America's CAR-MART Inc (CRMT) 2007 Q2 法說會逐字稿

Good morning. Thank you for holding and welcome to the America's Car-Mart second-quarter conference call. The topic of this call will be the earnings and operating results for the Company's first quarter ended July 31, 2006.

Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay for the next two days. The dial-in number and access information are included in this morning's press release, which can be found on America's Car-Mart's website at www.car-mart.com.

As you all know, some of management's comments today may include forward-looking statements, which inherently involve risks and uncertainties that could cause actual results to differ materially from management's present view. These statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. The Company cannot guarantee the accuracy of any forecast or estimate, nor does it undertake any obligation to update such forward-looking statements. For more information regarding forward-looking information, please see item one of part one of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2005 and its current and quarterly report furnished to or filed with the Securities and Exchange Commission on Forms 8-K and 10-Q.

Participating on the call this morning are Skip Falgout, Car-Mart's Chief Executive Officer; Hank Henderson, the Company's President, and Jeff Williams, Chief Financial Officer. And now, I would like to turn the call over to the Company CEO, Skip Falgout.

Good morning. Now, I would like to make sure everybody knows, this is the earnings call for our second quarter ended October 31. We did issue a press release this morning, as well as a pre-announcement of our second-quarter results, which was issued on November 13 and both of these releases are posted on our website.

This morning, we reported a loss for the second quarter of $0.16 per diluted share, which includes a $3.3 million non-cash after-tax charge related to an increase in the allowance for loan losses. And Jeff will go into the details of the financial results in a minute.

We obviously are not satisfied with the results of this quarter and we're actively and aggressively addressing each of the major aspects of our business; namely, purchasing the right vehicle, selling the right vehicle to the right customer, and successfully collecting from that customer. All of this has one major goal of providing the highest level of customer satisfaction in order to build our repeat customer base to ensure our long-term success and growth.

In light of our financial performance so far this year, we have refocused our efforts and are driving to maximize our returns on invested capital on a lot by lot basis. We will continually review our returns to ensure that we employ capital in the future to those dealerships' activities that will generate acceptable returns that can be sustained over the long term.

We have curtailed the opening of new dealerships as we look to bring both established and newer lots up to performance benchmarks that we feel are attainable based upon our history. All of our financial goals are aligned with our desire for our customers to succeed and become repeat customers in the future. Hank will address some of the specific things we're doing to improve our lot level performance. First, Jeff is going to discuss the second-quarter results in more detail.

As mentioned in the press release, top-line revenues increased 7.6% for the quarter. The increase was principally the result of an increase in the average retail selling price, an increase in the volume and pricing related to wholesale vehicles, a 24% increase in interest income offset by a 3.3% decrease in retail unit sales.

Same store revenue growth was 1.4% for the quarter. Our average retail sales price per unit was up 9% to 7957 from 7301 in the second quarter of last year. The average retail sales price for the quarter was up slightly from our first quarter's average of 7913.

Going forward, we expect to see some continuing growth in our average retail sales price when compared to the prior year results; although the average retail sales price should be about the same as the level we saw this quarter. We saw a decline in unit sales for the quarter due primarily to the fact that we had tightened up underwriting in the face of increased credit losses. Unit decrease was particularly concentrated in our lots that are experiencing higher credit losses.

We're focused on making good deals, and are passing on a higher percentage of applicants than we have in the past as we work to bring credit losses in line. Interest income is up as a result of the increase in our average finance receivable portfolio balance of about 24 million, as well as the effect of increases in the federal primary credit rate, which is the base rate for underwriting in the state of Arkansas.

At October 31, we were charging 11.25% on new Arkansas loans, up from 5.75% three years ago. Our effective interest rate earned on finance receivables for the quarter was 12.4% compared to 11.4% in the prior year period. It should be noted that we may see a slightly slower growth rate in the future for interest income due to some specific state decisions to reduce rates in our efforts to help our customers succeed. Hank will discuss this in more detail in a minute.

For the second quarter of this year, our gross profit margin percentage was 42% of sales, which is down from 44.4% in the second quarter of last year and 44.4% for the first quarter of this year. The reduced gross margin percentage resulted from higher operating expenses, mostly repair costs, as we work to keep customers in vehicles related to a higher volume of wholesale sales, which for the most part relate to cash sales of repossessed vehicles at breakeven and the effect of selling a higher priced vehicle.

As we have previously discussed, the Company's gross margins are set based upon the cost of the vehicle purchased with lower priced vehicles having higher gross margin percentages. Lot managers are given some discretion in establishing retail prices and have focused efforts at the direction of our operations management on maintaining margins even in the face of rising vehicle costs.

For the remainder of this fiscal year, we will continue to focus efforts on retail pricing. We will work to keep our repair and transport costs down, and we would expect to see gross margin percentages approximating the second-quarter results.

In the second quarter, SG&A as a percentage of sales increased to 19.5% from 19% in the same period last year. The increase was primarily related to increased advertising, higher insurance costs, and additional costs associated with repossession activity during the quarter.

Additionally, the overall dollar increase between periods was due in part to increased costs incurred to strengthen controls and improve efficiencies in our corporate infrastructure, as well as the incremental costs associated with the 11 new lots that have been opened within the last 12 months.

Total dollars in SG&A was in line with our budget. But because our top-line sales were below expectations, the expense as a percentage of sales is higher than the prior year period. As we have previously discussed, the investment in our corporate infrastructure is ongoing and will allow us to support and enhance our operating execution at the dealership level. We have not yet seen the bottom-line benefits of these investments, but intend to fully leverage these costs into the future.

It should also be noted that we incurred approximately $90,000 in non-cash compensation expense during the quarter, which is included in SG&A related to stock-based compensation, under FAS 123(r), which we adopted effective May 1, 2006.

For the current quarter, credit losses as a percentage of sales were 27%. This is excluding the $5.3 million non-cash charge to increase our allowance for credit losses. This is up from 24.6% in the second quarter of last year. The largest percentage increase in credit losses was concentrated in our Texas dealerships. While overall credit loss percentages are much lower in our mature stores, stores in existence for ten years or more, the losses for these locations during the quarter were higher than historical averages and we are aggressively addressing collections at these lots.

As we have previously discussed, credit losses on a percentage basis tend to be higher at new and developing stores than at mature stores. Generally this is the case because the store management at new and developing stores tends to be less experienced in making credit decisions and collecting customer accounts and the customer base is less seasoned. Generally, older stores have more repeat customers.

As mentioned in the press release, our older, more established dealerships have a high percentage of repeat customers in excess of 45% and the lowest credit losses in the low 20% range. Our average repeat customers are a better credit risk than non-repeat customers.

Due to the rate of the Company's growth, the percentage of new and developing stores as a percentage of total stores has been increasing over the last few years. Although higher energy and fuel costs, increasing interest rates, general inflation and personal discretionary spending levels affecting our customers have had a negative impact on collection results. We know we can execute better at the lot level and our renewed focus and initiatives on this part of our business, as well as our decision to slow down our new store growth should get our credit losses back in line hopefully within the next several months.

At October 31, 2006, 5.4% of the Company's finance receivable balances were 30 days plus past due. This compares to 4.1% at October 31, 2005. During the second quarter, actual charge-offs increased to approximately 15 million or about 28% of sales compared to 12.5 million or 23% of sales for the prior year's second quarter. The increase in charge-offs coupled with the level of accounts in our 30 plus days past due category prompted us to increase our allowance for loan losses from 19.2% to 22% of finance receivable principal balances.

The increase in the reserve was broad based as collections have suffered across the board and as mentioned, many of our older dealerships experienced above average credit losses during the quarter. As Hank will discuss later, we are aggressively addressing our underwriting guidelines and practices, as well as our payment terms to ensure collections improve going forward.

We saw a decrease in total finance receivable principal balance of $1.9 million or 1% during the second quarter due to the higher charge-off levels and our lower sales levels. Our debt increased by 2 million for the quarter; inventory levels increased by 2.1 million and capital expenditures were 600,000 for the quarter.

Additionally, we made $3 million in income tax payments during the quarter. We were in violation of our collateral adjustment percentage covenant under our revolving credit facility. As expected, this violation has been waived by our lenders. We have significant liquidity under our debt agreement. Excess availability was $12 million at October 31, 2006. We will continue to review our capital structure in the coming months to ensure that we position the Company with adequate liquidity and resources for the foreseeable future. Now, I will turn it over to Hank.

Thank you, Jeff. With regard to the issue of controlling credit losses, there is no question that throughout our history, we have put far more energy and focus on the collections and customer side of the equation than we have on the underwriting side. And while in many ways this approach has served us well in the past, we have come to recognize that we do have a lot of room for improvement with respect to the decisions we make on the front end.

Our IT department has been working for the past couple of months on enhancements to our operational database that will provide us with far more customer profile information than we have ever had. Our plan is to have this project completed and rolled out in January and while those enhancements will be providing us more information on future sales, we have also initiated a project to assemble customer information from historical sales so that we can begin work immediately improving this aspect of our business. And ultimately, this data should provide us with certain facts that are predictors of our customers' ability to pay for their vehicle.

Also regarding underwriting as we have discussed, it is generally our newer stores that have the higher credit losses and therefore, we have put specific underwriting guidelines in place on these younger stores with higher credit losses in an effort to weed out some bad decisions. And we have lowered our interest rates at all of our Texas stores, as well as our one store in Tennessee. Our goal here is to put our customer in a situation where they are more able to get their car paid down into an equity situation.

As we've said many times, repeat business is vital to our success and we believe that this move will help our customers and ultimately increase our repeat business. Obviously, it will take some time to realize the benefits of this, but we're confident it is the right thing to do in the long term. Our Arkansas lots have been extremely successful with lower interest rates and they have excellent repeat business.

On the collection side, our associate development department is presently devoting 100% of their efforts to the training and retraining of our collection staff and they have also just put into place a competency test to assure all of our accounts reps are fully trained.

To touch on sales, our focus is not just on increasing sales numbers, but specifically on increasing our number of good, solid quality deals. Obviously, as we tighten up underwriting, we must do a better job with sales to attract more prospective customers to our stores and we have substantially increased our television advertising. While we have done some television in the past, we have never done it to the extent we are now. Our current advertising campaign stresses the quality that Car-Mart offers and we believe this will help us attract a larger and better pool of qualified customers.

We also now have a point person, a sales specialist from our corporate office working directly with stores that are not reaching their sales potential. This individual has over 20 years experience as a store manager and he definitely knows how to sell cars. Now he works with these lots to improve their inventory mix and merchandising and also provides them with whatever sales training may be needed and he also oversees our secret shopper program.

Our purchasing department is doing their part to help the sales efforts by putting more focus on ensuring that not only does each store have an adequate number of vehicles for sale, but that each store is stocked specifically with the vehicles that sell best at each particular location.

Now there is one last, but very important point I want to share with you, and you really couldn't call it an initiative or a project and it's certainly not anything new, but it is very vital -- a very vital component to our future success and that is the focus of management of Car-Mart on our customer at this time. Now I hate to admit that it may have needed to be revitalized, but I candidly can tell you that it has been. We recognize not only the great opportunity and potential out there for our Company, but we also recognize that in order for us to be successful, we have to take care of our customers and we have to understand the struggles that a customer has and do everything we can to put them in a vehicle that is mechanically sound with payment terms they can afford, and work with them patiently through those times when it is tough to make payments.

Now every decision we're making we're trying our best to be very mindful of how it impacts our customer. There is no question there is a tremendous need out there in the "Buy Here/Pay Here" market and we believe that whoever does the best job taking care of the customer will be the most successful. And with that, I will turn it back over to Skip.

Thanks, Hank. Our rapid growth over the last few years has brought on challenges to the way we do business. The basic model of our business is the same as it was in 1981; buy them, sell them and collect for them. However, to continue to do that successfully, we are adding good people, better training, stronger policies and increased levels of technology. All of these things will then change what we do. Sort of like that TV commercial, should enable us to do these things better.

We want to continue to encourage the entrepreneurial spirit of our associates to adhere to our basic values of respect, integrity, compassion and excellence. While following these values, we will drive the ultimate factor of our success to satisfy customers who have been and will be repeat customers. We have always taken a long-term view of our success as evidenced by the continuous growth of even our oldest dealerships.

We know that we are going through a difficult phase of our growth from a small regional company to a truly national company. But we're confident that we can manage our business and growth to enable us to continue to be the number one "Buy Here/Pay Here" company in America.

Operator, that concludes our remarks and we would like to move on to questions if we could.

At this time, the participants will now answer questions from the callers. I would like to reiterate that my earlier comments regarding forward-looking statements apply both to the participants' prepared remarks and to anything that may come up during the Q&A. (OPERATOR INSTRUCTIONS)

Daniel O'Sullivan, Utendahl.

Yes, good morning, gentlemen. Thank you for taking my questions. Just curious to know, can you give us a sense of what you're seeing as far as losses in the current quarter? Can we expect past due accounts and losses to be somewhat similar this quarter or maybe give us a sense on that front?

I would tell you, obviously we are just one month into this quarter and we don't have anything we specifically would tell you. Our expectation is that even with the changes that we have made that Hank went through in some detail, the balance of this fiscal year is still going to be difficult for us in this area. A lot of the changes we are putting in, you don't see the results of those overnight. For example, a tighter underwriting decision today is something you won't see the result of for six to nine months down the road. So it is really hard to say, but we want to be cautious and conservative. We know it will take some of these initiatives time to go. So we will -- we don't have high expectations for dramatic changes through the balance of the year, but going forward in our next fiscal year, I would expect our expectation to be much higher.

Okay, that makes sense. Can you give us a sense -- do you think you may end up closing some lots or doing some consolidating in Texas?

I will tell you we're looking at every dealership we have that is underperforming. It is our best guess at this time that we have got a plan for each of those dealerships to succeed and we anticipate giving them the opportunity to succeed. The sites we have and the locations of the towns we're in, we're very comfortable with them. I will tell you, quite frankly, our failure to succeed in some of those stores has been more of an execution -- failure of execution as opposed to the location. So we want to put these initiatives in place, particularly some things that are Texas-specific, and see how those work out. So currently I will tell you we're looking at every store, we are analyzing our return on an equity basis and profitability, but no plans at this time to shut down a store.

Okay, and on that same note, did you end up having to let some lot managers go or even higher up turnover related to what is going on there?

Yes, I would rather not get into specifics there, but certainly there have been some changes in personnel at the lot level and in our middle management.

Okay, just one last question. I appreciate it. Can you give us a sense of the competitive environment? I think you had made mention in the press release a couple weeks ago irrational moves by some competitors. Maybe a little more background on that would be helpful?

Well, I don't know really how to speak specifically to what our competitors are doing. I can tell you that, as we've mentioned, we lowered some of our interest rates in Texas and our goal is not to just get out there and see how many payments we can get from a customer. That is not it at all. Our focus is on what has worked for us and to really work with our customers so they can get their cars paid off and build up business. So our eye is really on what we can do and not so much our competitors and that is why I really can't speak a whole lot to what our competition is doing right now.

Okay, I appreciate it. Have a great day.

John Hecht, JMP Securities.

Morning, guys. If my numbers are right, your historical net charge-offs activity has been sort of the 22% to 23% range. Your reserves have been in the 17% to 20% range. Obviously, this quarter, I think Hank referred to below 30% range for the charge-offs activity and you brought your reserves to 22%. I guess, how would you suggest we think about this going forward? Is there a permanent change in the competitive landscape and the customer base that suggests the historical numbers are a little low, but maybe the current levels are a little high just given you've tried to correct the situation? How do we think about that?

That's a good question. I will tell you the historical, when you go back six, seven, eight years or so, perhaps even five years, those probably are a little low. By that, the price of the car relative to what our customer earns today, this is more or less the same customer, makes it more difficult for those customers to pay for the car.

The current numbers I would think -- or current credit losses I would think are on the high side from what we would expect to see going forward. Again, not immediately, but going forward for the longer term, and that we feel that internally, some of the issues that we have that have caused us to raise our reserve were more execution-driven through our growth and not having all of the pieces in place that we perhaps should have as opposed to our ability in the future to collect from this customer.

So from the high side, I would expect to see that get better. From the low side, I wouldn't expect it to go as low as it was historically to the 17%, 18.5% range.

Okay, that's helpful. Can you maybe comment a little bit more of what is going on specifically in Texas? My assumption is that you may have a slightly younger store base there, but is there anything else you can point at why there may be additional troubles there?

Yes, we do have newer managers. I think we have talked about this a lot. It is a combination. We have got newer managers. We also have less repeat business and I know we have talked about that a lot, but I can't emphasize it enough. That is really -- it takes some time for that to roll back in. In Texas, as compared to Arkansas for example, we have been charging -- we had been charging 19% in Texas and then in addition to that, we also financed their sales tax and that makes the payment higher, the term longer, and so when a vehicle is repossessed in Texas, they have obviously paid down the principal balance less. So that in and of itself makes for a higher average loss and so we have addressed these things. I really think when you put all those factors together, it has just been more challenging there.

Okay. Final question before I get back into queue here. Given the tax refund season is upon us, can you tell us anything with respect to inventory levels, kind of ability to find good quality cars, any indications on the early component of the tax refund season and what that might be doing to sales levels here?

Well, I can tell you -- address both those points. First of all, on inventory, we are very well stocked with inventory. We have got plenty of cars. And here recently, I will tell you that our purchasing department has done a really good job of finding some of the more desirable, top vehicles such as trucks, vans, SUVs, and so our lots are well stocked.

We have just within literally the past couple of weeks -- you kind of get this early wave of the tax time now -- and so far, it looks very promising and we also, as mentioned, have a pretty strong advertising campaign out there supporting a specific promotion on our tax refund sales. So right now, it looks good.

All right, thanks, guys, very much.

Bob Bridges, Sterling Capital Management.

Good morning. Are you prepared to talk about maybe the bands of the interest rate reductions you're offering in Texas and Tennessee?

Yes, I think so. We're going to put it on the front of a car here in a few days. Historically, in states outside of Arkansas, we have charged 19% generally and that is where we were in Texas until recently. Then we dropped a few lots down, I believe, to 15%, and what we're going to currently do is go down to 10% in Texas, which is about 14 dealerships there, as well as one in Tennessee, we will do the same. We think it will be very good from a competitive standpoint. Particularly in Tennessee where there are rates as high as -- one of our competitors and many of them charge over 30%, believe it or not. So we believe it will be a very good competitive issue for us.

But also, back to Hank's point earlier, it will help our customers get equity in their cars sooner and hopefully drive eventually more repeat business. And the loss in interest income in the near term, we believe, will be more than made up with the improvement in credit losses down the line and hopefully when we feel that those lots are prepared for it to see additional unit sales in those smaller dealerships in Texas. So 10% is the number for those dealerships.

And then on the comment Jeff made on higher operating expenses, I think he mentioned something about just higher repair costs. Explain for us exactly what that entails? I was under the impression that the Company doesn't offer any services. Is that a credit situation where you need to help somebody fix a car today so they can maybe keep making payments? What exactly is going on there?

As Jeff had mentioned also, we have been carrying more delinquent customers and just the fact is when you have got more folks out there you are working with, there are people that need help. And yes, it is just working more with customers does tend to help out more folks getting their cars fixed to keep them paying because they definitely need to be able to get to work and so forth. So it does -- the level of delinquencies does impact our repair expense.

And this repair expense, can you give us a feel for what a typical type repair might be and the dollar range and the nature of the repair?

Well, for these, when we are working with customers, we are certainly not talking about the major issues of replacing the transmission or things like that. But some of the lesser items that may be a couple hundred bucks and it is difficult for the customer to both make his payment and pay for that repair if he's in a paycheck to paycheck situation.

Sure, okay. And then Hank, just to kind of flesh out your comments at the end there, we just talked about making repairs, lower interest rates. Any other specific things you can point to that would be embodied by a higher focus on the customer? What other kinds of things might that entail?

Yes, without going into too many specifics, I will tell you one of the things we are really working hard on now is taking a better look at the length of the term. As Skip mentioned, it is unlikely we will be able to return to the lower credit losses of several years ago, and one of the points of that is the term was shorter then because cars cost less. Just the same quality of car cost less money, so the term was shorter and as you extend that term, obviously, that just creates more exposure for a chance of the car -- something happening with the car or with the customer.

As time has gone on and the price of cars have gone up, the customers' payments have gone up some, but also the payment terms have gone out there just too long. And so we are looking at really limiting how far out we are going to finance particular vehicles because we don't want to set the customer up for a situation where the car is really not going to make it.

So we have got some specific things in place. We have actually, this week, been training our entire sales staff on different means of how we write the deal, how we structure the terms and all of this is driven toward one single goal and that is to try to help our customer be in a situation where he can actually get that vehicle paid down and hopefully we treat him right and he comes back to us. And over time, as we roll more and more of these good customers back in, these are obviously much more known risks and much less risky than just the new customer and so, it is a long-term approach, but we feel confident it is the right thing to do.

And just building on that, if the price of a car at wholesale and retail is the market rate what it is and if you are looking at shortening terms, I guess that implies that you are probably going to be demanding slightly higher down payments going forward? Is that true?

It is going to be a combination of all of those things. We are certainly going to make our best effort for higher down payments. We will probably be working more, also, with special payments, really working with the customer to see when they can pay a little bit extra, that sort of thing.

In some cases, it may mean $3 or $4 extra on their payment, but even though ideally we don't like to see customers' payments raise, we feel like we're at a point now where it is better to have a little bit of a rise there so we can shorten his term so that they can get these paid down. So it will really be a combination of the down, the special and the regular payment.

Great, thanks a lot.

One thing I would add to that, we have given our sales staff some tools to work with there so they have a better understanding of putting the right car on the right terms and frankly, if a customer doesn't have the ability, no matter how you work the transaction, to afford what we believe is the right term for the right car, then our goal then to meet them -- move the customer down a little bit to a car he can afford and again try to more match up the customer to the right car and the right payment terms. Some of the tools we have rolled out to our lot managers and sales folks should really give them some good ways to work those things.

Have you had success in the past where maybe you have demanded a little bit of a higher down payment or are we talking about shades of gray that it's not going to be noticeable because you're pulling lots of levers to try to get to your goal?

Well, this move we have made -- well, let me back up. We do know that a higher down payment does equate to a lesser chance of that account going bad. And so we feel confident that that part will make a difference, but all in all, as we've said, these changes were just put into place, and it takes quite some time to really see the effects because we are obviously -- we're not -- our losses aren't on the customers we just sold in the past couple of months, but really you have to look back a little further.

Sure, okay. Thanks a lot.

(OPERATOR INSTRUCTIONS) Bill Armstrong, C.L. King & Associates.

Good morning, gentlemen. So my recollection is that your average loan length is about 27 months now. What are you targeting going forward for an average loan term?

The target is to take a month or two off that term and get that -- we'd like to get all cars paid for within a couple of years. We feel like the quality of car we are buying at this point would certainly support a 24, 25-month term. Sometimes longer. But the overall goal is to try to bring that term back down to 24, 25 months.

Okay, yes, that should help some. What about the average price of the car? You're operating at an all-time high and up about $650 just from a year ago, almost $8000 average. I know you tried the -- you were testing the real low priced cars two or three years ago and that didn't work out very well, but it seems like -- are you perhaps maybe getting too high on the other end in terms of average price? And is that -- I have seen your press release. You mentioned something about an emphasis on affordability. Can lowering your average price help that?

Absolutely. There is no question that where we can sell less expensive cars, it does help our customer out. It is a balancing act between obtaining a car that we feel is mechanically sound that we can put out there and I will tell you that the bottom-end range of where you can get that mechanically sound card has moved up on us.

We are actually trying to trim off, and I know this seems kind of backwards because the average has gone up, we are really trying to trim off the top part of the number of higher dollar cars that we sell. But at the same time, our bottom end has moved up a little bit. And so we are really squeezed down into a tighter range and because that bottom end has come up, it has really pushed our average up some. But this is -- you are exactly right. We are continually working to try to push that down. And really the thing that pushes against us is making sure that we have mechanically sound quality vehicles for our customers.

Now, with the shorter loan term, is that going to be just for Texas and Tennessee or are you going to shorten that throughout the entire chain?

That is throughout the entire Company.

Okay. About vehicle purchasing costs, I see you're not buying cars from Florida anymore. You have got that new purchasing manager I think came from Wal-Mart. How is that going? And are you getting better deals on buying your cars?

Yes, I think it is going very well. He's getting a feel for the situation. He definitely came to us, while not a car purchasing expert, he definitely came to us with a lot of managerial strengths and I think we are starting to realize some benefits of that. As we increase our efficiency there, and are able to buy more cars locally, obviously that will save us a lot of money on transport costs. There is no doubt that last year going to Florida kept our purchase numbers up. But we did spend a lot of money getting those cars up here from Florida.

So right now, we are not doing that. We don't see a need to do that. We have plenty of cars, and so we do expect to save some money going forward on these transport costs. Really I think each month that passes, as John learns more and more about our business, I think he's going to bring a lot to the table. So we are excited about it.

Are you finding new sources of supply, maybe auctions or Coparts, people like that?

Well, we're not actually buying cars through Copart. Although, we are selling some of our repossessed vehicles and such through there. We have utilized auctions. We do have some special deals because of our volume with some discounts on some fees through some auctions. But we continually try to work hard refining better routes, better training for our buyers so that we are able to buy more direct, new car trades and that's where we feel like we do best and that is where our focus is.

Bill, I would tell you one thing we're beginning to see and I think Hank alluded to it earlier is more of the right cars on the right lots. Through our purchasing department getting a bit more scientific and better at their job, we are seeing more of the right vehicles for the right dealerships and that changes throughout the Company.

In nine states, certain makes and models at certain price levels are a lot more attractive and sell better at other areas. And also, you don't have too many high priced vehicles in a place where the customer can't afford them. So we're seeing some definite improvement in having not just enough inventory, but the right inventory. I expect that to only get better and eventually, with these tighter terms, or tying the term more to the car, it should lead to lower credit losses. That is obviously the ultimate goal of this.

Okay, and I just have two other questions. I guess in the last conference call three months ago, you gave us some idea of what the credit losses were in Texas, which was your most difficult market and in Arkansas, which was your best and most mature market. I was wondering if you could update us on those figures.

Do you have that, Jeff?

Yes. Of course, Texas continues to be a struggle for us. The losses have gone up in the last quarter higher than expected and higher than historical averages and we haven't seen a bump up just in some of our larger, more mature lots in Arkansas by a point or two. So we are continuing to keep an eye on that. We do feel like everything we have in place and the initiatives in place now are going to bring those percentages back down, but we have a few more months of dealing with higher losses.

I think three months ago you mentioned that Texas was around 30%. Is that up to maybe 35% now? Is it that high?

Yes.

Yes, it is actually a little higher than that at this point.

Is it [40]% maybe?

Part of that hopefully as we go through this is some cleanup and when you do that, you're going to have -- you're repoing more cars and you're cleaning up portfolios. So we will see how it levels out going forward.

Right, okay, and my final question of, the waivers on your bank agreements, did you incur any financial penalties either through higher interest rates or anything else?

No, we did not have any fees or charges for the waiver and the interest rate is set on funded debt to EBITDA levels. So with the current performance, we are paying about a quarter point more than we were a few months ago. We are currently at prime. We were prime minus a quarter, and we continue to keep an eye on that, and it is simply based on certain ratios of funded debt to EBITDA.

Okay, so that was sort of a matrix that was already in the agreement and it just sort of moved up automatically?

Right, it has been there the whole time.

I see. Okay, thank you.

[Quentin Maynard], Investor Management Corporation.

How are you guys doing today? Just one quick question for you. I saw that you were saying that gross margins were staying at 42%, which is certainly a little lower than historical. I didn't know if looking down the pipeline you think that that is going to be moving back up at all or if, because of the higher price of the new vehicles, 42% is kind of the target range going forward?

We would like to see that come back up, but unfortunately as we have discussed, we do expect for the next six months to be working through some continuing repossession activity and at the same time, tightening underwriting standards. So we expect that percentage of wholesale sales at breakeven to limit what we can do on the increase in gross margins over the short term. And then the price of the cars over the short term, we can -- I think our expectations at this point is for that to stay fairly level for the rest of the year. But we don't see a big upside on gross margins for the remainder of this fiscal year, but we certainly hope some things fall into place to start our next fiscal year.

Yes, I was just more meaning fiscal year '08. You are thinking that it is reasonable to think about that number possibly coming back in line more with what it has been in the past?

Yes, if the initiatives we have in place take hold like we expect them to, we would expect that number to come back up to -- whether we can get back up to 45%, 46%, 47%, we're not counting on that, but certainly back closer to 44% would be something we would certainly anticipate.

Great, well, thanks a lot.

Bob Bridges, Sterling Capital Management.

Are you able to break out and share with us what percentage of your net receivables book is tied to the state of Texas or tied to say dealerships that are less than three years old?

Texas is a little less than 10% on the accounts receivable side. And the lots over 10, let's see, --.

What was the other part of your question? Lots under three years old?

Yes, or any metric that you have in terms of newer lots. I know the sales start out slower, but I'm just curious what percentage of the book would be, these younger lots?

I don't have it at hand for the younger lots, but I do know Texas is right at 10% or slightly less than that.

Okay, and Arkansas, what percent of the book is Arkansas today?

About 60%.

Thanks.

Bill Armstrong, C.L. King & Associates.

Just a quick follow-up. In selling off your repo cars through Copart, has that enabled you to get better pricing do you think for these cars?

Yes, we think so, and right now, I will tell you, in not only Copart, but also through auctions in general, right now, we are really committed to utilizing auctions and Copart a lot more. And I think we are starting to see a little increase there.

What did you use -- or how did you previously, maybe a couple years ago, dispose of these cars?

Well, it varies quite a bit from lot to lot. Some of our guys that are in the bigger towns have utilized auctions more so. Some of our outlying areas have depended more on individual wholesalers that would come around on a weekly basis and buy them, pick them up right there. But we have some special arrangements worked out where we're having more of those transported to auctions and Copart and so -- but I guess in answer to your question, just wholesalers coming directly to the store would be the other way.

Okay.

What we are able to drive now is more competition for these cars through Copart and auctions. So it's even making the local wholesalers stand up a little bit and put some more money on these cars. So long term, we are seeing some real improvement here on a unit by unit basis, on an average basis. So we think it is a good thing.

Right, okay. That's great. All right, thanks.

That was our final question. Gentlemen, do you have any closing remarks?

Yes, ma'am. We will just finish up here. Thank you very much for your attention and your questions. Jeff, Hank and I will be available in the future if there is anything we can answer for you folks. And we look forward for these initiatives to take place and to take hold and expect to see our results improve in the future. Thank you very much.

Thank you. This does conclude today's conference. You may now disconnect.