore, they need fixing, and therefore you get the parts from Copart. And that's how all these dealers will handle it. Copart isn't quite recession-proof or downturn proof, but it's not far off.

Copart: International Growth Opportunities

Copart

Copart is a leading provider of online auctions and vehicle remarketing services with operations mostly in North America. It is also expanding overseas. The company was founded by Willis Johnson and Incorporated in California in 1982. It became a public company in 1994 and is headquartered in Dallas, TX.

Copart is dominant in its industry, operating in a with a strong balance sheet, high insider ownership and a track record of strong returns.

The company has a robust competitive position. For decades, Copart has acquired land in key cities around the US. As a result of zoning restrictions and the growth of American cities, Copart’s land position would be impossible to replicate today. Copart operates in a duopoly with Insurance Auto Auctions.

Copart: International Growth Opportunities

Former CEO Middle East, India & Africa at Copart

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Copart

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Executive Bio

Former CEO Middle East, India & Africa at Copart

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