Interview Transcript

Kyle, can you share some background about your role and responsibilities at Copart?

I spent eight years with Copart in various operations roles. Most of my time was facility operations and I also served roles in catastrophe relief. Copart handles hurricanes and floods and I've had a couple of roles in that. My final role was in Maryland running Copart Baltimore.

How big were those facilities?

The largest facility was Copart Baltimore. It is a F size facility on Copart scale and it sold about 35,000 cars annually.

You were managing a couple of facilities in Baltimore which totaled 35,000 cars?

Correct. It was three facilities that made up the Baltimore market or area that we covered and those three collectively sold about 35,000 at auction, on an annual basis.

Can we walk through the full lifecycle of the salvage auction process? Starting where the driver crashes the car, makes a claim; what is the process for the insurance company after they've received that claim?

The company's first goal is to decide whether they're going to repair the vehicle or they're going to total out the vehicle. Every company has their own process for that. Some of them send adjusters in person. Some of them do it via images. Some of them have the customers take photos. There's a variety of processes and that's on a company by company basis. So they would move it to a facility and either to do an estimate or to do auction and a tow truck would move it to that facility. After it's deemed a total, either at my facility or at a tow facility, then it moves to an auction facility to move through the auction lifecycle process.

How does the adjusting process impact the total loss frequency ratio?

It’s a financial decision for them so they want to take the cheapest option, whether that's totaling the vehicle out or whether that's repairing the vehicle. They take a look at a car and say, how much will it cost us to fix this vehicle? Then they also take a look at what it will cost to pay the customer for their vehicle. Copart has evolved enough that they are able to give info to the insurers as well that says, we can sell this vehicle for this much so they can calculate that into the decision-making process.

Given the fact that the loss adjuster might not be visiting the vehicle and is not just taking and sending pictures, is there any impact that could have on the total loss ratio?

Yes. If they're doing it via photos, they have to make some assumptions. You can only photo a vehicle so well and Copart, at least, doesn't dismantle the vehicles for them so it's hard to see what's going on behind the damage via photos. Photos generally increase your total loss rate because you're assuming that everything you can't see is also damaged. Whereas when they visit them in person, they can dismantle it themselves, they can check into the engine compartment, check underneath into the suspension and get a full part by part breakdown. In general, it will be the more expensive vehicles they'll take a closer look at and see how they can break them down into individual parts for cost.

Do you think that's had a significant impact in the total loss ratio that we've seen increase from, I think, 13%, 14% up to nearly 20% today?

Yes, definitely. Total loss frequency is up based upon both digital adjusting as well as the complexity of vehicles. Now a vehicle has a lot more parts and technology in it than it used to. There's cameras, sensors, all types of stuff just in the front end of a vehicle where 10 years ago, 20 years ago, it was just metal and plastic up front so it was a much simpler process both from parts and from a repair standpoint.

Roughly what percentage of the adjusting is done digital versus in person, today?

I can really only speak anecdotally about that; I'm not entirely sure numbers wise. Some companies, some insurers do a lot of digital adjusting. Some still haven't done any of it so it really just varies and it’s more how those companies view the market totally and what they can do with or without field adjusters.

Are we talking 40%, 50% roughly, in your opinion for the industry?

I would say it's over 50% now. Some of the larger carriers have moved exclusively to digital adjusting and, in general, there's a certain percentage of cars that you can just look at and tell that they’re totals and so almost no company, at this point, is taking those photos and still sending an adjuster out. If the entire front end is removed from a vehicle there's just no point repairing it. Photos and digital adjusting is becoming more common. There's advertisements out now for some of the companies where you take photos at the accident scene and send them to your adjuster and there are certain ones you can see every single airbag is popped and the entire front end is gone; the adjuster process just goes out the window there.

How do you see the total loss frequency evolving over the next 10 years?

I would expect it to continue to increase. Safety features and technology features are becoming more and more common. Particularly in the United States, safety standards go up almost annually and from a customer standpoint, it's usually viewed as preferable to total the vehicle. A lot of customers really don't enjoy getting back what they consider a wrecked vehicle or a repaired vehicle and so there are certain companies in the insurance world that view totaling out a vehicle as a customer service move. So if it's close or the customer has expressed disinterest in getting the vehicle back, some of them will take it as a customer service move to go ahead and total the vehicle. As feedback with customers becomes more common, as well as digital adjusting and technology in the vehicles, I think you are going to continue to see it move upwards.

As the insurers get more competitive, they could look at totaling as not a perk, but as providing that great customer service?

Right. A lot of them use net promoter score like a lot of other companies in different industries and they get that type of feedback of, they repaired my car and it took them two months to do so and I had to drive a rental all that time and they didn't enjoy the claims process. That's something that insurers look at, at Copart and their competitors, on how positive was the experience with getting the car back and how positive was the experience of full total loss. They don't want to get calls saying it was terrible dealing with the auction or it took them forever to get my vehicle. All of those type of things are part of the client experience too and so it's absolutely something where they want to have the highest net promoter score they can and retain insurers. There are a lot of pieces to that customer service part and I definitely think you’ll see that move upwards.

How do you look at the complexity of vehicles and the impact on salvage rates?

As used car prices go up, obviously you can spend more to repair them and still stay under the cost of the vehicle. The other side you look at is the cost of parts. If you've got one sensor on the front end, that's a lot cheaper to repair than 15 sensors on the front end. You look at something like a new Tesla that has enough sensors to operate on its own in certain conditions, there's going to be a significant sensor package in there and so just the costs alone in parts becomes prohibitive. The other part is that it's more complex to do those repairs. If all you had to do was put a new hood, put new headlights and put a front bumper on it, that was fairly simple repair work.

Now you're talking about recalibrating the sensors and installing cameras; it's a significantly more expensive and complicated process just to do the repair. There are more options to do it wrong: the sensors could go wrong, the camera might be misaligned and that creates a situation for you where the value of the car is higher, but the complexity to repair it is higher too. You've got higher labor costs because you need more talented technicians to complete all those repairs and the parts themselves just become prohibitive. You've got a front-end fender bender and now you're ordering 40 parts just to replace that front end. That is tricky.

But these cars are still repairable? With 15 sensors, you can still replace that part?

Absolutely. They're repairable in different ways. The bulk of the vehicles I dealt with were obviously US domestic vehicles and if I saw them again, that meant that they were staying domestically. If they were going back on the road they had all the parts replaced, all the sensors replaced, all the airbags replaced.

The US is only one country. There are different safety standards in different countries and there's different thresholds for what a consumer views as acceptable. So if you move that vehicle overseas and you don't replace any of the sensors on the front end but the car still runs and drives fine, the transmission is fine, the engine is fine, all the wheels are aligned, a customer in a country where that's a legal way to drive that vehicle would view it very differently from in the United States. It's definitely a global market and you need to look at and what things are and aren't acceptable to buyers in different markets.

What do you think is the biggest risk to the salvage industry going forward?

A year ago I would have said the biggest concern that is always expressed in the industry is self-driving vehicles. I've never viewed that as too large of a concern, at least not for me within the market because self-driving vehicles only eliminate accidents when every vehicle is self-driving. When you throw a human into the mix then cars can’t predict the behavior of humans. So until every vehicle is self-driving, you can't really ensure that the cars will keep themselves from hitting each other.

In the US, there's still people driving cars without seatbelts and airbags so the expectation that self-driving vehicles would become that ubiquitous within my lifetime, I think, is a little bit of a reach. But in the current atmosphere, there's a big concern that could push into how the remote work and how the world of a pandemic could change the salvage industry. There's a direct correlation between miles driven and total losses; the more people are driving cars, the more accidents there are going to be. So when you take cars off of the road, it becomes way more common to work from home, it becomes way more common to not travel for vacations, you decrease miles driven and decrease accidents and, therefore, decrease salvage.

I think that's kind of the biggest look is how the next 10 to 20 years’ technology develops and the work from home culture develops. As it becomes a lot more common to work from home on a larger, grander scale, then you're going to look at miles driven going down potentially and that could lower the amount of salvage vehicles available.

On the point of autonomous vehicles and safer vehicles which has been supposedly a risk for Copart for a few years now, isn't there also an offsetting effect where cars are getting safer, which reduces accidents to some extent over the next five to 10 years? But if the cars are more complex, the average selling price or the value of the parts and, therefore, potentially the revenue opportunity for Copart could not be that impaired or offsets the fact that there's less accidents. Do you see that, again, there’s always this offsetting impact in the industry?

Yes, absolutely. The more valuable the cars are and the more valuable the parts are, the more opportunity you have for them to sell for more. So something you can look at, even as we talk and discuss work from home and accident frequency going down, is that less cars in the salvage market would work similarly to less cars in the used car market and so ASPs could be driven up because there's less vehicles available. If you need to repair a Honda Accord and only five Honda Accords have been wrecked this week, this month, whatever it is within your market, you're going to have to be a lot more competitive to win that vehicle than you were when 10 or 15 Accords were being totaled. There's definitely a balance and it will be interesting to see how that develops with the availability of salvage vehicles.

So the adjuster totals the car. How does the insurance company choose who to work with between Copart and competitors?

For the most part, the insurance company has already got that set up so the large bulk of agreements are on a national basis and are on a contractual basis for most or all vehicles within a market, and so Copart uses the term ‘assignment’. It's already determined which salvage provider the assignment is going to go to and local adjusters, local employees of that insurance company are usually pretty familiar with that process of their salvage carrier. That's taken out of the hands of 99.9% of insurance employees because it's negotiated on a very large-scale level.

How do they choose that? Let's take GEICO or one of the big insurers, how do they actually choose that assignment relationship between IAA or Copart?

Most of them, including the ones that you just listed, have experience working with both companies and so it's a big relationship piece. The things that matter most on a grand scale to the insurers are customer service and returns. Some of them are really, really focused on returns; who can provide the highest returns? Some of them are really focused on what their customer service experience looks like. Are they getting the exact services that they were promised? Are the vehicles getting moved in the exact way that was promised? They've all got internal measurements to those and almost all of them have experience with both of the major carriers previously and that's been a relationship that's been developed over years and decades. So they're usually comfortable with one versus the other and the data really isn't that hard to come up with. If returns is a real focus for them, you take two facilities, you put half your cars to an IAA, half your cars to a Copart and see who's got the better return percentage. You can come up with the math for it and so, traditionally, what they're focused on is, internally, what their goals are; what their C-suite and management really focus on is how they can make a determination of which carrier they view as better serving them.

What drives returns for the insurer?

On a national scale, it's going to be how many buyers are looking at the vehicle. Nine times out of 10, that's going to be the determiner. Are there 500 people viewing? Are there 1,500 people viewing? Are there 5,000 people viewing? There's a direct link between how many people are looking at the vehicle and how many people are bidding on it. There's other factors; where the vehicle is located is a big piece. How close is it to a port? How close is it to a major metro area? Those things definitely affect return, whether there's a large volume, whether there's a small volume.

You see ASPs go down in catastrophe situations because there's a flood of salvage vehicles within that market. Then you can see the opposite in areas like Maryland or further north when they have mild winters and there's not as much ice and snow causing accidents, volumes go down over normal levels because it's a more mild weather situation. You would see ASPs go up because there's not as many total losses as the market is used to. So those affect returns a little bit but the top thing is how many eyes are on each of those vehicles?

Therefore the larger the scale, the more the advantage to drive returns through the customer.

Absolutely. Volume is a big piece. Buyers can only have so many eyes on auctions. You've got IAA or some competitor that's running 100 cars today and you've got a Copart auction that's running 200, it's much more likely that you're going to find something you like within that 200 as opposed to the 100, so your eyes would move that way and vice versa. Our auctions in Baltimore would scale up all the way to about 1,000 vehicles, so volume definitely would dictate how many eyes I was getting on those vehicles and that would push returns absolutely because there's more competition to it and they’re auction style. Human nature just dictates a little bit of that. I want to win this vehicle and I want to beat that person. eBay found that out a long time ago, I believe, that you can put something at a flat price and put an auction next to it and people would pay more just to feel like they were winning or beating someone else to that product. That's consumer behavior and that's a whole other different world to it, but it's something that definitely gets interesting when you look at vehicles and then place within the auction becomes a thing. There's a whole science to it and a lot of data.

Therefore, the ability for the auction houses to scale internationally to drive the demand is crucial to driving returns for the insurers?

Yes, absolutely. You can only have so many domestic eyes, so the next move is international eyes. How many people can we have looking at this to export it or how many people can we have bidding from another country in order for one of their business partners, domestically, to pick it up? The US has roughly 300 million people, give or take. That's not a significant portion of the world population. If you're going to focus purely on how many eyes you can get on it, there's a lot of opportunities out there beyond just domestic.

What really matters in customer service for insurance companies?

Again, they have different priorities. You'll find some that really focus on time and process which is basically from the time the vehicle is wrecked until the time it sells; how many days are passed. You've got others that focus really just on how quickly the car gets picked up from a tow facility, so how quickly does it get from the accident scene to a Copart facility? You've got others that really care about response time from Copart’s customer service team. Every single Copart facility has its own customer service team and they have a relationship with most of the local companies or the local adjusters and it’s a symbiotic thing of, do they feel like when they make a request that it gets attention? Do they feel like their local team is working with them or working against them? How comfortable they are on both directions?

Then some of them still do send employees into the facilities so they have a good positive customer service relationship with their people that are showing up to the facilities to either look at vehicles, to reinspect vehicles, to make sure that services are being completed as promised, any sort of interactions they have in person. The other side goes to what their customers view as a positive or negative relationship with the auction house. If you're Allstate, you would never want to have a customer call you and say the CSR I interacted with at Copart was rude to me or lied to me or I feel misled, because that's putting your relationship with them at risk, even though it wasn't something that one of your employees did. It's making sure that their customers feel served and attended to by us just as much as their internal employees feel like we're giving them 100%.

Why does the time to collect the vehicle or tow the vehicle away really matter?

In the US, storage at tow facilities can be very, very expensive, particularly near large metro areas. It can go up to $100 a day. Most facilities within Copart give a grace period for storage so the quicker you can get it out of that tow facility and into a Copart facility, it usually saves them what Copart calls advanced charges, which is the amount that they're paying out before the vehicle even gets to us; it affects returns. So if you can get the vehicle quicker then you can save them some money.

So the more yards you have or the higher density of yards could increase the time to collect or deal with it?

Yes, absolutely. If you can minimize tow time then it absolutely makes that much quicker. If most of the population is 10 miles from your facility, you can move trucks and cars a lot faster than if most of the population is 50 miles from your facility.

In your experience, did you see any of the insurers switch between the two players?

Yes. I wouldn't say it's super common but I wouldn't call it uncommon either. Contract renewal comes up fairly often and it's not uncommon for a carrier to say, we've worked with IAA for five years, we'd like to put some volume over Copart to give them a competitive chance at it and vice versa. We've been with Copart, we’re up for renewal, we would like to give IAA something like 10% of volume and try the other side.

The other part of that is obviously Copart and IAA are both similar to a sports player; they'd prefer to lock in a contract prior to it coming up for renewal. You'll see a year out, two years out, a contract is coming up for renewal and they'll extend it before they can hit the free agent market and have it become an open bid. I don't have a good number behind it for how common it is for them to switch, but it certainly wasn't something that would be considered a super rare event.

How do you compare Copart’s offering for insurance companies to IAA?

It's a similar end product. Both attempt to achieve the exact same experience and have the same goals for their insurance companies; storing the vehicle, processing the vehicle, selling it online for as much as possible. How they go about that internally is kind of the difference and that's where the insurance companies would see the difference as far as process is concerned. It's the relationship that they have with the local facilities and their national team that would differentiate that. Copart really like to integrate processes with companies. How deeply or how simple it is for information from their system to get into our system would be definitely something that you can tell a difference from an insurance standpoint of working between the two and then there's some small product offering differences.

They're both trying to remain as competitive as they can, so you'll see them adding new products whether it's additional photo packages, videos, title services. Title procurement comes up, such as how much of the customer service and process piece can we take off on the hands of the insurance company to make it as simple for them as possible and so you would see some different mixes between product offerings and what Copart or IAA has at any given time.

How exactly did Copart look to integrate systems with the insurer?

That's a software side piece, so for me it was like magic. The assignment would disappear and all the info would come through and our software team handle that from a technology standpoint.

Hasn't IAA got that as well? Is that a real advantage?

I would assume so, but I'm not entirely sure what their internal side of things looks like. So integration of technology, I'm not entirely sure how it works other than what I saw on our end and that was kind of a piece of how we communicated with the insurers. Telephone was a very traditional way but people are getting away from phone usage. You move into email, you move into text message, you move into alert-based communication and so that's something that we would see that would integrate with them that we would add on as a as a product later.

So you would have a system at the yard and it would be linked up to the tow facility with insurers local to your yard that would then send you an automated alert when you had a new assignment?

At least for my facility and I believe even working in smaller facilities, I don’t remember this as ever coming up. The volume of assignments is so high that if you got an alert, you would be just drowned in alerts. So there's an active screen that gets updated with new assignments that the customer service team works in order. Give or take depending on the time of year, Baltimore would see 120 assignments a day and so those were actively coming in and actively being worked by both customer service and management.

How is customer service structured at Copart?

It's one of the teams within operations so at most facilities, there's usually a customer service team, there's a dispatch team and there's a title processing team. Those are all within the office structure and then you have an outside team that handles processing the vehicles. Internally, the customer service team is in charge of inbound and outbound calls as well as any customers who are physically in the facility whether they're coming to pay, whether they're coming to pick up, whether they're a member of the public coming to look at vehicles, whether they're a member of the public coming to get things out of their cars. All of those would interact directly with the customer service team which is our customer facing portion of the business.

You mentioned that they go out and speak to the claimant or the towing facility and deal with that?

They would do that primarily via phone. There's a little bit of interaction where people come in and say, I'd like to release my vehicle or I'd like to see my vehicle or I need to pick up my vehicle. That's minimal. The bulk of that is either inbound or outbound communication as far as checking with the tow facility for a vehicle being ready for pickup or speaking with the owner saying hey, this vehicle is in your driveway, are you ready to release it to us and then us sending a tow truck to them.

You’ve picked up the car from the towing facility, moved it to your yard, it's in storage. For your yard, specifically, what were the costs of the whole process?

The two largest costs for that operation are sub-haul and labor, so obviously I have employees on all ends of that and labor becomes a big cost for almost any business. Sub-haul is the other really large expense in the auction industry and that comes from the fact that Copart doesn't own a vast majority of tow trucks. It owns a minimal amount of tow trucks. The bulk of it is done through contracts with local providers and so the bulk of that towing is handled through what they call sub haul and it's on a contract basis. You've got a pool of sub-haulers who all agree to set pricing per vehicle and so those companies work to get the vehicles for you and then you pay out on a per vehicle basis; that would be a significant cost to the facility. Towing, in general, isn't cheap and so when you're towing 40,000 cars annually give or take it, it adds up really quickly.

Roughly how much is it per car to sub-haul?

That varies on market and distance. It's much cheaper to tow a vehicle in Alabama than it is in New York City so the system is based on travel distance. The further they have to go out for a vehicle, the more it costs. Really, it's where in the country is the vehicle and how far away from a Copart is it? It's another one that gets back to your prior question about facility density. Facility density is huge. If you've only got to tow the vehicle 20 miles it's going to be way cheaper than if you've got to tow it 120 miles. That's why you see constant capex on adding facilities; it's both for storage capacity and minimizing that sub-haul cost and distance.

How much of the yard cost is sub-haul and labor, roughly?

That's a good question. P&L wise I don’t recall, as a percentage.

We can work backwards, potentially. The vehicle sells for $1,000. Let's say it's 20 miles away, would there be a certain cost of picking up that vehicle that you would be happy with?

There's an internal metric of cost per car and that gets averaged out across 35,000 cars sold, give or take, and that's tracked, broken into pieces. I would say probably about half of that becomes labor and sub-haul.

That's roughly 25% each?

They’re pretty close to match. That's going to vary a lot depending on the size of your facility. If you've got a smaller facility, you're not going to spend as much on sub-haul but some of your labor costs are going to be static. Every facility has a GM, every one of them has a dispatcher, regardless of size, so you might see that tilt one way or another because of how the staffing is set up. Some work with a little bit less office staff, some work with a little bit more so those will vary, but your cost on a sub-haul basis per car shouldn't vary all that much, particularly within a region or a facility.

Did you see the sub-haul cost decline over your eight years for any facility?

Sub-haul costs declined, I believe, overall, in the eight years I was there, but they’re variable relative to market conditions that are outside of Copart’s control for the most part. Fuel cost is huge for a tow truck operating and that diesel cost is massive. Insurance costs is a big deal too so as it became riskier to insure tow trucks, it took more costs for that. Fuel was that big one. Labor within the market is one of those.

There was a time where unemployment in the United States was extremely low and so you had to pay more to get a tow truck driver. It became more competitive to get those guys. That drove up those costs and, in turn, they would ask Copart for more money to meet those costs. As fuel costs went down, as unemployment went up and it became cheaper to employ those people, then Copart would look at adjusting sub-haul, where could they make savings within the market too. They’re a publicly traded company so they are always going to evaluate those on as much of a rolling basis as they possibly can.

And what was the best in class or lowest cost per car?

Good question that I can't recall. There used to be a whole breakdown of that on a national basis and I remember I would just get absolutely buried by some people who were able to do it way cheaper than I was.

What would you be happy with?

I'd look down the list and see myself third from the bottom and say, what is going on? Well, Maryland is a fairly expensive market to operate within and even with three facilities we had some sections where we had to tow pretty far. I don't remember who was best on a cost per car basis but, in general, as a rule of thumb, low cost of living and a facility that doesn't tow super far are going to be the metrics that really, really help you. Montgomery, Alabama was a place where I spent a year. I had a much lower cost for car there than I did when I was in Florida or when I was in Maryland.

So you received the car in the yard, how do you process it?

There's a position that's in charge of processing those vehicles in the operation called a receiver. Every receiver has a handheld digital device, it’s basically a smartphone where there's a pre-programmed application in there that requires them to check all of the data and then automatically uploads into our system. They walk up to the vehicle, check the VIN, make sure that stock number matches the listing that they have within their device and then they go through processing it; taking photos, seeing if the vehicle starts, seeing if the vehicle will move, verifying what sections of it are actually damaged, what sections of it are actually good. Was it a rear end collision? Was the front end fine? And vice versa, those type of things.

It's a portion of verifying details that we already have and a portion of identifying what's actively wrong or not wrong with the vehicle and then photos of the vehicle are integrated into that process as well. So they complete all of that data, hit submit and then it automatically would upload into Copart’s system.

How long does that roughly take?

It depends on how good your employee is. For a simple car where there's not much wrong with it and a competent employee, two to three minutes. Some of the guys are incredibly fast. A complex car with a lot of things wrong with it or that you have to dismantle a little bit to see properly or a guy who was just really trying to take his time can take up to 10 to 15 minutes.

What is the most difficult part of that processing operation?

Copart has a very tight threshold for allowable photos, so making sure that your photos meet the particular criteria is definitely the most difficult portion of that. It's a setup similar to restaurants where if you go to a McDonald’s, every hamburger is supposed to be exactly the same. If you go to McDonald’s here or 100 miles away, the product should look the same. Copart follows a similar philosophy for photos. If you have a photo taken in Maryland or Alabama or California of a similar car, those photos should be able to almost be placed over the top of each other and give you the exact same viewpoint of the vehicle, so making sure that guys replicate the exact same process repeatedly and get quality photos over and over is a real big piece of that.

How did you improve the processing operation in your facilities over the years?

A big part of it is training, making sure that everything is done not only properly but done properly the first time. Our biggest time sink would be repeating work. If a vehicle needs a new photo set or if a vehicle got information entered wrong or they did the wrong vehicle with that information, you go back and do that. It's a big training piece on making sure you have the right people in the right positions and they're producing quality work the first time.

So my focus was usually on employees looking at photos for quality and making sure that everything's getting done properly and that we're not wasting time. There's a lot of minor things within a facility that a general manager or regional manager would take a look at and say hey, this doesn't seem to be going as well and all the vehicles are removed with large forklifts and so are the guys driving around without vehicles on their forklifts often? Are they doing circles around the parking lot or they just going on joyrides or they actively moving cars a lot too? So it's both an experience piece of knowing what a facility should look like after you've been in it; and then a metrics piece of looking at are we operating as cleanly and as efficiently as we could?

What metrics that you typically follow?

So the most basic one is how many cars did a guy process in a day? You can look at that data really, really easily. He processed 10 yesterday, okay, that’s crazy. What was he doing? Maybe he was doing other tasks and that's what could explain it. You get with his team lead. What did you have that guy doing yesterday? Oh, he was just processing cars all day. Okay, well he might have been taking a nap in the car? You’ve got to look at that and you could do the same thing for our loader operators or forklift operators with touches. How many vehicles did he touch yesterday? Did he touch 40? Did he touch 400? What was he really doing? Then you could break that down on the outside and then inside had metrics too and it's the same thing of Copart deals with a lot of volume and so a lot of it is volume pieces.

How many inbound calls did one of your CSRs take? How many outbound calls did one of your CSRs take? How many cars did one of your dispatchers get moved? How many cars did one of your dispatchers get picked up? All of those things were really trackable and it was cars in, cars out, cars in, cars out, all moving in a circle, kind of life cycle piece and so looking at each of your team members from a metric standpoint and seeing if they're fairly in line with each other or if you've got outliers in one direction or another. Do you have a superstar or do you have someone who's really dragging the team down and trying to get everyone closer to that median level.

How could you improve the photographing bottleneck in the process?

Technology would be great if you could just drop into photo booth and automatically hit a button and it takes your 10 photos and just move on with it. It's a little more complex because you've got to manipulate the car a little bit and photo booth is tricky from that standpoint though not impossible and I believe both IAA and Copart now are moving into video processes which would certainly integrate with that. You could get a 360 of the car and that technology is evolving pretty quickly. You look at someone like Carvana who has a fully digital online website that you can rotate the car, open doors, those type of things. So as technology evolves, that makes the photo process simpler and both more complex just with what you can do to it.

From a really simple standpoint in a facility, it's making sure the guys understand why they're taking the photos and what details we're actually looking for in the photos. If you say okay, I need you to open the passenger door and take a picture, they're just going to open the passenger door and take a picture. If you say, I need to see the steering wheel, I need to see the gearshift and I need to see whether the passenger side airbag is deployed, well now they're taking a much more specific photo because they know what data that you're trying to get from that photo and it's all data that's based on what the customer is looking for. Is it an automatic or manual transmission? Is the steering wheel bag blown? Is the passenger bag blown? Those are things that all have interest to a buyer and so making sure that your guys understand, not just the work you're looking for, but why they're doing the work that you're asking them to do I think was a really important piece in getting the photos that you need the first time and getting effective work out of it.

So there are opportunities to automate some of that process to take out the manual labor and hopefully reduce cost?

Yes. Ideally you would automate as much of that as you could. The concept of moving the vehicle into its own photo booth or a video area or something like that is definitely something I think you will see come online in the future. Then that would allow you to have someone enter the details similar to the adjuster process, so it’s moving digitally. You could turn the intake process into something that's more digital too. It would get tricky with certain points. A VIN plate is really tiny, so how do you get down to verify that that is the proper VIN plate on the door? A robot camera can’t really open the door so getting interior photos becomes sort of an issue.

There's always going to be some technical hang ups because every car that Copart deals with is unique. No accident is absolutely 100% the same so there's always some amount of variability to it. Automation and technology are definitely going to come more online in every aspect of that business as they can integrate them and any chance that I think Copart sees or IAA sees to reduce labor costs by increasing automation, I expect they will absolutely take it.

There's no real competitive advantage for Copart or IAA because it seems like both companies could and will do the same thing around that?

Yes. One of the interesting things about that industry is that most of the work that is done is publicly published on the internet so it's not hard for someone from IAA to see what a Copart listing looks like and vice versa. It's kind of hard to sneak something past the competitor and get that much of a competitive advantage because you've got to share it publicly. As far as a processing thing, you could have a first mover advantage so if Copart were the first one with full video or the first one with full 360, that could absolutely give them a temporary bump. But I can't think of anything that would really give a permanent bump in that area because you can't really keep much of anything secret, at least not from the customer facing portion of it and the buyer facing portion of it.

You can definitely hide some things and offer some products on the seller side that aren't as public facing and those definitely help with volume and retention and relationships but Coca-Cola and Pepsi sell their product to the world. Coca-Cola wants to know what the new Pepsi tastes like, they’ve just got to buy one bottle of it and it kind of operates the same way. If Copart decides to change their whole photo setup, they’ve got to put it on the internet first thing and so I could take a look and say, oh, they're doing 15 photos now instead of 10 and can decide whether they want to adjust accordingly.

Do you think there's any operational advantage that you can get in this industry from processing the vehicles?

Operationally, from a big picture no. On an individual facility by facility, the quality of employees and the quality of training definitely shows through facility to facility. If they're not cleaning the vehicles properly, if they're not taking good photos, that can get noticed on a local level and so you can run into hey, IAA just does a lot better than you all are doing at cleaning out the cars and taking photos, and so you have a local adjuster who says I would like to try and move from IAA to Copart or vice versa because of the quality of the local facility and their processing.

But I can't think of really any big competitive advantages other than speed. There's initiatives to how quickly can you get the vehicle into the system. If you've got an insurance company that's doing primarily digital adjusting and if they're doing it with Copart or IAA’s base photos, then the quicker those photos get into the system, the quicker that they can adjust it and the quicker that they can make a decision for their customer. So if you could automate or increase the rate at which you get that information to the customer, that would be a big help but again that's something that's probably going to get communicated across the board pretty quickly. If Copart say tomorrow that from the minute it gets to our facility, we're going to have it uploaded within 15 minutes and they follow through and are able to do that, it's not going to be long before someone from one of the insurance companies tells that to IAA and says Copart’s getting every vehicle up in 15 minutes. Why can't you all do that?

So they could either adjust or say that's just not something that we're interested in doing. We don't view it as possible, helpful, whatever reason they may have but they'll definitely get to make that competitive decision because there's really not that much that’s secret.

So the car’s processed; moving to an auction, what do the buyers really care about?

Getting it as cheaply as they can. Paying as little money as they possibly can for it is what they care the most about. Unfortunately for them, that's a little out of their control and so the other thing they really care about is getting exactly what they think that they're buying. If they see the vehicle as wrecked in the front, they want the rear to be perfect. If it shows as perfect in the photos, that's the product that they want. If you list online that the engine starts and the car will move forward, they want that vehicle to start and move when they get to the facility. They want to be able to trust the information provided to them because the bulk of them don't come out and touch the vehicle or walk around the vehicle.

Copart provides that opportunity. I'm fairly certain IAA provides an opportunity as well, but if you're bidding on a vehicle in Baltimore and you're in Kenya or England or anywhere else in the world, you're not flying over to touch the car to then go back and bid, so you need to trust that the information provided is accurate. However cheaply they can get it and then they want the car to match exactly what the description is; those two things are paramount over anything else. The interior being clean, the exterior being clean, those are all kind of frivolous things that you might have a buyer here or there say, there was mud on the car, I can't believe it. But that's going to be more of a one off. If I if I said well, what if I told you that car was going to be $500 cheaper because it was muddy, yeah, bring on the mud; no issues.

Let's say I'm buying a car, $1,000. I know they have a list price online but how do Copart think about the pricing?

The purchase price of the vehicle is directly relative or directly relevant to the insurance company, so that's what goes to them. Then there's a fee structure for the buyers of what they pay to participate with Copart. Every vehicle has a few flat fees that if you're buying a car, you're going to have to pay x, y and z fee and then there's a sliding scale fee that goes up as the price goes up. So a $500 and a $50,000 car are going to have a very different set of fees based on that sale but they'll still have the same flat fees attached as well.

I believe there was either three or four. It’s either two flat and a sliding or three flat and a sliding. Then the only additions to that are if they want us to hold the vehicle for a longer time. Obviously, we'll store it for as long as they want but we're not going to store it forever for free so they could add up more charges depending on how quickly they can get the vehicle.

How has the buyer fee, the percentage of the average selling price, evolved over the last 10 years since you were working?

It’s steadily increased. I've never seen a reduction in fees, not that I can recall.

As Copart has scaled, they've had pricing power to increase the fee?

That's mostly just a market piece. As they control more of the market, they've got more of the volume, they can dictate what it really looks like to operate their facilities and say hey, we've looked at our costs for sub-haul and labor, they've gone up 10%, it just costs us 10% more to produce this product and continue to put on these auctions. It’s easier to assign that on to the buyer side because they're fully in control of their own product, than it is to renegotiate national contracts over a long time. If they do need to adjust for that 10%, 5%, whatever they're looking at operating costs going up, it's much easier to do on the buyer side than it is on the seller side.

Can you flex the fees due to market demand or because it’s a list fee it’s hard to change?

There's definitely an opportunity to make it a little more transparent as far as you're bidding this much and this is what your out the door price would look like in an auction. I don't believe either company offers that currently until you've actually purchased the vehicle and then it displays your out-the-door price. But you could certainly look at that maybe even as an option that they provide within the auction of changing your own settings to say, is this my bid price or is this my out the door price and make it simpler for those guys to do that math on the fly. But I'm not sure that you can really optimize, say, the price of Honda Accords or Toyota Highlanders because there's variability in the markets and the quality of car.

You can take a look at what every single Honda Accord has sold for at Copart internally, Copart employees can. I don’t believe that data has ever been shared with buyers but every one of those is unique. So you can take a guess at what a vehicle would sell for but that front-end collision is just not exactly the same as another front-end collision. You might have retained one headlight, you might have retained the hood, so you can make a really good prediction on what it looks like but every one of them is going to be just a unique purchase.

How do you look at the evolution of the buyer fee over the next 10 years?

My prediction is it would continue to scale up but you can only move that so far before your buyer fees are going to start outpacing the cost of the vehicle. That's not something that I think would ever happen both from a customer service standpoint and an appearance standpoint. Neither Copart nor IAA wants to say hey, you gave us this car and we sold it for $1,000 but we took $1,100 extra on top of that? You've got to reduce the capability of returns for the insurance company at a certain point and so it's kind of a balancing act. I'm fairly confident there's people smarter than me doing math behind the scenes that say hey, where's the threshold for this where we cross over between affecting returns and moving buyer fees?

My guess, based on historical data, is that it will continue to move up, but if they got a little more creative with what they offer as peripherals, they could potentially move it down if they're trying to continue to pick out more volume. It helps that it's already scaling a little bit. If volumes dropped and average selling prices went up then Copart fees, by default, as a percentage, would move up with them just because if a $1,000 car is now worth $1,200 it will continually move in that way. So by not making it completely flat on the buyer side, they do have a little bit of flex in both directions that protects them.

It seems that they've also added the bidding fee and these other peripheral fees like you added which kind of protects the lower buyer fee but also increases their revenue.

Right, and it gives them a little bit more predictability to their model. It makes it such that if you sell X amount of cars, even if they were all really cheap, base level cars which your product mix would never be that way, but you might as well set a floor to it, you know that you have a flat fee attached to every single one of them and so there's pretty much a guarantee that you can bake in on both directions. That's going to cost you X to pick up, store and sell the vehicle, you can add what your flat fee on the seller side would be and add your buyer fee flat rate and make sure that you at least cover everything and then add on top of that to make sure that you're actually profiting, so it definitely adds to predictability and scalability of the model.

But it also has to be a function of the return on investment for me if I’m a buyer. If I'm buying a vehicle for $1,000 and I paid $150 buyer fee, $50 or $60 hidden fee, if it’s $1,300 for me total, I’ve still got to get a return on that vehicle. How do you look at that ROI of the buyer and what could drive that over the next 10 years?

That's an interesting piece because it's relative to used car pricing as well. They can have more opportunity for ROI as used car pricing goes up. Used car pricing in the US right now is really up and so if you can sell a Toyota Camry that's, let’s say, 10 years old for $3,000 whereas six months ago it was only $2,500, that gives them more flex as far as opportunity. It also gives them another $100, $200 to bid on the vehicle so it could move returns as well.

I expect used car pricing to just continue to move up. Parts have a lot of value these days, scrap, repair, all of that stuff so I would assume that you're going to see a change progressively higher of the opportunities for ROI because people will get more creative with what they can do. Exporting between countries is going to progressively move down in cost, I would say, as you get more and more globalized countries. I think that those two will match but I don't have a really good model on that one because there's a lot of variables outside of the control.

Just looking at that, so when you get a vehicle in in the yard, what is typically the issue? We look at a stat from LKQ which was the salvage market, the stuff that they buy, I think it's 50/50 between mechanical and collision parts that had the issue. How do you look at just roughly the major issues with the vehicles?

Damage code which was something Copart lists online and is a searchable field for them is a huge dictator of how much the vehicle is worth. The vast majority of collisions are front end, at least in some kind of capacity. They hit something. They ran into a wall, they ran into a tree, they ran into another car. So that makes your front-end collision the most common thing. If you're looking to replace the front end of a car, you need a rear end collision. That's less likely or less common, so that vehicle's going to have more value. Now there's also the fact that the engine is in the front of most vehicles and that's usually the most expensive part of a vehicle is the powertrain, so engine transmission.

Mechanical cars, at least in the US, it's not common for them to be totaled for those reasons unless it's a flawed vehicle so you would see those as dealer vehicles or consignment vehicles that would come in with that mechanical code. It's not impossible for a vehicle to be mechanical damaged and get totaled by an insurance company but usually it's going to be a special case. Did the vehicle catch on fire? Was it stolen and somebody ran it out of gas or oil? Did they suck up water into the engine? Those type of mechanical issues which would make all of the body fine. Hail kind of falls into that as well; the body panels are messed up but the engine isn't, that’s kind of the opposite.

Then LKQ’s mix of that, I’d say 50% mechanical vehicles, I'd be really surprised by that. Now the mechanical gets thrown on as a backup code by a lot of facilities and that's kind of an indicator of, this thing ran into a tree and it pushed the radiator halfway into the engine block. We're going to list it as mechanical. I wouldn't personally consider that a mechanical car. It's one that's been damaged on the front end so bad that the engine doesn't run, so it's still a front-end collision vehicle but there's definitely that mix of vehicles that have good body panels, bad powertrain and vice versa that have bad powertrain, good body panels.

What kind of cars are dismantled and sold for parts versus rebuilt. I guess my question there is just around as we see cars evolve and move electric with more complexity, how do you see the rebuild-ability of vehicles?

That's dictated a little bit on a state to state basis in the US because, in the US, title laws are dictated state by state so they all have their different policies of what can be rebuilt and put back on the road. If you're in a state that has pretty aggressive rebuild laws, as far as you can almost rebuild anything, then you're going to see more cars rebuilt within that state as opposed to some that have really conservative rebuild laws that pretty much dictate if it's been hit in any kind of way, you’re probably out of luck with that.

One of the beauties of Copart’s business model really is that they don't really change the vehicle in any sort of way. What the end user decides to do with it is outside their control and their sphere of influence and so, to the best of my knowledge, it's not really tracked how many cars are rebuilt or dismantled. You can take a good guess at it based upon the vehicle damage, such as the year, the mileage, those type of things. There's a car you look at and you say, that one's going to be dismantled. It’s a 25-year-old Honda Accord with 300,000 miles on it. There's just no value to that as a running vehicle but it's got the value as parts. The opposite side of that is a brand-new Lamborghini. If the front end is wrecked and the engine is in the rear, there's a real good chance they're going to rebuild that one. It's just got a lot more value as a car than it does as pieces. But I honestly don't know what a mix looks like between repair and dismantle because it was just never really relevant to Copart, what people were going to do with it.

Does it even matter going forward, as cars get more complex and change?

I think for a while it will, particularly in developing countries. We spoke a little bit earlier about what I would call improperly repairing or only partially repairing a vehicle and moving it to a place with different safety standards, different rebuild standards. I think until those cars become more common in developing nations that you would see more of the more complex cars here get moved to there, get partially repaired and continue to get driven until it becomes more common or their laws become more in line with US domestic ones. If it's cheaper to repair and put it back on the road in a foreign country than it is in the US, you'll see more of those move there and when it's back in line then you might see a lot more of them stay here and get dismantled and rebuilt domestically. That would go for the EU as well. You’ve got cars within England, UK that would get exported to a developing country for partial repair versus staying domestically.

Most of the cars purchased internationally on Copart auction are really the rebuilt ones or even just driving them in that local region?

Yes. A lot of them are moved internationally because that's a really good source of cars. There's a really vast dealer network within the US that doesn't exist in a lot of developing nations and so you can build your own independent dealership internationally by bringing in vehicles that your market likes. If your market is really into SUVs and trucks then you can import a lot of those from a variety of makers and you can do that by taking salvage vehicles as opposed to importing brand new vehicles which would have a much higher cost.

In certain instances, it also gets you around tariffs and taxes as well. You can take a look at a damaged vehicle and call it auto parts as opposed to a new auto and, therefore, you could import it for a lot more affordably than you could a brand new one. You take a look at something like, let's say, a 2019 BMW and you purchase it at auction, remove the engine, put it into two crates and import it. Or you can take a brand new 2019, 2020 BMW from Germany and import it and your costs on those two to get a BMW into your country would be significantly different just based on tax law, import law, what your individual country views that as.

So playing this forward 10 years, as we do see vehicles becoming more complex, does that reduce the ability to rebuild the vehicles or is there still this opportunity to arbitrage between international or less developed countries and the US?

I think if you look at it from a 10-year standpoint there's still a lot of opportunity and it's going to vary country by country, based on what your customer threshold will allow for. Are customers in your country willing to accept all of the warning lights on the dash being lit up because none of the sensors were reinstalled, none of the airbags were reinstalled and does your country allow that vehicle to go back on the road? Does it need to have all of the original safety equipment in it? Do people who are purchasing vehicles in your country care that it has all of that equipment in it? It becomes significantly more cost effective to repair a vehicle when all you have to do is repair the visible pieces of it.

So if you do two headlights, the front bumper and a hood on a brand new BMW and skip every camera and sensor package in it, you can have that BMW looking a lot more put together than it might actually be underneath the skin and so I don't see that changing too much in the next 10 years. There's definitely going to be that available market within a lot of countries, at least for the foreseeable future, as long as that country's laws and that country's customers don't change what they're looking for.

But around the whole theme of cars changing and becoming more complex, electric, autonomous, what are you most worried about for the salvage industry?

Something interesting within the industry is Tesla operates a lot differently from almost every other auto manufacturer. They do over the air updates. They control software within the vehicle. They do a lot of what we would call a technology company type thing and do a lot of new and innovative things that also gives them the ability to break a vehicle if they want to. As that becomes more common, manufacturers can start saying, once a vehicle has been in a collision, we have no intention of ever allowing it to be on the road again and we're going to shut down the software on this vehicle remotely and we're going to do that every time that it gets reported as a total loss. Well, if that vehicle can only be used for parts in the future, you're going to see the sale price of it go down. If it's no longer a car and it's just materials. Even if it's a brand-new vehicle, it's going to be worth a lot less and so it'll be interesting to see how manufacturers move into technology and remotely connecting to vehicles.

Tesla's the only one I'm aware of that really does it on a large scale right now. GM has an OnStar set up in pretty much every one of its vehicles. I’d be surprised if they can't shut down some level of the software within it if they wanted to. I've never heard of them doing so but certainly a lot more luxury vehicles allow you to start the vehicle and turn it off with an application on your phone. There's definitely more software integration coming in and how the auto manufacturers utilize that technology could absolutely affect salvage if they want to drive it down. Tesla has a really major focus on, I think, what they view as protecting their product and producing a very similar product. If they decide we never want a wrecked Tesla to ever get back on the road, we're going to start wrecking all of them, from a software standpoint that's something they can do and that would absolutely drive down the value of those vehicles from a salvage standpoint.

That's still a small part of the vehicle park but as we do see EVs, Teslas, more complex vehicles enter the park, if the manufacturers can total them automatically and turn them automatically into parts, that's going to hit the ASPs of Copart and IAA.

It’s also going to lower returns and it's going to effectively change the math for insurance companies as well. Those vehicles are going to become more expensive to insure because when they go to salvage, they're not worth as much. There’s a million things that are added into underwriting for insurance, but if you drive a brand-new Honda Accord and it gets in an accident, they have data on roughly what their average return on that vehicle is. If it moves down 10%, that takes 10% out of the math, that Honda Accord is going to become more expensive to do and you would absolutely see a move up in insurance costs on vehicles that have a lower salvage value.

That would be something you would look at from maker to maker. So if Toyota comes out and says, starting in 2022 any of our vehicles that get in wrecks, we're going to break and Honda comes out and says any of our vehicles that get into wrecks, we're going to continue to support for five years, it's going to be more expensive to insure a Toyota than it is a Honda.

Is something like that likely, in your opinion?

I'm not sure. Tesla has certainly started it. I'm not entirely sure that they are completely breaking any salvage vehicles but it is more expensive to insure a Tesla than a similarly priced luxury vehicle. If you just take an apples to apples $70,000 car, the Tesla is going to be more to insure which is something they're looking at from a competitive standpoint. I believe they're looking at starting to insure all of their own vehicles. They like to change things and, historically, the large auto manufacturers have not changed that quickly and I'd be really surprised to see them, on a large scale, decide that they need to start attacking the salvage market in any sort of way because historically it's not something that they've ever really evaluated. I wouldn't say that no automaker looks at it that way but it's certainly something you could ask them about.

If the vehicle is bricked the minute it gets into a wreck, that means the person who wrecked that vehicle isn't getting it repaired or getting it back, so what do they have to do? They have to purchase another vehicle. Now that's not to say that they would buy a new Toyota, but it's not to say that they wouldn't either and so if you start taking more drivable vehicles out of the market, I would say that new car sales would have the potential to move up as would the sales price on used autos. At least in the US, I think that's something that the government would react to quicker than anything else. If it was viewed as price fixing or price collusion that every large manufacturer decided to start killing all their salvage vehicles in order to push new car sales, I think someone would take notice of that but it's not impossible.

Did you ever processed a totaled Tesla?

Yes, but very few.

How much were they worth? Were they parts or rebuilt?

They were all wrecked and I believe we exported all of them; I believe all of them went internationally. I definitely had a Model X, two model Ss and one 3. The 3 was still really new to Maryland when I was up there. For Copart, as a whole, if you went on their website right now, there are probably 100 Teslas, give or take, and that's across the whole country. I definitely had some but I don't remember too much about them specifically.

This was a front collision?

I think the Model X was a rear and I believe all the others were fronts. They do have very good front collision avoidance as far as automatic braking; I think it’s standard in all of them or almost standard in all of them which helps them. It also hurts them, if someone's going to hit them from the side, there's nothing that the car is going to do about it.

Those cars, obviously, were purchased abroad where I guess if the sensor wasn't replaced, they could drive the Tesla around without the required up to date specs?

Right. If they didn't replace all the sensors but the local government didn't require it. The big piece of the US is an inspection. Every single state has its own policies on it but, for the most part, if you buy a salvaged vehicle and you want to put it back on the road, the government has to look at it in some kind of capacity and they want to know that you replaced everything in it. If it gets exported to a country where they don't do inspections or they don't view it as important to replace every single part, you could certainly move it over there, change the front clip out and suddenly say the car's fine and it's driving when I hit the button and it goes. Now that's not to say that the screen might not show a big X and say no, or that 50 different warning signals are going off or whatever, but that's an electronic standpoint. You start cutting the right wires and you start solving it.

Where there's motivation, there's a way to solve any sort of problem like that. If you just say well, no one's going to buy this car because this light keeps flashing and it’s dinging because we never replaced that sensor. Okay, well, let's take it out and cut that wire to that light. Oh, suddenly the chime doesn't go off and the light doesn't light up. If consumers in your country and the government in your country aren't looking for that or don't view that as an important thing, then by all means you might as well go for it.

It’s also interesting because as Copart and IAA scale globally, you open up so much more opportunity to almost arbitrage the regulations but also drive lots of buyers to drive demand.

Correct and you also present an opportunity for those customers who have purchased Copart vehicles in the US to do it on a more local scale. They no longer would have to look exclusively in the United States for their salvage vehicles. If they're in, let's say, North Africa or the Middle East it's much cheaper for them I would assume, on a distance basis, to get something from France, Germany, Italy, distance wise to import into that region of the world as opposed to the US. So if you've got salvage pools there and you've got the opportunity to buy on larger scale then you can help with ROI, as you mentioned earlier. It only cost me X to get it here and import it, as opposed to Y and so it opens up even more opportunity for them to scale their business.

Let's say they can only get 50 cars out of the US, that's what they can afford, maybe they could get 75 out of Germany and once they're profiting off of that, they could add that on top of the 50 they get from the US and they could buy a different type of car because their ROI mix changes a little bit. If it's a little cheaper for them to import it than they can look at what customers in their country would purchase. There's also a different product mix. Every single car offered in the US isn't necessarily offered in Europe and vice versa. So you've got some makes that are in countries that aren't in others and salvage pooling there allows an opportunity for those vehicles to get imported and start moving across borders.

How do you look at the opportunity for Copart to replicate the US system in Germany?

Right now, in Germany, or at least it was last year, I'm not super aware if they've made any moves, when a vehicle gets totaled out, the insurance company looks at what they would pay to repair it, what they would pay you to purchase the vehicle from it and what they think it should sell for. What they generally do is take what they owe you on it, remove what they think it can sell for and you get that amount plus the vehicle and so now it's your job to dispose of it.

When that's how the industry has worked for forever then consumers view it as normal within the market. If that was done in the US, people would start losing their minds. If Allstate called you up and said hey, we're about to dump your wrecked car on your front lawn, figure it out, people would go insane because there's no infrastructure really to sell that right now; they all go to salvage pools and that's how it works. Copart is looking at that and saying, we think that it's a better opportunity to pool those vehicles and retain them and put them into areas where they're much easier to sell. Germany is the market they're really attacking right now, by purchasing those vehicles from individuals and pooling them and like we talked about earlier, if you've got one car to sell, you've only got so many eyes on it. If you put 100 in a location, it's much simpler from a buyer standpoint to find something that they want. If Copart can gather up 100 cars and put them together, they're going to sell them for more. Well, if they can sell them for more, that means returns would be better for the insurance company if they go with that model. So it's something where they will look at hey, if you pool this, it's what they view as a better customer service piece to the insurers and it's better returns for the insurance company, so it's win-win. It’s standard over there up to this point, so that's what they're looking at as far as the whole EU is concerned.

It's almost like there's actually more friction in Germany than the US.

Correct. Just looking at it from my point of view, it sounds like a very complicated system. You get handed a vehicle and you're told you need to sell it for this amount of money. That's assuming you can sell it for that amount of money and if not, you've got a vehicle that you can't really do anything with, sitting in a parking space in front of your home or in your backyard or any sort of an area where you don't want it to be. Maybe you only have one parking space dedicated to you and your wrecked car is in it. You need a new car. Where are you going to put that new car? So then you’re motivated to get that one out. Well, that probably means you're going to offload it to the first person who offers you anything reasonable for it. So even if that's €1,000 less than what the insurance company thought that you should get for it, you need that thing gone and someone's finally offering you money for it, so you offload it. Well, now you've returned €1,000 less than the value of your vehicle was to start so you're not happy. You tell your insurance company. You said I could sell it for €5,000 and no one ever offered me over €4,000 for it, so where’s my extra €1,000? They say well, everyone else has been able to sell it for €5,000. You don't know that and from a consumer standpoint you don't have that data, but it definitely isn't as seamless as the US.

It's an interesting market here because everyone has a car. Almost everyone has multiple cars it seems like. That's my car, that's my wife's car, that's our kids’ car and they've got them everywhere. The bulk of people have no clue what happens after they wreck a car. Car gets wrecked, it gets totaled. They never see it again. Their insurance company calls them, says it's a total, we'll send you a check. They say okay and the process is over and that's for the vast majority of Americans. It's definitely something that, at least on paper, they have never experienced that system right over in Europe, but on paper it sounds much more complex. They say, hey, your vehicle’s worth €10,000, we think you can sell it for €5,000. It's at this location, go pick it up and we'll send you €5,000.

Which seems crazy when you think about it.

Yeah, absolutely.

What do you think could be the barrier to entering those markets?

This varies a lot by country but it's definitely going to be something where you look at space as a concern. A large-scale industrial space in certain countries in Europe probably doesn't exist. So you've got to say Copart fits, give or take, about 150 cars per acre. I'm not sure if acreage is even a measure in Europe, but you would look at something like that outside of a large city, you need something like 100 acres; that might not exist and so that that's really tricky to come up with in certain countries over there.

The other issue is you need to convince the insurance companies that it's better for them in the long term but it is a cash outlay on the front end. If they're paying the full value of the vehicle to their insurance, that means they're now slightly on the hook for the sale price of that car. Long term, the math should work out for them and probably will work out for them, but you need to convince them up front hey, you're going to have a whole lot more money in an outlay until these vehicles sell. Under the current system, if they say your car's worth €10,000, we're giving you €5,000, it's on the customer to figure out what to do with it. They're only out that €5,000, whereas if they move to a US model, they're out €10,000 until that vehicle sells.

How do you convince them?

If I were doing it, I would purchase up the vehicles for X amount, prove my model by selling them for Y and then take that into a spreadsheet and send it directly to the insurance company and say, here's how much money you missed out on this quarter. Here's how much you missed out on this fiscal year and say sign up, we'll take it over from here and you will be able to up returns and reduce costs. I would turn it straight into a math problem and make it almost impossible for them to say no.

I think that's what they're doing so I guess we're going to find out. I think we're going to find out what happens over the next four years.